Things You Should Keep in Mind When Selling a Business

Selling a business is a significant decision that comes with its own set of difficulties and considerations. No matter if you're a seasoned entrepreneur looking to move on to new ventures or a small business owner ready to retire, it's crucial to approach the selling process with careful planning and preparation. From understanding your business's value to finding the right buyer and negotiating a fair deal, there are several key factors to keep in mind when selling a business.

Consideration #1: How Much is My Business Worth?

When it comes to the process of selling a business, valuation plays a pivotal role. Valuation is the estimate of your business’s worth, and it determines the fair market price and sets the foundation for negotiations. Understanding the true value of your company enables you to set realistic expectations while also avoiding overpricing or undervaluing your business that could lead to a possible lack of interest from buyers or even a loss of profit. 

Determining your company’s value involves a thorough analysis of various factors in addition to consulting with professional expertise. A valuation should reflect the total overall worth of your business after considering its projected profits, existing assets and obligations, and other market factors. 

As part of the valuation process, reviewing financial statements, including income statements, balance sheets, and cash flow statements, will provide insights into your company's profitability, revenue trends, expenses, and overall financial health. Likewise, you’ll need to assess the business’s tangible assets, such as real estate, equipment, and inventory, as well as its intangible assets, which may include intellectual property, patents, and trademarks.

Additionally, comparing your business to similar companies in the market can provide a benchmark for valuation. Be sure to consider factors such as industry trends, market share, future growth potential, and competitive advantages in the valuation phases. 

It's important to note that determining a business's value is not an exact science, and different methods may yield different results. It's often beneficial to use a combination of approaches to arrive at a realistic valuation. Engaging the services of a lawyer or accountant with expertise in valuation can help you obtain a more accurate assessment of the business's worth.

Consideration #2: Do I Want To Hire a Broker?

A business broker is a professional intermediary who facilitates the sale and purchase of businesses. While a good broker can play a vital role in assisting business owners who are looking to sell their businesses, there are also some disadvantages to working with a broker that you should keep in mind. 

In many situations, a high-quality business broker can use their industry connections to find potential buyers who are a good fit for your business. Because brokers have established networks of investors, individuals, and companies looking to acquire businesses, they can significantly increase your company’s exposure to attract qualified buyers who may not have been reachable otherwise. A business broker can also assist with the valuation, due diligence, and agreement negotiation phases.

While many brokers charge commissions based on the sale price of the business, some may require an upfront flat fee or mix of a success fee and an upfront fee. And although the expertise and services provided by brokers can be valuable, it is an evident fact that paying a broker fee will lower your total profits from the sale. 

When deciding whether or not to consult with a broker for the sale of your business, be sure to consider the particular details of your situation. For example, if you are having trouble finding a buyer or your industry is somewhat niche, retaining a business broker may be worth the cost for you. On the other hand, if you are able to attract buyers without access to a broker’s network, it may be unnecessary to utilize the assistance of a broker.

If you choose to work with a business broker, it’s crucial to make sure you find the right one. Be sure to select a broker who has established contacts in your industry or proven business marketing methods. It is also important to consult an attorney to review your potential broker’s agreement. There are often broad provisions explaining when a fee is earned that are important to understand before signing. 

Consideration #3: What Should I Expect in the Diligence Phase? 

During the due diligence phase, potential buyers will conduct a detailed examination of all the relevant aspects of your business, such as operations, financials, and legal matters. This process allows buyers to assess the overall viability of the business they are considering acquiring. If a buyer decides to move forward, the information uncovered during this stage will serve as the foundation for purchase agreement negotiations. 

At the start of the diligence process, you should expect buyers to request a wide range of documents and information related to the business. This may include financial statements (balance sheets, income statements, cash flow statements), tax returns, customer and supplier contracts, employee agreements, leases, permits and licenses, intellectual property documentation, organizational documents, insurance policies, and any relevant legal or regulatory compliance records. 

As a seller, you should be prepared to provide comprehensive and accurate documentation in a timely manner. You should also anticipate extensive communication with potential buyers, additional document requests, and detailed inquiries about various aspects of the business. It is imperative to be transparent, responsive, and well-prepared to address any concerns or questions that may arise.

You may also want to consider requiring potential buyers to sign a Non-Disclosure Agreement (NDA) before providing any confidential details about your business. An experienced business attorney can advise you as to the necessity of these legal documents and draft an NDA that will sufficiently protect your proprietary information. 

Consideration #4: What Happens in the Agreement Phase?

Once the due diligence phase is complete and the buyer is satisfied with the findings and willing to proceed with the acquisition, the next step is to negotiate and draft the purchase agreement and associated ancillary documents. The purchase agreement is a legally binding contract that outlines the terms and conditions of the sale, and the information obtained during the due diligence phase often informs and shapes the content of the purchase agreement and the subjects of negotiations.

After the key terms and conditions of the sale have been negotiated, the purchase agreement is drafted. The buyer's legal counsel usually takes the lead in preparing the initial draft, incorporating the agreed-upon terms, representations, warranties, and other essential provisions. 

After the initial purchase agreement is drafted, negotiations between the seller and the buyer typically continue, as both parties seek to protect their interests and ensure that the terms of the sale are fair and satisfactory. The purchase agreement will likely go through a series of revisions based on the feedback and input received for each draft. Once all parties are satisfied with the final version of the purchase agreement, it will be executed by the buyer and the seller.

It is essential to seek the guidance of an experienced legal professional throughout the process of selling a business. Among other things, your lawyer can assist you through valuation, due diligence, and purchase agreement negotiations while also helping to identify and address legal issues that may arise during the sale process. Their  valuable legal expertise and guidance will truly benefit you in this process every step of the way. For this reason, engaging a business lawyer early in the process can significantly contribute to a seamless and successful sale transaction.