8 Steps to Selling (or Buying) a Business
I originally wrote this post for business owners on the MidStreet website, but I feel it’s valuable for anyone interested in business to understand — whether you own a company or you aspire to.
Before we get started, here’s a list of the steps listed in this article:
Selling a business is usually a long and emotional process that involves a good deal of preparation.
Business owners of MidStreet Companies ($1M-$25M in revenue) typically spend six to eleven months on the sale.
An owner’s satisfaction with the result depends on:
- The reason for the sale
- The seller’s level of preparation
- The quality of advisors chosen
- The buyer selected
Step 1: Prepare to Sell
The first step in the process for a business owner is to understand why they want to sell their company.
Here are some common reasons we see:
- Health problems and burn out
- Retirement
- Divorce
- Partnership disputes
Owners should plan for what they’re going to do after the sale, whether that means moving on to another venture, focusing on family life and hobbies, or even volunteering in the community.
We tell business owners they should prepare to sell well in advance and to focus on the factors that that will make their company more valuable, such as:
- Reducing their day-to-day involvement
- Eliminating unnecessary expenses
- Cutting down on customer or supplier revenue concentration
If the owner wants to sell the business because it is becoming less profitable or they’re seeing negative industry trends, that will make it much harder to attract qualified buyers.
Step 2: Set a Price
A MidStreet business ($1M-$25M in revenue) will usually sell for 2–6 times profit, depending on its profitability, size, industry, type of buyer, and several other factors.
There are three main options for pricing a business.
- Create a ballpark price range
- Pay for a business appraisal
- Engage a business broker to perform a business valuation
Business owners often prepare their financial statements for tax reasons, so a broker or appraiser will recast the financials to give prospective buyers a better understanding of the company’s cash flow.
Once the valuation is complete, a business owner should work with their accountant to see how much money they would walk away from the sale with. This exercise helps them decide if now is the right time to sell.
Owners also need to decide if they want to sell their company’s real estate with the business.
Step 3: List with a Broker
Would a business owner review all their legal documents themselves, or would they hire lawyers to represent them?
Similarly, when the time comes for them to sell the business, they should enlist the help of a qualified business broker dedicated to helping them achieve their goals.
Quality brokers earn their fee by providing value throughout the sale.
In a negotiation, a simple conversation between the broker and the buyer could mean the difference between the owner gaining or losing $100,000.
What is the best way to find a quality business broker?
We recommend looking based on experience and accreditation.
You can also search the IBBA website by using the Find a Business Broker search tool and speaking with brokers who have their CBI (Certified Business Intermediary) certification.
The IBBA (International Business Broker Association) is the largest community of business intermediaries in the United States.
Step 4: Gather Documents
It’s important to make a buyer feel comfortable by being prompt with their requests, and the best way to do that is by gathering documents in advance.
Here are a few items to gather upfront:
- Financial information (already gathered)
- List of equipment
- Permits and licensing agreements
- Corporate governance documents
A quality business broker will have access to data room software (such as CapLinked) to securely store sensitive information and track buyer activity in the portal.
Step 5: Find a Buyer
If someone has offered to buy a business unsolicited, it’s unlikely that they’ll offer what the business is actually worth in the market.
To get the best price and terms for a business, business owners should enlist an experienced business broker to handle the sale.
A broker will prepare a marketing package to help buyers better understand the business. The following items are typically included:
1. Blind Profile: Used to give potential buyers just enough information so that the best buyers will inquire about the opportunity. See an example from our website below.
2. CIM (Confidential Information Memorandum): A written summary of the business. These can be anywhere from 1–40 pages in length, depending on the brokerage.
3. Marketing Video: Gives prospective buyers an “inside look” at the business. See an example we created for Mill Tek Toll Grinders below.
We require the buyer to complete an initial interview, online questionnaire, and Non-Disclosure Agreement before providing the CIM or the Marketing Video.
Once a buyer reviews the marketing materials, if they’re interested in taking the next step, the broker will likely set up an introductory call with the owner and an in-person visit for the best candidates.
Eventually, the business owner will receive offers on the company.
Step 6: Accept an Offer
At this stage, the broker has marketed the business for sale and received interest from buyers.
It’s time to receive offers and come to an agreement with one of the candidates.
Before a business owner accepts anything, we recommend they think back to their goals with selling to determine what price and terms they’ll be comfortable with.
Below are some documents for this step of the process.
- IOI: Indication of Interest. A non-binding document usually covering only the basic financial terms of a deal.
- LOI: Letter of Intent. A document describing the intentions of the buyer in a potential purchase. Usually more detailed than an IOI.
- Purchase Agreement. The final, definitive agreement between the seller and the buyer.
Any of the above documents can be binding or non-binding. It’s important for business owners to retain good attorneys and read all documents.
After the owner accepts an offer, they will enter due diligence.
Step 7: Due Diligence and the Purchase Agreement
Due diligence is a review performed by the buyer to confirm the facts represented in the marketing materials and in follow-up conversations.
Until the buyer and seller build trust between each other, the seller should avoid providing information that might put the business at risk, such as supplier contact information or detailed product ordering information.
During Due Diligence, the buy-side and sell-side lawyers should work together to complete the purchase agreement.
Some buyers will use the due diligence period to reduce the purchase price or change the terms of the deal to better suit their goals.
Step 8: Closing and Training
If the buyer is using SBA 7(a) financing, the lender will perform their own due diligence.
We recommend that the seller work together with their broker and the buyer to satisfy all lender requests.
At the end of this process, the seller meets the buyer, attorneys, and their broker in a conference room (or virtually!) to sign all of the required closing documents.
After closing, the previous owner will likely tell the employees that they’re selling the business. I recommend introducing the buyer in the best light possible, to ensure a smooth transition.
Once the business sells, the previous owner’s level of involvement should be limited to training the new owner on running the business, as defined by the purchase agreement.
If the seller is maintaining ownership in the business, this step is more complex. Read more about private equity and strategic buyers here.
Conclusion
Selling a business is a long journey that demands perseverance and time.
It will require the seller (and buyer!) to be emotionally ready and financially prepared.
But if done right and with knowledge of the steps outlined above, a business owner could secure their family’s future and transition into the next chapter of their life.
Thank you for reading my post. I’m always open to receive feedback, questions, or comments. Email me at jonah@midstreet.com.
Own a small business in the Southeast? Prepare to sell by determining the value of your business.
Originally published at https://www.midstreet.com.
