Selling a small business can be complicated, but it’s easier once you know the main steps. To help you get started, here’s what you need to know.
Benefits of selling a small business
There are many reasons why you might sell a company. Maybe you’ve found a better opportunity elsewhere, or maybe you need capital.
Whatever your reasons, selling a small business has its advantages:
- You can free up cash to pay off your personal debts, such as mortgages.
- Selling allows you to focus your energy on a new project that you’re passionate about.
- You can use the proceeds to invest in another company.
- If your company’s no longer profitable, selling is a great exit strategy.
All that said, there’s one drawback: once the company’s gone, it’s gone. You can’t get it back. That’s why it’s so important to get the sale right first time around.
So, where do you start? Let’s take a look.
Selling a small business: 6 steps
Although the exact stages vary depending on the size and complexity of your business, there’s always at least six steps.
1. Get organised
Before you sell, you need to get your paperwork in order. This applies even if you’re just selling a part of your business.
You will need:
- A one-page document outlining how your business operates
- Financial statements
- Tax returns dating back at least three years
File the paperwork neatly so it’s easy to read. If you have an office, ensure it’s tidy. And finally, repair or replace any essential equipment.
2. Hire a broker (optional)
Business brokers sell companies for a living. They can find a buyer and handle negotiations on your behalf. Brokers are especially helpful for new business owners who don’t know where to find potential buyers.
However, brokers aren’t for everyone. Some sellers prefer to work alone, especially if they’ve already got buyers in mind. Remember, too, that brokers charge a fee for their services. Factor in the cost if you hire one.
You should seriously consider hiring a lawyer if you don’t use a broker, because otherwise, there’s no one protecting your legal interests.
3. Value the company
Selling a small business means getting the fair market value (FMV) for the company. So, you need a company valuation.
You can get a basic valuation by comparing your company against other similar businesses already on the market. Or, you can tally up what it costs to set up a business like yours.
If you’re unsure how to value the business, ask a broker for help.
4. Identify buyers
Who can buy your company? There are a few options.
You can sell to:
- Third parties
- Family members
Brokers and other business contacts can introduce you to third-party buyers. It’s a good idea to find two or three potential buyers – that way, if someone pulls out, you still have options.
5. Negotiate a deal
Next comes the hardest part of selling a small business – avoiding mistakes in the negotiation.
- Have the buyer sign a confidentiality agreement before you disclose any sensitive information.
- If the buyer wants to proceed, they pay a deposit. At this point, take the business off the market.
- Negotiate a final sale price.
As the seller, you want the highest price possible. But how does the buyer decide what’s a fair offer? They go beyond the company valuation – namely, they do their due diligence.
6. Prepare for due diligence
Due diligence is basically a financial audit. It’s a key part of the negotiation. Essentially, the buyer audits your company to confirm your financials. If the buyer finds anything they’re unhappy with, it could affect the price they’re willing to pay.
Before the audit, you should:
- Settle any outstanding disputes or court actions
- Reduce any personal expenses
- Clear up any issues with your lease or other legal contracts
Ask yourself if there anything that makes your company unappealing to buyers right now. Do what you can to fix those issues before selling.
How long does it take?
There’s no straight answer to how long the sale of a business takes. It all depends on:
- The complexity of the deal
- How much you’re willing to accept for the company
On average, small businesses take about six months to sell. Some deals, though, take far longer.
If you need to sell fast, it might be best to hire a broker. They have the skills and connections to quickly find buyers.
Selling a business is challenging, but it’s often a good idea. Before you sell, make sure you know how much your company is worth. It’s much easier to negotiate if you know your company’s fair market value.
And remember, always get legal advice before selling your business. A lawyer can help you secure the best deal while reducing your tax liabilities where possible.
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