You’ve done it: You took an idea, built it into a thriving business, and now you’re ready to sell. Congratulations — few entrepreneurs make it to this point. But now it’s time to ensure you make the right deal for your most prized possession.
Entrepreneurs choose to sell their businesses for many reasons, ranging from retirement and health problems to co-founder conflict and just plain boredom. In 2021, 8,647 businesses were sold, a 14% jump from the year before.
Regardless of why you’re moving on, there are actionable steps you can take so that your business is sold at the right time, for the right price, and to the right buyer.
Steps to selling a business
1) Educate yourself — Spend some time researching how to sell (you’re doing that now!) and figure out if you need to make any changes to get your business ready for the process. Common actions include adding business processes to make the business scalable, adding features that would open up a new market, or filing patents to lock down intellectual property.
2) Get organized — Do your due diligence by organizing your bookkeeping and financials and getting ahead of anything that could slow down the sale (such as signoff from other shareholders or active lawsuits or legal proceedings). Write a business memorandum: the company’s history, overview, and successes (highlight wins such as high talent retention or pivoting amid the pandemic).
Also consider your business’s employee contracts, intellectual property issues, and federal and state tax requirements. To ensure you have time to fix all potential red flags, hire a third-party accounting firm to audit your financial statements a year or two before the sale.
3) Get a preliminary business valuation — Turn to experts (e.g., business brokers, merger and acquisition advisers) to understand how much your company is worth, then consider if you’re willing to accept that price.
4) Identify who should be your buyer — Find the why when thinking of your ideal fit. For example: Does the buyer have the cash to buy, or do they need financing? Have they bought companies before? Who would need to approve the deal on the buyer’s end (internally: founders, board members, management; externally: investors, banks)? Will they keep your team employed after the sale?
5) Assemble your team — Putting together a team early can prevent a lot of stumbling down the road. Professionals who could help with the process include:
- Corporate finance attorney
- Business broker
- M&A adviser
- Personal tax accountant
- Company auditor
- Sell-side bankers
6) Go to market — For small businesses, owners can list their companies anonymously on business broker sites. For larger ventures, owners should identify potential suitors by looking at direct rivals and companies in related industries.
7) Follow the deal to close — Deals can fall through days before closing; stay on top of it along the way by responding to requests within 24 hours, scheduling weekly calls with advisers, and pushing legal counsel to move documents forward quickly.
A tip: Time is your enemy. Resist any efforts made to push the closing date.
8) Prepare for life after sale — Your business is your baby: You should be hands-on when planning your company’s transition (this includes how the new owner will interact with your employees and customers). But entrepreneurs also need to give thought to life after their exit, from retirement planning and managing sale proceeds to future personal and professional goals.
When to sell your business
Knowing exactly when to let go of your venture can be intimidating, but experts agree you should decide whether selling is in your future at the very beginning.
“The best time for entrepreneurs to consider selling their business is when they start their company,” says business broker Katie Milton Jordan. “Consider what you want your company to do for you. Are you creating a company that you want to sell or a company that will create an independent stream of income just for you?”
When weighing the pros and cons of an exit, also think about the financial health of your company. “You want to be selling when your company is performing well, you’re cashed up, and you’re growing,” says David Raffa, a corporate finance expert. “The worst possible thing you can have is to sell in the slope part of your year.”
Along with financial considerations, the right time to exit your business is a deeply personal decision that only you can make. For Cindy Summers, founder of Sugar Fixé Pâtisserie, moving on felt right once her business no longer challenged her or fit her lifestyle.
“My passion is building businesses and creating great customer experiences. Once my business was established, I became more of an operator. This didn’t give me the mental gymnastics I needed to stay inspired,” she says.
Additionally, the nature of her business made it difficult for Summers to find work-life balance. “I was married but kid-free when I started the business. Three kids later, and there was an emotional conflict between my family, employees, and customers. Busiest times in a bakery are weekends and holidays. This meant missing out on a lot at home,” she says.
Some other common life experiences that lead to exits include:
- Co-founder misalignment or conflict
- Shifting life priorities
Jordan advises owners to sell their companies before the “five D’s”: death, divorce, disease, disengagement, and downturn. Making an exit prior to those events can ensure you get a fair price for your creation.
“Most entrepreneurs tend to get out too late, when they have no gas left in the tank, and the growth rate of the business is a big piece of the value you get in the end,” says Raleigh Williams, who sold his escape-room business for $26m. “Ending on a high note is something that pro exit entrepreneurs do versus amateurs.”
How much to sell your business for
Della Kirkman, a CPA and business investor, uses a simple calculation to get entrepreneurs started: “A quick and easy formula is to determine the five-year weighted average of EBITDA and multiply it by the range of multiples that are appropriate for your type of business.” Kirkman says she most often uses a multiple between three and five.
Meeting with experts to get a professional valuation of your business is the most accurate way to find the right number. Therefore, get started with assembling a team of advisers early in the selling process, and find professionals who work closely with your industry whenever possible. The more niche their experience, the more they’ll be able to guide your sale appropriately.
Third-party experts can also ensure the business is ready to be sold. “A lot of business owners don’t realize their company can’t be transacted and isn’t packaged properly to go to market,” Jordan says. “That’s why it’s important to ask questions and get educated as soon as possible.”
A common roadblock Jordan sees is solopreneur businesses. For those who wear every hat at their firm, buyers feel they are essentially buying a job rather than a company. Another reason for a difficult transaction could be if a business is tied up in any sort of legal proceedings.
To make a business more appealing to buyers, Jordan suggests depersonalizing your operations.
“Business owners create a business and a system in a way that’s easy for them to run, built around their strengths and personality, because they work so hard around the clock,” says Jordan. “When it comes time to sell, their quirks are not the quirks of the new owner.”
She suggests that owners create manuals, standard operating procedures (SOPs), and automations where possible.
“Just like when someone buys a new car and you hand them the set of keys and the owner’s manual,” she says. “If you have a company you can hand off with an owner’s manual, you have something that can be transacted.”
Once you have the right deal, stay active in the process until the very end.
“As a founder, so much of your net worth is tied up in this transaction,” Williams says. “Outsourcing that process and not being involved, or expecting a lawyer or broker to be as involved in the details to the same extent you need to be, is unwise.”
Where to sell your business
The right method for selling your business depends on its size. For small solopreneur-owned ventures, owners can list their companies anonymously on business broker sites (such as BizBuySell).
There are many different business sites. Some target specific cities or states, as buyers often want to acquire local businesses. Experts recommend researching the best site to list using a simple Google search that includes your location.
For larger companies, Raffa says that entrepreneurs can spearhead the selling process directly through a sell-side banker rather than list on a business broker website.
“In that situation, you should do rounds of approaches,” he explains. “Make a list of 100 potential buyers, and start with the first 10-30 ideal ones, and work down that list.”
Raffa advises assembling your list by including companies 5-10x your size in your business space (often competitors), companies in a closely related space, companies in a similar industry who are struggling and need a new edge, and companies that want to enter your geographic market.
He notes that when reaching out to potential buyers, likely only half will engage with you, and they should sign NDAs before you disclose further financial information and insider business details.
Alternatively, you can start with companies lower down the list to dip your toe in, understand the typical questions asked, and circle back to your ideal buyers when you feel more prepared.
When Williams began the process of finding a buyer, he approached direct competitors first, a tactic he says is helpful across industries.
“People in the same industry or adjacent to the industry are the easiest people to do deals with because they understand what they’re looking at,” he says.
It’s also common for business owners to get inquiries from companies or investors interested in acquiring. Even if a sale isn’t in your immediate plans, don’t ignore the opportunities, which may lay the groundwork for a deal down the road.
Life after exiting
Selling doesn’t have to mark the end of your career — aspirations for the future can actually be baked into the terms of the sale.
“The options are endless,” says Kirkman. “Whatever they can dream up and negotiate into the deal, they can have.”
Kirkman says this includes options such as:
- Annuity in perpetuity: a profit share for the life of the business
- Retaining ownership of a brick-and-mortar building to create a future rent stream
- Taking a revenue share for any new clients brought into the company
- Selling your business on a partial installment basis to spread out the payments (which can help with tax deductions)
- Staying on as an employee (often called an acqua-hire)
- Stay with the business as a consultant
Whatever you choose, be sure to put time into the decision-making process. If a clean break feels like the right move, it likely is. If you’re not quite ready to say goodbye, that’s OK, too.
Plus, your exit might just be the first of many, and you can use the experience to inform your future ventures.
“Most entrepreneurs after they’ve exited something realize that the ends won’t justify the means nearly as much as they thought they would,” Williams says of running a business that’s purely profit-driven.
“They tend to actually move into the thing that they wanted to do all along, but were scared there wasn’t enough money in,” says Williams. “And they tend to make way more money in the thing they actually enjoy doing than their first exit.”