Selling Your Business - The Six Key Steps

In the pages that follow we will go into a detailed explanation of each aspect involved in selling your business. But to start with, let's review the six basic steps that are a part of every sale so that you can get a view of the "Big Picture".

Step 1.) Preparation - No matter how large or small your business is, you will have to do some significant preparation to be sure the business is ready to be seen by buyers. However, avoid the trap of over preparing - waiting until every last detail is perfect before looking for a buyer.

Things will never be perfect.

Begin your preparation by gathering or creating all of those things that will need to be put on paper.

Start by preparing a neat and professional looking set of Financial Statements. A buyer will want to see written proof of how your business has performed. You may also need to create a set of Recast Financial Statements where you add back to the bottom line all those benefits you took out of the business - company car, spouse's salary, travel expenses etc. - before you calculated your income taxes.

Then, you will want to collect all your important documents and agreements: contracts with suppliers and customers, leases, titles to real estate etc. If your lease is about to expire, talk to your landlord now about an extension. Click here for a discussion about reviewing your contracts and leases

The final step to prepare for selling your business is to devote some time to the physical preparation required to sell a business.

Without going into a full-scale makeover you want to make sure your parking lot, office space, warehouse etc. make the best possible first impression. Inventory, vehicles and machinery should all be inspected by you ahead of time so they are ready to be inspected by the buyer.

Step 2.) Determine The Value Of Your Business - We will discuss two valuation methods that are most commonly used when selling your businesses:

Assets Based Valuations and Valuation Based On A Multiple Of Sales Or Profits

Despite what you may have been lead to believe, there is no universally accepted valuation formula that will give you a definitive asking price for your business. Even the two methods discussed here are meant to give you a price range that can then be refined throughout the negotiation process.

For every business there will be individual circumstances that will influence the ultimate selling price. So a formula can only take you so far. But a realistic valuation will allow you to justify your asking price to the buyer and put you in a stronger position when negotiations begin.

Step 3.) Locate & Qualify Multiple Prospects - Once you have prepared your business (both physically and on paper) and have determined a realistic price range, you are now ready to look for qualified buyers.

We will go into great detail about how to write an effective business for sale ad. You may also decide to run ads in newspapers or magazines. While most small businesses find their buyer through paid advertising, some have had success asking their banker, accountant, lawyer or other advisers for referrals.

However you market your business, you should always do all you can to maintain your confidentiality. It is usually best if your employees, suppliers and customers don't know the business is for sale until it is sold. In all your advertising, be sure not to use your company name or to provide information that is too detailed - especially about your location. Also, make sure that prospects can respond to your ad at an e-mail address or phone number that is not connected to your business.

In order to protect your confidentiality throughout the process of selling your business, you should require all prospects to sign a Nondisclosure Agreement before you provide them with any detailed information. If they balk at this request they are probably not a legitimate prospect.

Of course, not every person who responds to your advertisement will be financially capable of buying your business. Others may be financially qualified but still won't be a good match for you because of their own personal needs and desires. Therefore, you don't want prospects coming and touring your location until much further along in the process.

I strongly suggest you take the time put together a Selling Memorandum and make this the first piece of written information you give the buyer. The selling Memorandum is basically a brochure for your business - but one that is written to appeal to the business buyer instead of your customers.

There is no need to have the prospect visit your location or to exchange vital financial information until they have read and digested your Selling Memorandum.

Step 4.) Structure The Sale For Maximum Benefit - Throughout this entire process of meeting and qualifying buyers, your goal will be to identify your best prospect and have them sign a Letter Of Intent. The Letter Of Intent is an agreement in principle that you and the buyer have agreed on the most important aspects of the sale and the buyer will in fact buy the business if all the details can be worked out.

"Structuring The Sale" is the process of working out all those details. In most sales this phase will focus mainly on the financing. Other agreements may need to be reached concerning non-compete clauses, consulting agreements or the status of employees.

Step 5.) Due Diligence - The term "due diligence" refers to that period during which the buyer has the chance to examine the business thoroughly. The buyer can fully research the company's financial statements, inventory, contracts etc. in order to confirm all the claims made by the owner during the selling process.

If you have been honest with the buyer from the start, the due diligence phase should not stand in the way of you selling your business.

Step 6.) Close The Sale - At this point your lawyer will handle much of the work such as writing the sales agreement and getting all the documents signed. A sale can still fall through at this late stage. But if you have performed steps 1 through 5 correctly , you will eliminate most stumbling blocks that can arise at this late stage.

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