Successfully selling your business is a major milestone—one that requires thoughtful planning, honest reflection, and a clear understanding of your goals. Before you embark on this transition, consider not only the financial implications but also how your life might change in the years to come. Ask yourself whether the proceeds from the sale will truly support your future ambitions, and take time to envision your next chapter, both professionally and personally. Consulting a tax professional can help you navigate the complexities and ensure that your sale achieves what you set out to accomplish.
Understanding Your Value Proposition
Many elements of a business make it attractive and build value in the eyes of the buyer. For example, does it have a solid history of profitability, a large, diversified, and loyal base of customers, a competitive advantage (product or service superiority), barriers to entry (intellectual property rights, long-term contracts with clients, exclusive distributorships), opportunities for growth, a desirable location, and a skilled workforce? Have you built a team capable of success once you’ve left the business? Will the business run successfully without you present?
Preparing Your Business for Sale
Get your books in order. You will need the following before you go to market:
Last three years’ profit-and-loss statements
Year-to-date profit-and-loss statement
Current balance sheet
Last three years’ full tax returns
List of furniture, fixtures, and equipment
List of inventories
Copy of your lease agreement (or appraisal if selling real estate)
Backlog (if manufacturer), contracts of future business, etc.
Be ready to furnish other documentation during the due diligence phase when you will probably be asked to produce insurance policies, employment agreements, customer and vendor contracts, lists of patents issued, equipment leases and bank statements. You will also want to clean up your business to make it attractive to buyers. Make any needed improvements to the premises, get rid of outdated inventory and make sure that equipment is in good working order.
Utilizing a Business Broker/Intermediary
Now that you’re prepared to sell your business, your next decision, is whether to use a business broker/intermediary or not.
Here are a few questions to ask when visiting with business brokers/ intermediaries:
Please tell me about you and your firm?
How will you market my business?
Do you cooperate with other business brokers/intermediaries?
Will you display my business on business-brokerage Internet sites?
Can you provide references?
How will you value my business?
May I have a sample copy of your listing agreement?
Are you affiliated with any business brokerage/intermediaries’ associations or trade groups?
Business brokers/intermediaries should be able to bring you prospective buyers that you would not be able to get on your own. Most brokers will ask for at least a one-year exclusive listing agreement. This means that any disposition of the business will entitle the brokerage firm to their fee. Commission rates will normally vary between 10 to 12 percent, but they are, by law, negotiable. Many firms also have a minimum fee for small businesses. Some may ask for a retainer for up-front fees or advertising costs.
Usually, the smaller the transaction, the larger the commission. “Main Street” businesses, those with enterprise value between $100,000 and $1,000,000, can expect commissions to average between 10% – 12%. Commissions are determined between the client (seller or buyer) and their broker and are normally paid at closing. The larger middle market transactions use the Double Lehman scale.
A good business broker/intermediary will assist you throughout the remainder of the process outlined below.
Business Valuation
Selling a business is both art and science, and in no other area is this more evident than the business valuation. While every seller wants to achieve maximum value, setting an asking price that is too high might signal to buyers that you may not be serious about selling. The following three valuation methods are the most commonly used today.
Market Data Method
The Direct Market Data Method (DMDM) values businesses by analysing sales data from similar private companies, assuming that median value ratios in large samples reflect Fair Market Value. Commonly used for smaller transactions, this method typically applies a multiple to Sellers Discretionary Earnings (SDE), calculated by adjusting profit-and-loss statements for interest, taxes, depreciation, amortization, and discretionary expenses. Choosing the right multiple depends on factors such as earnings sustainability, company stability, growth projections, competition, customer concentration, location, and industry conditions. Reviewing a robust dataset of comparable sales improves valuation accuracy. Consulting a business broker is recommended for expert benchmarking. For larger or complex enterprises, methods like Adjusted Net Asset and Discounted Future Earnings may be more suitable.
Adjusted Net Asset Method
Methods from the Adjusted Net Asset Method Definition are often appropriate in the following situations:
The company is considering liquidating or going out of business
The company has no earnings history
The company’s earnings cannot be reliably estimated
The company depends heavily on competitive contracts and there is not consistent, predictable customer base (e.g., construction companies)
The company derives little or no value from labor or intangible assets (e.g., real estate or holding companies)
A significant portion of the company’s assets are composed of liquid assets or other investments (e.g., marketable securities, real estate, mineral rights)
The asset approach is typically only used when the value of the business is heavily concentrated in its tangible assets or the business is not generating a high enough return on its assets to warrant “excess earnings” or “goodwill.”
Discounted Future Earnings Method
The Discounted Future Earnings Definition (investopedia.com) is a theoretically correct method of value when investors are seeing a return on their investment. This method is dependent upon two inputs, the projection of the future benefits and the determination of a suitable discount rate. This method is often used when projected cash flows are expected to be uneven because of irregular growth or other factors.
The forecasting of earnings or cash flow and then discounting it to a present value is a valuation method appropriate when it appears that a Company’s current and historical operations do not indicate an expectation for stable earnings and a constant growth rate. This method provides for the recognition of a varying pattern of financial benefits and an annually changing rate of growth.
The application of this method requires the following critical decisions:
The selection of a type of financial return to be forecast
A decision as to whether to use that return applicable to equity or invested capital (since we are using EBITDA, invested capital is applicable)
The number of years to forecast (we’ve forecasted 5 years)
The selection of a discount and capitalization rate to be applied to the return selected (modified build-up rate on EBITDA)
In essence, we are simply forecasting future cash flows, discounting the returns to their present value based on a discount rate specific to the risk of the investment. We then calculate a terminal value with the assumption the business will have value at the end of the forecast period. This “value” is also discounted and added to the sum of the present value of the future cash flows. For additional methodologies on valuation please contact us directly.
Prepare Your Marketing Package
There are two primary marketing materials that are used to describe your business to potential buyers. The first is a one-page document that offers highlights of the business without revealing its identity and is sometimes referred to as a “blind ad.” These “blind ads” are used to generate interest without creating any possible negative consequences with employees, suppliers, customers, or competitors.
The second is a comprehensive selling prospectus or business profile to be sent to serious buyers who have signed a confidentiality agreement. It is important to include photos (a picture is worth 1,000 words) of major assets, buildings, products, etc. The business profile should provide a comprehensive overview of the business including structure of the business, opportunities for growth, competitive advantages, personnel summaries, requirements for licensing, financial results, an equipment list, licensing requirements, reasons for selling, terms and conditions of the sale, seller financing, and potential buyer profiles.
Marketing Plan
Once your marketing package is ready, it’s important to develop a targeted plan for reaching both financial and strategic buyers. Financial buyers are typically focused on investment returns and are interested in businesses they can improve and grow. They often rely on existing management and may request the seller’s ongoing involvement. Financial buyers may include individuals seeking a new career (job buyers) or high net worth investors aiming for strong returns. To reach these buyers, advertise on established business-for-sale websites using “blind ads” that protect company identity.
Strategic buyers already operate within your industry or a related field. They look for synergies like increased market share, expanded offerings, or operational efficiencies. These buyers might be competitors, suppliers, related service providers, or even current managers and employees (through management buyouts or employee stock ownership plans). Private Equity Groups also fall into this category, seeking businesses they can grow and eventually sell.
Marketing to strategic buyers often involves direct outreach through targeted lists, direct mail, email, or calls—again using “blind ads” until confidentiality agreements are in place. Typically, the seller covers upfront marketing costs, especially when agreements are success-based.
Qualifying Buyers
If you don’t have a process to qualify prospects, you may find yourself dealing with tire-kickers, wasting lots of time and resources trying to sell them your business. There’s no bigger waste of time than working with a buyer who will not be able to complete a transaction. In addition, you should require buyers to submit some basic information:
Name and all contact information
Previous employment and business ownership
Educational background
Funds available to invest and sources of financing
Minimum monthly income requirement
Intended timeframe for completing a transaction
Reason for interest in your business
Your business broker should have a process in place for qualifying buyers.
Site Visit
Once a buyer has been qualified, signed a confidentiality agreement, reviewed your business profile, and shows continued interest; the next step is typically a site visit. I suggest that these visits be scheduled after hours for confidentiality and to allow you to focus on the buyer. This is your one chance to “sell your business” so it is imperative that you be on top of your game. A tour is usually the best way to start the site visit as it will generate a lot of good questions and give you an opportunity to present your business in a favorable light.
It is highly recommended that your business broker be there to document disclosures made between seller and buyer and to answer any questions relating to terms and conditions and the process should it continue.
Negotiating the Deal
After you’ve found a qualified buyer, provided a business profile and had an initial site visit, it is time to stop the flow of information and ask that an offer be presented. This can take the form of a nonbinding letter of intent or a written offer. It should spell out the terms of the deal so that all parties can move forward in good faith.
All sellers hope to get a full-price cash offer for their business. But in the real world this rarely happens. More often buyers will make a down payment and pay the remainder in installments to either you or a lender. We recommend that sellers get pre-approval letters from banks using the Small Business Administration (SBA) whenever possible, to facilitate the loan process and expand the potential buyer pool.
Don’t be disappointed by an offer that doesn’t meet your expectations. It is not uncommon to counter-offer the original offer. A willingness to be creative with the terms of a transaction can go a long way toward a successful sale. Your business broker/intermediary can be the creative “glue” that holds the deal together. Also, be sure to enlist your accountant to help you assess the tax consequences of the terms you accept.
Once the terms have been agreed upon by both parties (offer and acceptance) it is time to open an escrow account. Your business broker/intermediary can walk you through the escrow process, costs, and timeline. Depending on the complexities of the deal, plan on allowing approximately 30 to 60 days to close escrow.
Now that escrow has been established, be prepared to furnish other documentation during the due diligence phase. This is where the buyer will likely ask you to produce insurance policies, employment agreements, customer and vendor contracts, customer lists, lists of patents issued, facility leases, equipment leases and bank statements, just to name a few.
Navigating the escrow closing process takes careful attention and daily follow-up. This is where a skilled business intermediary or broker can really help. As the saying goes: “Nothing happens until the sale is final.” Business sale transactions can easily fall apart during the escrow period unless momentum to close the transaction is sustained by careful attention to detail.
Successfully completing the sale of your business is both a professional milestone and a personal achievement. By staying organized, communicating openly, and relying on the expertise of your advisors, you can help ensure a smooth transition for all involved. Remember, the closing of one chapter is the beginning of another—embrace the journey ahead with confidence and optimism, knowing you’ve laid the groundwork for lasting success.
