If you’re a small business owner and you’re thinking about your exit strategy, we’ve prepared a thorough checklist of all the things you’ll need to consider to get ready for a sale of your business.
The first question most potential buyers will ask is: why are you selling? For many, the answer is retirement. For others, they’re ready to do something else. Whatever the reason, start by understanding your “why” and crafting a response for potential acquirers. If you’re trying to understand if you should sell your business, here’s a helpful guide on thinking through whether or not you’re ready.
When I exited my first company, I was simply done. I’d poured 5 years of my early twenties into the business. There were many sleepless nights. Our goal was to build a huge tech company, and while we built a great product with happy customers, we weren’t on the fast track to the kind of success I wanted. So without a “seller checklist” like this one, we started shopping the business around. It took months to find potential acquirers, and in retrospect, having some guidance around what a sales process looked like would have been extremely helpful.
Prepare a statement that explains the reason you want to sell
By understanding your internal “why” for selling, you’ll be able to articulate that to potential buyers. You’ll also set yourself up for a better understanding of the types of buyers you’re most interested in talking to. If you’re looking to maximize the sale price of your business, and earning enough money for a long retirement is the goal, you may not care what the seller plans on doing with your business after you hand over the reins. If you want to pass on a legacy, you may want to consider buyers who are interested in preserving your brand and operating your company “as is”, rather than rolling it into a larger entity.
Putting your “why” down on paper, and writing up a short statement on the reason for selling will help you kickstart the package you’ll eventually pull together for prospective buyers, often referred to as a prospectus or Confidential Information Memorandum (CIM).
Since exiting my first business, I’ve gone on to buy two more. Both sellers had clear reasons for selling: one wanted to start a new company and the other was getting ready to retire. With those clear “whys”, it made it easier for me to understand why they were selling companies that were profitable instead of questioning their motives.
With the first business I bought, the seller had done much of the upfront work outlined below, and we were able to go from first meeting to closing the transaction in 90 days. When we took over the business, we had everything we needed for him to hand it over seamlessly.
The second company was less prepared for a sale - we approached them, and they hadn’t engaged the necessary advisors to help package the company up like the first seller had. We worked through it together, but from introduction to close took much longer, as we had to help them compile and then review and verify much of what’s on this seller’s checklist. That’s why, in my experience as owner and buyer, if you want to expedite the sales process - it’s good to have a why.
Determine the Value
The first thing to consider when selling your business is what its actual value is. Baton believes every business owner deserves to know what their business is worth — so they made it free. They evaluate hundreds of comparable businesses, taking location, industry and other factors into consideration, and compare the results of a variety of valuation methods (eg. discounted cash flow, cash flow multiples, revenue multiples, EBIDTA multiples, and more). Their proprietary algorithm weights these values to produce an estimated valuation range that gives owners a realistic view of what the business may be worth if sold today. Along with your valuation range, they’ll provide actionable advice on how to prepare your business for a sale and maximize your chances of selling on the higher end of the range, along with personalized connections to our vetted partners.
If you’re considering alternatives to Baton, check this article out on how much valuations cost or this one that breaks down different valuation methods.
Collect documentation that supports that value
Your valuation is going to be primarily supported by your business financials. Your profit and loss statement will show a potential buyer what your business looks like on a monthly basis. Your balance sheet will show your assets and your liabilities. These are collectively used to determine what the business is actually worth.
You’ll want to work with an accountant to help you clean up your books, pulling out any expenses that may not be necessary for the ongoing operation of your business. It’s also common to pull out one off expenses you may have put on your profit and loss statement for tax purposes that are not necessary to operate the business on an ongoing basis. This helps show the true income your business generates, and is called “normalizing the P&L”.
Many sellers run personal vehicles, insurance, etc. through their business - and that’s fine and simple to pull out and show as income to a buyer. By normalizing those financial statements, you generally show more income than you would on your tax return.
Create a Brand Overview
Creating a summary of your business can be a helpful tool to both target and share with potential buyers. What does your business do? Who are your customers? In what markets do you operate? What business assets do you have that will be of value to a potential customer?
If you’re running a doughnut shop, you’ll want to describe how long you’ve been in business, why your locations are valuable, what your customer base looks like, what your brand means to your local community, how many employees you have, and what type of equipment you own that will be of value to someone that wants to run a doughnut business.
List the Brand's Unique Selling Points
What makes your business different from your competitors? Does your doughnut shop have a proprietary recipe that makes Dunkin Donuts taste like cardboard by comparison? Have you been operating in your community for decades, building up tremendous goodwill in the neighborhood? Like anything people buy and sell, a buyer wants to understand that what they are buying is unique and differentiated from other business acquisitions they may be considering.
Pull together all of your marketing activities and assets into a document. Ideally, you can show a buyer how much you spend on marketing and where you’re spending it. This will give the buyer an understanding of how much it costs you to acquire a customer.
If you have a strong brand, it’s also helpful to show the buyer that you’ve created and organized assets they can use when they take over the business. Logo files, brand guidelines, current and past advertisements, flyers, promotions, etc. are all valuable to a buyer that wants to take over your business.
Complete inventory list
Some small businesses that are inventory heavy are purchased for a sales price + the cost of any existing inventory. You’ll want to compile your inventory list, noting which inventory is still sellable and which may need to be written off. If some of your inventory isn’t selling for whatever reason, is expired, or defective, you’ll want to be upfront with a potential buyer about that, as they will generally incorporate clauses in the purchase agreement that stipulate you are selling them sellable inventory.
Gather all Business Licenses, Contracts, and Agreements
Depending on the type of business you run, you’ll have various licenses, contracts, and legal agreements the buyer will want to review. If you’re operating in a regulated or licensed industry, the buyer will want to understand that you are in compliance and that the license transfers as part of the sale. Similarly, the buyer will want to see any real estate lease agreements, equipment leases, employee agreements, etc. that could materially impact the business when they take it over.
We recommend putting together a “data room” - some sort of shared folder setup in the cloud that can easily be shared with advisors and potential buyers. You can start to compile all the documents mentioned in this guide in that data room and add to them over time as you work through this checklist.
A buyer is going to want to see your tax returns to understand that the income you’re reporting on your tax returns aligns with what you’re telling them the business actually makes. Most buyers have an understanding that some small businesses run expenses through them for tax purposes. Ideally, personal expenses can be backed out by an accountant or financial professional.
Seller's discretionary earnings
A seller's discretionary earnings (or SDE) is generally what the seller can pull out of the business every year. Businesses are usually valued on a multiple of these earnings - so if all of the true expenses needed to operate the business on a daily basis are subtracted from the revenues, you’re left with SDE. That is what an acquirer can hope to take home if they buy your business. They’ll use that number to understand how they can finance the business, as that is usually what they will be using to pay back any debt, or to realize their own returns on the investment they’re making when buying your company.
Working with an accountant to pull together clean financial statements is a crucial part of the sales process. Any potential buyer is going to want to review your financials, and they usually want to see a Profit and Loss statement, a Balance Sheet, and a Cash Flow statement. These will paint a financial picture of your business for the buyer, and an accountant can help you present them in a way that makes your business look most attractive.
Do you have any agreements with suppliers where they extend you credit? If so, you’ll want to document those.
Does your business have any outstanding debts? Those will be paid off either before or during the sales process, and they will usually be discounted as part of the purchase price. Say your business is valued at $5M. If you have an SBA loan for $2M, you’ll net $3M from the sale.
Do you have any accounts receivable from customers? Figuring out when those are paid, and to whom, is generally part of the sales process. You’ll want to have those documented so you can understand how they will impact the business valuation as you get closer to a sale.
General Business Documents
Equipment and facility maintenance agreements
Any agreements you have to maintain your facility or equipment will be helpful to a buyer. Those will likely be transferred to them during the sales process, but they may want to understand what the contracts look like.
Existing customer and supplier contracts
Do you have customer contracts? Those are usually transferred at the time of a sale, but the terms of those contracts may also have an impact on your valuation.
Product or services price list
Providing a seller with your services and pricing will help them better understand all that your business offers.
Intellectual property documents
Does your business have any intellectual property, like patents, trademarks, or copyrights? Those will all have value to a potential buyer, and as part of the sales process, you’ll likely transfer them to the new owner.
As part of the sales process, potential buyers will want to understand what legal obligations your business may have, how the company is structured, and whether or not you’re dealing with any pending lawsuits. Gathering the following information will help get you out in front of these fun legal questions:
Stockholders and shareholders
The first legal document a buyer is likely going to want to review is an operating agreement or shareholders agreement to ensure that you are legally able to sell the company. If you have partners, you’ll need to understand if you require their approval for a sale. A buyer will likewise want to know if you have partners and how they will be compensated when the transaction closes.
What do your employee contracts or agreements look like? Is the buyer obligated to your existing employees in any way? And how do employees transfer over once a sale is complete? Some businesses have “key man risk”, meaning there are managers or executives that are crucial to running the business. As the owner, you may be one of those people, and a buyer may want you to stay on for some period of time to help you transition the company after the sale. You may have a key manager, and a seller may want to understand the likelihood of them staying involved in the business, either contractually or otherwise, after you sell.
Physical legal description of business property
If you own your property, you can sell it as part of the sale of your business. Some owners opt to keep the real estate and lease it back to the new owners. Some buyers will want to buy the real estate, while others will prefer to lease it back. Regardless, having the physical legal description can help buyers start to evaluate your location and the value of the real estate they’ll be renting or buying.
IRS audits (if available)
If you’ve ever been audited by the IRS, you’ll need to show the documentation of the audit.
Pending lawsuits (if available)
Prospective buyers will do a search on any pending lawsuits and loans against the business. It’s best to disclose this information up front.
Gather any founding documents you may have, including your business registration with the state.
Insurance usually does not transfer to a new owner, but a buyer will still want to understand what types of insurance coverage you carry and the levels of coverage. If there are any issues getting insurance coverage, etc.
Some businesses also hold “key man” insurance or life insurance policies on key employees in the business. If you have executives or managers that are core to your operations, sometimes a buyer will want to ensure that they will be covered once the business transfers and that those managers will continue to work with them post-sale.
Create a list of all Security of Information and Technology Systems
If you’ve been storing all your passwords on a post it note - now is the perfect time to get all those online accounts organized. I’d recommend using a password manager like LastPass or 1Password. These are online tools that will help you organize all your passwords in one location, and these accounts can then be transferred to a future owner.
In your list of passwords and systems, you’ll want to include any online accounts that are relevant to the business. Everything from access to online tools, emails, and online bill pay.
You’ll also want to gather any website domain renewal dates to ensure that both you and a future owner maintain ownership over your URLs.
Prepare to Work With Potential Buyers
After you’ve compiled all this information about your business, it’s time to start thinking about how to really sell your business. There are as many ways to contact prospective buyers as there are ways to acquire customers for your business. Depending on your industry, there may be competitors that would be interested in acquiring your company. There may also be large consolidators or Private Equity firms buying up businesses like yours. Plenty of “searchers”, or solo entrepreneurs are also looking to buy small businesses as a path toward business ownership.
Depending on the type of buyer you think will be interested in your company, your best first step here is to decide which advisors you want to help you through the sales process and to work with them on a buyer outreach strategy.
At Baton - you’ll start by receiving a complimentary valuation and connecting with an advisor to support you regardless of where you are in your journey. If you’re ready to connect with buyers, we surface lists of potential buyers that have indicated interest in businesses within your criteria. This way, you can stay anonymous for as long as you’d like.
Preparing for Buyer Requests
Once you start talking to buyers, be prepared for them to ask lots of seemingly invasive questions. Keep in mind, that they’re considering paying you a lot of money for your business, so they’re going to want to intimately understand what it is they are buying.
When you first engage a buyer, having a document, like a “CIM” described above can be a great starting point. That document should provide a high-level summary of your business and your financials, and give the buyer enough to decide if they are interested.
From there, they may want to see some more detailed financial information, tour your operations, and have conversations to better understand the business. Once you’ve provided them with that information, they should have enough to decide if they want to make you an offer or not on your company.
An offer is usually sent in the form of a Letter of Intent (LOI), stipulating the purchase price for the business and any additional contingencies of the sale. You can read more about this process here.
Once you sign an LOI, there is a due diligence period where the buyer will investigate all the documentation discussed above. They will want to reconcile all your financials to ensure that the way you are reporting income and expenses is accurate. They’ll dive into all the legal documents to make sure there are no pending legal liabilities. They’ll make sure the ownership structure of the company is conducive to a sale. If this all sounds overwhelming, great advisors (and Baton) can help.
Consider Outside Help
Selling a business likely isn’t your business. There are however competent experts in legal, finance, and business broker that do nothing but help buyers and sellers of small businesses complete transactions. If you’re overwhelmed by this list, or just value having experts in your corner as you navigate a sale, we strongly recommend engaging some of these professionals. Not only will they make the process smoother, but they will often help you get more money for your business than if you sold it on your own.
Baton can help you connect to our vetted partners so you know that your business and future are in good hands.
A business broker is similar to a real estate broker. If you’ve ever sold a house, likely a broker helped you price and list the house, find and manage potential buyers, and ushered you through the sales process. A business broker does much the same thing. They can help you understand a professional business valuation, decide on an asking price, and then help you negotiate with a buyer for the actual purchase price. They’ll likely have an understanding of your business’s true profitability and can even help you compile much of the documentation you’ll need before and during the sale.
Similarly, brokers often know buyers. They may have contacts with people buying businesses like yours, and they can help you decide on whether or not the timing for a sale is right for you. All in all, they’ll streamline the whole process so you can keep running your business until it sells. You can read more about how to qualify brokers here.
A business sale is a legal transaction, so you’ll want a good attorney to help you through the purchase agreement. Generally, a purchase agreement is created by a buyer. As such, you’ll want your attorney to review it, suggest changes, and help you understand what you’re agreeing to as part of the sale.
If you don’t already have a good accountant and/or book keeper, you’ll want one to help you organize the financials a buyer is going to want to see. They can help you normalize your financials, and prepare them for buyers. Most small business accountants will be familiar with packing up your business for a sale. Additionally, there are tax implications when you sell a business. An accountant can help you think through those so you keep your tax liability as low as possible when you’re paid out after the sale.
At first, the business sales process may seem a bit overwhelming. As you’re well aware, running a small business has countless moving parts. Documenting many of them, and then packaging them up for a potential buyer is definitely work - but it can all be worth it if you are ready to sell and you find the right buyer.
When I exited my first company, we did it without much guidance, we came up with a complicated legal agreement, and no one ended up making any money in the end. With hindsight, I would have done things very differently. With buying my first two businesses, we brought on the right advisors, worked more closely with the sellers, and at the end of both transactions, we and the sellers were delighted with the results. Working through a checklist like this made all the difference.
Wherever you are in your journey, Baton wants to support you. Even if you aren’t considering selling at all and simply want access to partners to help you think about how to organize your business around some of these ideas – you’re in the right place. Get started with Baton today.