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How Do i sell my business?

How Do I Sell My Small Business?

"How do I sell my business" might be the most important question you ask yourself as a current (and possibly soon to be former) business owner. Why? Because selling a business is something less than 30% of ALL small business owners EVER do. Most are transferred for little to no real value OR fade into oblivion. Statistics say it's hard to do.

First, the answer to your question. You can do it yourself or you can use a business broker. In either case, you need a plan. Specifically, a small business transition (exit) plan. The second thing you'll need is to figure out what your business is worth. In my world it's called business value/enterprise value. People also refer to this as a business valuation. Finally, it means you'll have to follow a process. This article is intended to answer ALL 3 of these questions. 


WHO IS THIS ARTICLE FOR?

In other words, who should read this article? You should read this article if you plan on using a business broker. You should read this article if you plan on doing it yourself. Statistics say, close to 90% of ALL small businesses, in the US, generate less than $1,000,000 in annual revenue. If you're a small business owner and the value of your business is less than $1,500,000, this article will help you.


WHY IS THIS ARTICLE WORTH YOUR TIME?

The world wide web is massive. Google search results say there are almost 2 billion results just on the phrase "how do I sell my business." I'm going to try to help you so you don't have to go down this rat hole. I've been down it. It's not pretty.

I'm a business broker (full disclosure at the bottom of this article). I spend 50+ hours a week helping small business owners. I've also owned 3 businesses personally that I've successfully sold for well over 7 figures. I've been in your shoes. Additionally, I have a free newsletter that helps teach people about buying and selling small businesses. I teach several courses that help teach people how to buy and sell small businesses ON THEIR OWN. As of the writing of this article, I'm over 50 years old. I've been through the business transaction wars. I have the scars to prove it. I've learned some hard lessons.

As a result, I've developed a proprietary 6 step process to buying or selling virtually ANY small business. It's a process I've developed based on doing. I'm going to share this 6 step process with you.

In other words, I'm well qualified to help you through this event. It's an event less than 30% of us business owners will go through once or twice in our entire lives.

That's probably the reason why you searched "how do I sell my business," clicked on a link, etc. You, like most business owners, have been fully invested in building and operating your business. Now, for whatever your reason, you're thinking about selling your small business. In case you are wondering, here's what I'm hearing from business owners:

  • They’ve thought about selling their businesses but don’t know how to take the next step. 
  • A current business is distracting them from other opportunities.
  • They’re ready to retire but don’t know how to do it and fear the unknown.
  • Questions like...How much will it cost? Do I have to pay a business broker even if he/she doesn’t sell it or I turn down an offer, etc?
  • Because of everything that’s already going on, they just cannot find time to focus on it or, because they don’t understand the process, are avoiding it.
  • They’d like to sell before the economy suffers and their business value suffers.
  • For health reasons, they're being forced to sell immediately.


3 BUCKETS

I've also developed a concept called "3 buckets" which helps small business owners quickly understand how the financial opportunities available to all small business owners are 3 distinct buckets of money. You can find my "3 buckets" explanation here... The article is worth a read if you're trying to wrap your head around how selling a small business is such a unique experience.


Recently, I Googled "how do I sell my small business." The results were surprising. I'm hopeful this page will one day be among the top results because I was less than impressed with the results I found.

Some were clearly written by people who have little to no experience in actually participating in the act of selling a small business. Some were clearly intended to be marketing resources for the website owner. Some were articles on "popular" and/or well known websites like Forbes.com or Entrepreneur.com. Finally, there were a few that provided some valuable information but were more geared on mistakes to avoid.  I've set out to provide more relevant and direct information to this specific question. 


NEEDLE IN A HAYSTACK

But, the first thing to understand is this: selling a business is a bit of "a needle in a haystack" kind of exercise. Whether you're approached out of the blue by a buyer (not likely) or take a proactive approach to selling your business, finding the right buyer is difficult.  The right buyer will be hard to find because most buyers don't possess 5 important qualities needed to purchase your small business. Depending on your business niche, the pool of buyers may be really small. For most small businesses, these are all (based on my experience) significant factors in your ability to find the "right" buyer. Remember also, this has NOTHING to do with your ability to generate interest based on your asking price, "sell-ability," etc. We'll get to this later. First, what makes a person your right buyer:

  • Geography - He/she likely lives in your area. For small businesses selling for under $1,5000,000 in enterprise value (especially those under $500,000 in enterprise value) the likelihood of a person buying your business from "out of town" is small. Depending on the size of your metro, this might significantly impact your available buyer pool.
  • Ability - When I refer to ability, I'm mainly referring to financial ability. First, the right buyer must have at least 10% of the purchase price as a down-payment unless you're willing to do some very generous seller financing. Second, the buyer must have additional reserves if/when necessary. Third, the buyer must have the ability to qualify for a small business loan. Approval rates vary by bank but it's not a walk in the park to qualify for a business acquisition loan.
  • Experience - Depending on your niche, the experience needed to run your business may require lots of experience. If so, it creates a high barrier to entry for competing businesses (which is good) but will also likely shrink the buyer pool.
  • Guts - Lots of people want to own their own business. In fact, a recent study by Vistaprint said 62% of American adults desire to own a business. But, another statistic says over 90% of them will never pull the trigger. So, the right buyer has to have the guts to do it even if the first 3 qualities are present.
  • Knowledge - Knowledge is power. Power can affect the "guts" of a potential buyer in a positive way. If a potential buyer has no idea how to buy a business, even if the first 3 qualities are present, there are lots of ways a deal can/will die.

Ultimately, if you don't have a buyer, you can't sell your business. However, finding the buyer isn't where your focus should be initially (especially as it relates to the purpose of this article).  The first thing you need is a transition (exit) plan. 


THE TRANSITION PLAN

In a 2017 article, by Entrepreneur magazine, about preparing to exit your small business, it said 70% of business owners said they had no plan in place to outline how they would transition their small businesses. Developing a transition plan should be the first step you take before you decide to actually sell your business. We offer a completely free, no obligation, course on how to create a small business transition plan.

There are some really important things you'll need to cover. Here are the biggest things you'll need to consider:


Is your business sellable? There are 6 core qualities your business should possess in order for it to be attractive to potential buyers:

  • Is it at least 2 years old?
  • Does it have a minimum $50,000 in SDE/free cash flow?
  • Are financials (tax returns, etc) and accounts accurate, current, and available?
  • Is the business ready to be sold?
  • Is the business owner dependent?
  • Is customer concentration low?

There are more qualities or factors that will ultimately determine if your business will sell. But, the above are the most important ones. Also, if you don't possess all the above qualities, it doesn't mean your business won't sell. What is does mean is, according to statistics (and my experience) it's much harder to sell the business.


Once you’ve determined your business is sellable, it’s time to create the transition plan. We’ve developed a pretty comprehensive checklist designed to cover most everything we’ve run into the last 25+ years. If you’d like access to the checklist, click here to enroll in our free course. Some of the most important items to address are making sure you thoroughly discuss selling your business with your loved ones. Sudden change is hard. Don’t do anything without getting “buy-in” from your spouse/significant other. 


BUSINESS VALUE

Business value is where the rubber meets the road. It all eventually boils down to this. What’s your business worth? The industry line is, it’s worth what both a reasonable/willing seller AND buyer are willing to agree to. The goal is to get the most you can get. As the seller, the trick is to offer something high enough to make sure you’re getting fair value but reasonable enough to attract interest. Have you ever had “sticker shock?” What do you usually do? Personally, I move on.  Having a listing price that's too high will cause buyer prospects to move on. Everyone wants a pot of gold at the end of the rainbow. My advice is to be reasonable.  


Finding the right asking price is, for the most part, a math exercise. We believe comparing other like businesses (that have actually sold) is the best way to establish a range of value. This range of value, along with adjustments and factors are all utilized to determine your asking price.


We use a proprietary report called our Business Range of Value Report. It analyzes four range of value methods (Revenue, SDE, Fair Price, and DSCR). These methods provide specific amounts that can be used together to arrive at a “defendable” asking price. Having this information allows you, the seller, to have confidence you’re not “giving the business away.”   Our report also shares a very important metric called OBP or "Owner Benefit Percentage." This metric analyzes the free cash flow of completed deals in your niche. Why is it important? Because it gives you an idea of where you stand against other like businesses. Is your free cash flow better, worse, or average compared to other businesses in your industry niche? If you're low, for example, it may cause you to spend the next 6-12 months improving it before you decide to sell your business. The higher your OBP, the more valuable your business will be. The more valuable your business is, the higher your selling price!


OBP is based on SDE. We offer a premium course, How to Buy or Sell Virtually ANY Small Business. One of the free preview lessons describes how to calculate SDE (Sellers Discretionary Earnings - a widely used metric for determining business value). To take this free preview lesson, click here


So what's SDE? It's all the money you have control over annually. It's everything that's left over after all operating expenses are paid. It includes ALL your compensation. It includes all your "fringe benefits." It's all the money you benefit from directly as the business owner. It's not gross profit. It's not EBITDA. It's every penny that benefits YOU (annually) and isn't required to make the business run effectively. For example, if you have a company vehicle but the business doesn't depend on it to operate, the money associated with this "benefit" can be added to SDE. Why? Because a new owner may already have a car. The new owner will have the same opportunity to apply revenue to this "benefit." He/she can always choose to just take this "discretionary" money as compensation. As mentioned above, we have a free preview lesson that explains how to calculate SDE. 


To summarize, small business value (businesses below $1,000,000 in enterprise value) is best determined (in my opinion), by starting with a comparable range of value against other "like businesses." Using readily available amounts like annual revenue and free/discretionary cash flow will allow you to compare your business against other businesses who have actually sold. Once you have this "range of value" you'll address and factors and adjustments that will help you confidently arrive at your asking price. 


THE PROCESS

Over the last 25 years, I’ve learned valuable lessons about what works and what doesn’t work when it comes to selling a small business. Time kills deals. Insults and disagreements kill deals. Egos kill deals. The list goes on and on. From all of this, I’ve developed a 6 Step process for selling a small business. Stick to it and your chances of selling your business will increase dramatically. Here they are:

  1. Step 1: Preparation - make sure you’re prepared. The transition plan makes up the bulk of this preparation. But, you’ll also need a CIM (Company Information Memorandum) or seller prospectus. You’ll need to maintain confidentiality. You’ll need to decide on your asking price. You’ll need to maintain confidentiality. You’ll need to list your business in places where possible buyers can find you. 
  2. Step 2: Information - Once you’ve “put yourself and your business out there,” it’s time to gather information. You’ll want to get a signed confidentiality agreement and buyer profile before you share any specific company information with prospects. Don’t gather information using your email address. Create an anonymous email account or ask someone to act as a “gatekeeper.” 
  3. Step 3: The offer - if you’ve prepared properly, you should have all your really important information ready for buyer prospects (once they’ve returned the confidentiality agreement and buyer profile). The information needed for buyer prospects is listed in the transition course checklist and in our premium course. Step 3 is important because at some point, you’ll politely encourage the buyer to make an offer before he/she will get access to additional information. That’s what makes step 3 so critical. It separates the wheat from the chaff. Tire-kickers won’t make an offer. Serious buyer prospects will be willing to make an offer. Why? Because contingencies within the offer gives the buyer “outs” should he/she find something during the next step. 
  4. Step 4: Due Diligence - Once the offer is accepted by you, you’re 50% there. The due diligence step is the slog through the details. Due diligence can test your patience and ego. Due diligence is driven by a due diligence checklist. There are plenty available free on the internet. We have one too in our premium course. Either way, Getting through the due diligence step is clearly where the buyer gets access to everything. 
  5. Step 5: Closing - Once you’re finished with due diligence, it’s time to close. But, don’t move on to this stage until both parties agree due diligence is over. Bleeding the closing step into the due diligence step is a recipe for disaster. Keep them separate. Put due diligence to bed before drafting agreements. Don’t waste time and money on attorneys until you’re sure the buyer is satisfied with due diligence. The buyer will usually be responsible for drafting the purchase agreement and any other documents that will be required for the transfer of your business to the buyer. Once draft agreements have been shared (and there aren’t any shocking surprises) you can talk about scheduling closing. Once a closing time/date/location has been scheduled, you’re 90% there. 
  6. Step 6: Transition - Congrats! If you’re here, you’ve closed your business. In other words, you’ve SOLD your business. Don’t run off yet. It’s likely you need to help transition the business to your buyer. That may require you to stick around full time for a period of time. This should have been spelled out in the purchase agreement. Once you’ve satisfied your transition responsibilities, you can head for the beach. 


Ok, there you have it. We’ve discussed your need for a transition plan and where to get free help. We’ve discussed your need to establish value. While our premium course provides a thorough and proprietary Business Range Of Value Report (using 4 range of value methods), BizBuySell does provide a low cost option. I’ve never used them for business value and I’m not sure how many niches are available. But, if you’re going the DIY economical route, this may be a good option. Here’s the link. Finally, I’ve shared our 6 Steps and a summary of what’s going on in each step.

This is how you sell a small business. I sincerely hope this has helped you. If you have any questions or would just like to bounce some questions off us, click here to schedule a free, no obligation conversation. We’re happy to assist you in any way we can.


Full disclosure: I'm a business broker. I help small business owners sell their businesses. Business brokers, like me, charge anywhere between 7-12% of the selling price of your business for our services. It's normally in the form of a success fee which means we get paid nothing (or very little) if your business doesn't sell. Because good business brokers will incur marketing costs for each business we represent, there may be a small fee charged if the business doesn't sell during the defined listing period (typically 12 months).  Some business brokers have a minimum fee. Some brokers also have a maximum fee. I have both. For businesses selling over 1 million dollars, most brokers will reduce the success fee percentage. 


ALL brokers should act as a fiduciary. A fiduciary means the broker should act in your best interests 100% of the time. Many don't. Lots of times you won't even know it. Need an example? Brokers should market your business confidentially. When they do this correctly, buyer prospects will come forward and ask for information. Sometimes, buyer prospects are represented by buyer reps who desire to "co-broker" the deal with the listing business broker. Unfortunately, when the listing broker is given this information, he/she says no to co-brokering. Shocking? For the seller...yes. For the broker, he/she sees a 7-12% success fee and doesn't want to split it with anyone. If the broker works for someone, it's likely he/she is already splitting it in half. Co-brokering means it's cut in half...again. Does this make it right? Of course not. But it's done too often. In fact, the IBBA's (International Business Broker Association) code of ethics makes no mention of "fiduciary responsibility." Incidentally, it's why I'm not a member of the IBBA. The worst of it is business brokers know you'll never find out. If a buyer rep calls your listing broker, and the above takes place, the buyer rep doesn't know who you are and will never be able to share this information with you. Knowing this, the listing broker simply says something like "I don't co-broker" or "the business already has a buyer" or something else that violates his/her fiduciary responsibility.

The better buyer reps have likely qualified their clients buy interest and ability to buy.  The business broker who even considers "no" to co-brokering should be banned from the industry. But, because it's really hard to police, unless the buyer rep reports the broker, it continues to happen.

Learn More

If you REALLY want to sell your business, you'll first need a transition plan. You'll also need to understand the value of your business. Finally, you'll want to follow a proven process. We can help...whether you plan to do it yourself or would like the help / full services of a business broker. 

Find out more