Top 8 things to consider when selling a business
March 20, 2023 ⋅ 14 min read
The reasons you might be thinking about selling your business could be personal, professional, or a mix of both. The important things about this moment are: here you are (for some good reason), and you want to get to a place where you can confidently decide one way or another about selling.
In the spirit of “you don’t know what you don’t know,” we’ve made this list of common unknowns: things like figuring out what your business is worth, the pros and cons of using a broker, what selling would mean to your taxes, etc. From there, you can take the next steps that make sense for you and your business.
Let’s start with the value of your business You’ll only know whether your business is worth selling if you know the worth of your business.
Understand the Various Methods Used to Value a Business
We have all kinds of tools to estimate how much an asset like a house or car is worth if we were to sell it today. We don’t even need to consult a human. But most business owners have no idea what their business is worth. According to a recent M&T Bank poll, 98% of business owners didn’t know their business valuation. So how do you determine what your business is worth today?
There are several different ways your business can be valued. And although you might find yourself with blinders on about the purchase price, remember that the sticker price is only one piece of the valuation and total return you’ll see from selling your business.
The different business valuation methods each come with their own pros and cons. In other words, some will give a more realistic picture of your business than others.
How do you know which method to use? This stuff can be tricky. Which method will depend on things like your business structure (are you an LLC, B corp, sole proprietorship, general partnership?), how your business is performing to date, and what assets you have.
What are some of the methods for measuring a business’s current worth?
Fair market value (FMV)
If an investor wanted to buy your business today, what it would go for on the market?
Adjusted Net Asset Method
This method is heavy on tangibles. It takes the balance sheet view — where you land after a tally of your current assets minus all of your liabilities — and takes into account other factors that help bring the totals closer to FMV.
This one trips a lot of owners up, but it’s basically a comparison of your stock cost against other companies. The math is your current share price per share in relation to your earnings per share (EPS).
Discounted cash flow
How valuable your company is today based on how much cash flow it's projected to see in the future.
If you want to dig into the details a bit more, here’s an in-depth look at the different business valuation methods. The good thing is that either way, you don’t need to be an expert – Baton is here to help get you an accurate and free valuation.
When you make a move like selling your business, you can’t ignore good old Uncle Sam. This is one asset sale that begins with consulting a tax advisor. Don’t skip it, and start early. Find a CPA you can trust, and get some solid financial planning underway.
What the tax consequences of selling your business look like will depend on several things. Some of the big ones are:
What kind of stake you have in your company and how long you’ve held it
How your buyer is paying (cash upfront or earnouts)
The structure of your business
For the purposes of the sale and taxes, you’ll need to do your due diligence and get your financial records in order. We recommend working with a trusted tax advisor, Baton is here to help you get started.
Timing of the Sale
Just as we have our example of a house – the same idea with a car – there are quick and free ways to get the temperature of the market. You can get a broad sense of whether or not now is a good time to plant your “For Sale” sign in the ground.
Here are some things to keep in mind:
The Economics of Your Deal
There are exceptions to every rule, but in general, buyers will be attracted to small and medium-sized businesses (SMBs) that have already proven their value on the market.
They’ll want to see records about the business and the numbers to give prospective buyers confidence in the direction they’re heading.
The Economics of the Moment
What shape the economy is in, including current interest rates, can impact how many prospective buyers you have. Good news, though: Even in less sunny economic times, mergers and acquisitions (M&A) can take more of a slight dip than the dive you might expect.
Consider Your Reasons for the Sale
As a business owner, your business can be a passion or a burden depending on the day (maybe even both within the same day). It’s tough to untangle your history and all your plans — wherever you’re at with them now — from your future goals. But that’s exactly the exercise you’ll want to do now.
Ask yourself: What are my financial goals? Great, now what are my personal goals?
Remove as Much Emotion From the Deal as You Can
You might have a key employee or employees, or a business partner you’re loyal to, deep relationships with your customer base. Your small business might have been in your family for generations. There’s no way around it: There's no avoiding it: this is an emotional process. The key is to address feelings head-on when they come and keep your eye on the future.
For processing the human side, don’t hesitate to lean on your inner circle. Friends and family outside the business can give you the emotional support that those involved with the deal just can’t.
Evaluate Opportunity Costs Against Life Goals
What do you gain or lose by selling your business? Are you ready to abandon the goals you had if it means growth in another part of life or on a new venture? Growth can be professional, financial, or personal (sometimes a combo of all three). But what you’re going after, when, is 100% up to you. Think about how selling aligns with the rest of life: where you are vs. where you want to be.
Plan What You Want to Do After the Sale
On that note, let’s imagine you’ve sold your business and the proceeds are in the bank. What’s your next move? Do you want to travel, retire, or invest in another business? Hold onto some shares and help your business scale? Thinking with the end in mind can help you make the best decision now.
Evaluate the Pros and Cons of Using a Business Broker
How Will You Find the Best-Fit Potential Buyer?
Potential buyers come in different types but the most important thing is that you’re dealing with serious buyers who won’t waste your time.
Buyers of all stripes are looking at your business as an opportunity. But different buyers come with different goals in mind. Most fall into two buckets: financial buyers and strategic buyers. A financial buyer is looking at your business as a money-making opportunity whereas a strategic buyer is looking at your business for signs of synergy. The latter compares capability notes for signals that your powers combined will take them to the next level.
But again, you’re an SMB owner, so your free time outside of your business is limited. How will you be able to source a stable of serious buyers? It could be as easy as tasking a professional with the job while you stick to the demands of your own.
Maybe the single biggest pro of working with a business broker is their experience in lining up business buyers and getting a business sale done efficiently. Many sales transactions take the better part of a year to complete and not all are successful. A broker is equally invested in making sure you have a successful transaction.
Brokers have built up networks, seen it all, and navigated the bumps in the road: how do you ensure you have multiple buyers lined up (drive competition), how do you handle the necessary dance with other deal collaborators (business appraiser, transaction attorney)? It’s probably all new.
Brokers are also invested in helping you attain your asking price and walking away with the full value of your business.
Marketing and negotiating are part-time jobs unto themselves and can’t usually be winged. Brokers know what it takes to help your business stand out and which channels to help you show up in. They can also help you review your financial statements and review all costs associated with the deal.
The main con won’t take long to come up with: the fees. For a smaller business, you’ll part with approximately 8-10% of your sale proceeds. If your business is doing between $1M and $50 million in revenue, you’ll fall into the lower middle market tier, and your pricing will be based on the Double Lehman Formula.
Another important con to look out for is a bad broker. They can take an otherwise strong deal and sink it due to inexperience or inefficiency. Baton has a vetted broker list and can help you pick a great one.
Another con might be adding another person to delegate to. Some would argue that this will ultimately make the process smoother and go faster, but it’s true that you'll have another person asking you questions, sending you reminders, and keeping you on a schedule that’s tied to their own.
You can work with Baton for a free valuation and advice before making the decision of whether or not you want to work with a business broker.
Consider How Do You Protect Yourself When Selling a Business?
If you decide to go through with the sale of your business alone, you’ll want to stay extra vigilant along the way. Business owners are out there exposed to all manner of scams, bad buyers, and sales structures that don’t ultimately benefit them.
What Should You Not Do When Selling a Business?
As a business owner, you’ve got the experience and people skills to know when a situation feels wrong. Don’t ignore that feeling. It’s totally conceivable that you could get a buyer on the line who’s putting up a good purchase price, but is completely out of sync with the things you value. These values could be the same ones that made your business a success in the first place. Having multiple buyers — potential buyers — lined up will help alleviate this kind of pressure.
Another thing to avoid when selling your business is ignoring the sale structure. As a business owner, the assets you’re putting up for sale fall under the categories “tangible” and “intangible.” When you work out — either solo or with a broker – how you are structuring the sale, make sure you keep coming back to your own goals.
What else? Don’t get caught behind the eight ball with your day-to-day business or financials. Make sure you keep working during this time and keep your records in order as you go. The latter might take some back-and-forth with your accountant, lawyer, and other team members.
How Do You Sell Your Business?
With most of your unknowns now known, you’ll want to flip your thinking to the actual steps of selling your business. You might have a rough idea of what it takes, but knowing what the process looks like end to end will give you some mental peace. No one wants to enter into a process without an idea of how long it will take, how much it will cost, what the effort entails, etc. Let’s get into it.
How Much Does Selling a Business Cost?
As we alluded to above, whether or not you involve experts like business brokers is your call. If you do, you’ll need to factor in their commission. You’ll also need to consider your attorney and appraisal fees (with Baton, an appraisal is free). You will also need to assess your tax obligation. Again, this is best handled with a CPA. And if you want to be really thorough about the overall cost to you, make sure to review the fees associated with selling your business that you might not be aware of. Much of this, again, is within your control. The key is to know what decisions are coming down the pike.
It might seem like there’s not much you can do about the overall cost of the sale. In reality, making sure your sale does not drag on will be a big one. A lot of that comes down to how prepared you are with your documents and how responsive you can be to the buyer’s questions.
How Do You Sell a Business Online?
Up until now, there haven’t been the same robust options for selling your business online as there have been for selling other assets. But this is changing. Just like so many small business owners market to their customers online, the best buyer opportunity is here, online. It might seem counterintuitive, like “surely my buyer is one of my competitors.” In reality, your surrounding competitors represent only a sliver of your potential buyer base.
How to get started:
Lay the groundwork for the buyers you want to attract. A big part of this effort will be getting your financials in order. Baton can help with that. You might also consider creating some standard operating procedures (SOPs) for your business. This systematized presentation will signal to potential buyers that the hand-off will be smooth, and they won’t miss a beat.
Another important consideration is the optimal time to sell. There are several indicators that the timing is right, including numbers looking up, the current team being stable, people continuing to want your product, and you’re ready to move on.
It’s important to approach this process with a clear roadmap: what needs to be done and what help do you need to enlist in order to get it done? There’s a handy checklist here.
When you’re ready, read more about how to maximize your opportunity and asking price by selling your business online.
How to sell your business online without losing your privacy might be on your mind. As a community member, this makes good sense. And it is entirely possible to get the best of both worlds by listing your business on an online marketplace like Baton. You’ll get the strength of the best data available along with the chance to tap into a broader network — without sticking an ad in your local paper for all to see.
It might feel strange to list your business online, but it is increasingly the way owners are able to make the most informed “big” decisions.
So should you sell your business? Hopefully, we’ve given you some food for thought that gets you farther down the path than where you started. To review, your first step is to find out what your business is worth. Based on that critical first piece, you can ask yourself the hard questions about why you’re selling and when. If you do decide to sell, make sure you’re in touch with a certified tax advisor so you don’t have any whammies, and figure out if consulting a business broker makes sense. Regardless of what professionals you connect with, get familiar with what it takes to sell your business and how to stay safe in the process.
If you’re ready to take that first step, Baton makes it simple to get an estimated business valuation fueled by actual data. It’s free of charge, and there’s no obligation to take further steps. Find out what your business is worth today.