In the past year, I’ve met with a lot of small business owners who have just received a valuation, and oftentimes, the number in their head was higher than the professional valuation or opinion of value. This makes the process of selling your business all the more difficult. Not only are you parting ways with a company you poured your life into, you also want to be sure you are getting the best deal possible and a fair value for the company. On top of that, it’s likely the first time that you are selling your business. This problem inspired us to start Baton, a marketplace for small business acquisitions and a whole lot more.
If you’re considering selling your business you probably have a lot of questions and concerns. Many business owners that we work with have spent hours wondering, “Okay, I’m selling my business… how much is it really worth?” Or, perhaps your questions are centered around the logistics of closing the deal. Or, maybe, you’re unsure about what your next steps are once you’ve decided to move forward with the sale.
We started Baton to support you regardless of which phase you’re currently in of selling your business. You shouldn’t have to navigate this daunting process of selling your business alone.
There are a lot of resources available to help you sell your business to the point that it’s overwhelming. That’s why we are breaking down the process of selling your business highlighting common questions and considerations.
You’ve invested years of your life into growing this company; it’s understandable that you want to get the most bang for your buck and ensure that you make a good deal. We’ll answer questions ranging from, “Is my business worth selling?” to “How do I prepare financials” to “How can I close a deal?”
Let’s dive into answering your very first question: how do you evaluate if your business is worth selling?
Is my business worth selling?
There are a lot of reasons why small business owners consider selling their business. Some small business owners simply want to try something new and will reinvest the profits from their first company into a new venture they’re excited about. In other cases, the small business is experiencing cash flow problems or there are financial risks that the owner is unwilling to take.
Alternatively, some people decide it’s time to say goodbye to their company if they’d prefer a guaranteed payout as opposed to rolling the dice to see what happens in the future. In other cases, the owner is retiring, and selling the business marks the end of their career.
Sometimes, there may be a case to be made for keeping your operation alive. For example, if sales have declined in recent years and you strongly believe you can improve the business's cash flow in a reasonable amount of time, it might benefit you to make some changes before selling.
Other times, you just have to let the industry or even global trends play out. Take the COVID-19 pandemic, for instance. Small businesses were disproportionately impacted, which negatively impacted cash flows, buyer demand, and business sale prices.
We encourage you to first evaluate why you’re selling your business. Try to consider what you’re looking to gain — or lose — by letting your business go. Once you decide that you’d like to proceed with considering the sale, your next steps await.
We’ve outlined the steps you’ll likely take once you decide to sell your business. The first step is centered around guaranteeing that you know how much your company is actually worth — so you can feel confident that you will be getting the most for it.
Step 1: Determine What Your Business is Worth
The first step should be receiving a business valuation — in other words, determining how much your business is worth. This is a critical step in the process for several reasons.
First, it will give you more perspective on how much you can get for the sale of the business. Second, it will give you leverage when you’re considering offers. A business with a proven track record of bringing in a strong profit will likely sell easier than one that doesn’t have such a track record.
It’s one thing to say you’re going to determine how much your business is worth, but it’s another to know how to go about this. It all comes down to the different valuation methods. Some of the most popular metholds are:
- Market-based valuation methods
- Adjusted net asset method
- Discounted cash flow method
- Seller discrestionary earnings method
- Capitalization of cash flow method
When determining which valuation method to use, it’s important to consider things like net income, company assets, and the current market. If you’re not sure which valuation method is right for your business, that’s where a partner like Baton can help.
Step 2. Prepare Your Financials
You have a clear picture of how much your business is worth, thanks to the research you’ve conducted and the time you’ve put into totaling it all up. Now, what is your next step when it comes to selling your small business? It is officially time to begin preparing your financials.
If you don’t already have an accountant or bookkeeper, working with a financial professional will help ensure your books are clean. While most small business owners run personal expenses through their company, you should be sure to normalize your profit and loss statement. This will show what the business generates.
When you’re rounding up your financials, you should have all of your sales and profit history. The more financial records you can provide, the better. Buyers may also expect to see profit and loss statements, bank statements, balance sheets, and tax returns.
If your business isn’t in the best financial state, you could consider pricing it accordingly — to demonstrate that you’re cognizant of the risk any potential buyers are taking by buying the company.
If you’ve had your business for several years, you can provide them with the net profit over a certain period of time to bolster their understanding of how much revenue the company has generated.
This brings us to our next point: cash flow. The cash flow refers to the movement of money in and out of a business. This is often discussed in regards to liquidity. With the help of cash flow statements, your potential buyers will gain insight as to if your business generates enough revenue to cover the expenses. Provide insight into the annual cash flow of the business and also give them an overview of the free cash flow.
Seller's discretionary earnings
Seller’s discretionary earnings (or SDE) is the calculation of the total financial benefit that one full-time owner would receive from a business annually. Sometimes you’ll hear this referred to as adjusted cash flow. Keep this in mind for later when we discuss how to figure out how much to price your business.
Hang onto this information — we’ll mention it later, too! When you calculate SDE, you’ll have to determine a reasonable multiple that you can apply to the earning stream. Multiples are usually 2-3x, however, this varies. You can even see it reach as high as 4x if your business is performing really well.
Step 3. List the Business for Sale
You completed the business valuation process, prepared your financial statements and due diligence documents, and now you’re ready to get started on the next step of selling your small business.
Your next step is to list your business and maybe you want to consider a broker.
Using a broker to sell your small business
A good broker may be able to handle a lot of the nitty-gritty of selling your business, allowing you to keep your focus on maintaining the company. Trying to sell a business can be a full-time job, and when you’re still in the process of keeping your business up and running, it can become quite demanding. A great broker should also be able to market your business efficiently and create new demand from their network of buyers.
There are also downsides to working with brokers as well – brokers aren’t cheap and may charge a retainer fee and typically take a percentage of the deal, anywhere from 10%-20% is standard. Moreover, if you don’t have a good sense of your valuation, a broker may promise a higher price to lock you into an exclusive agreement, only to drop the price.
Here at Baton, we pride ourselves on always being on the small business owners’ team — that’s why we start with an unbiased and complimentary business valuations, support you wherever you’re at in your journey, and never charge the owner. If you decide to work with a broker, Baton can connect you to their vetted broker network.
List the business
Now it’s time to officially list your business. We encourage you to use an online marketplace where potential buyers can peruse listings. When you list your small business on Baton, your company will be viewed by qualified potential buyers. Through Baton, the buyer has access to financing and purchase protection, too, which makes our marketplace an ideal place to sell.
Decide when you want to sell
You’ve decided to list your website on Baton’s digital marketplace. Now what? It’s time to figure out your exit strategy and when you’re going to sell. It’s not easy to determine when it’s the right time to sell your business.
There are several other indicators that may mean your business is in a good place to sell: your finances are trending upwards, your team is stable, there’s high demand for your products, and sales are consistent. If you find that this isn’t the case for your business, you could face a more difficult time trying to find a buyer.
After deciding if your business is in the place to sell, you’re ready to develop your exit strategy. When we discuss exit strategy, we’re really talking about your strategically designed plan to sell your company to another company or investor.
One thing that we want to stress is that there are all types of exit strategies and the better your business is doing, the more leverage you’ll have to make that a reality. For example, if it’s important for you to stay employed by the company, if you want a key employee to be taken care of, etc.
Set an asking price
You’re officially ready to set an asking price for your business. Keep in mind that the actual selling price will likely be different from the asking price, so be sure to start at a number you’re comfortable with.
Remember the work that you did gathering your financial statements? It’s time to use that when you’re determining your asking price. With the help of your financial statements, and your estimated valuation (hopefully done using Baton), you’ll be able to come up with a price.
Generally speaking, business values will range somewhere between one to five times their annual cash flow. When you estimate your earnings multiplier, you can assess your business in several key areas that impact the future, such as profit trends and revenue. This also factors in customer base and industry position.
Step 4: Field Offers From Potential Buyers
Once you start getting offers, you are hopefully in the home stretch of selling your business! However, you might be unsure what exactly fielding offers from potential buyers looks like — or how to choose the right person to take over the business you’ve been building for years.
Now that you’re at this step of the process, there are a few things you should know. First, remember that it can take somewhere between a few months and a couple of years to sell your business. If you invest in advertising and make it well-known that you are selling your company, you may be able to connect with more buyers which could make the sale quicker. That being said, if you can help it, you shouldn’t rush into a sale that you don't feel good about.
Ideally, you can get to a place where you are fielding multiple offers – the more offers you have, the more leverage you have to optimize for what is important to you. If you started with a valuation, you should have an understanding of what a fair price for your business is.
Here are a few of our best tips to ensure that the right person buys your company.
How to know when you have a good offer
Congratulations! You’ve officially received an offer on your business. Give yourself a pat on the back because you’ve put in a lot of legwork to get here. If you’re excited about the offer, it’s probably a good sign. However, it’s helpful to have a few guidelines to understand what a ‘good offer’ looks like in practice.
First, the price should be within range of your estimated valuation. A good offer takes into consideration the worth of the business while considering the company’s future. Your buyer is likely purchasing the business mostly because of its reputation, the client base, and how your team is already trained.
Next, allow for some negotiation. When you’re pricing your business, remember that you most likely will not get the exact asking price, so settle for a price that you’re comfortable with and know that you’ll most likely have an offer that’s lower than that.
You could consider ‘seller financing,’ in which case you’ll take some of the purchase price upfront and take payments on the rest over time. This could either be fixed or variable. If the price is fixed, the buyer typically completes the transaction quicker and more efficiently. This also provides the current owner an annuity — so you’ll get cash upfront and guaranteed income in the next several years. However, this can be dangerous if the buyer cannot pay back the seller note or if the note is performance-based and metrics aren’t hit.
Usually, you will receive a verbal offer first, and then the buyer will send an offer in writing or an LOI (letter of intent). This should include the purchase price, due diligence period, and expected date for closing the date. The LOI will usually include an exclusivity clause so you can’t engage any other possible buyers while the buyer does their due diligence.
If you feel uncomfortable with the offer, whether it’s because you feel your company’s future worth isn’t being properly calculated, or because you feel that the person interested in buying it is lowballing you, you can, of course, consider walking away.
Field offers from potential buyers
If you can get multiple offers, you’re in a great spot! Even when you think you found the buyer for your business, it is wise to keep in touch with all of the prospective buyers you’re speaking with throughout the sales process. If you do not stay in contact with them, and then the deal that you thought would go through doesn’t, you’re back to square one with sourcing buyers. When you’re interested in something, hearing updates on it helps maintain your enthusiasm for it. The same goes for prospective buyers.
Let the buyer perform due diligence
Your buyer is definitely going to have plenty of questions about your business, so let them get all of the answers by allowing them to do their ‘due diligence.’
Your buyer wants to make sure that they’re not buying a business that’s going to result in a loss, and one of the best ways to ease their fears is by being transparent with them. Provide them with as much information that you have – we know this can be uncomfortable as a lot of it can feel personal. However, a good business operator will want to know as much as they can and have a lot of questions. You should have digestible, honest answers available to them. Think like a buyer when you’re selling; what would you want to know if you’re considering investing in this business?
Some of the most common questions that people ask when they are considering buying a business include:
- Why are you selling the business?
- Walk us through the history of this business.
- Can I see a few years’ worth of tax returns?
- Is the company’s revenue increasing or declining? If it’s declining, why do you think that is?
- Are there any debts or liens against the business?
- Can I see the audited year-end financial statements for the business?
- Does the company have any ongoing lawsuits I should be aware of before buying?
- Who’s the target market? Who are the main competitors in the space?
- How does the business market itself? Which channels are the most and least effective?
- Is there any intellectual property associated with this business? If so, does ownership get transferred during the sale?
- How many suppliers does the company have?
- What does employee tenure look like here? Do people generally stay a long time, or is there a lot of turnover?
Remember: this is a two-way deal. While your buyer obviously has to do their due diligence on your company, you also have to do due diligence on them. Does the person who’s interested in your business to pre-qualify for financing? Do they have the right experience to operate your business? Doing your due diligence on a buyer may be extremely important, especially if you provide seller financing or if your reputation is tied to the business.
Step 5: Close the Deal
You did it! You’ve successfully closed the deal on your business. Give yourself another pat on the back; it’s quite a journey to reach this point, and you’ve navigated it gracefully. However, you’re not quite done yet. There are still a few more steps we encourage you to follow after signing on the dotted line.
You should ensure that all of your agreements are in writing. This means that your buyer will sign a nondisclosure agreement that protects your confidentiality and the information that you’re sharing with them.
Furthermore, the signed purchase agreement should be in escrow. After you’ve successfully completed the sale, you will need your bill of sale, which effectively transfers the assets to the person who bought your company, and the assignment of a lease (if applicable). In some cases, you’ll also see a security agreement or a non-compete clause.
You may also need to work with the new business owner to ensure a smooth transition. Sometimes you’ll be asked (or contractually obligated) to stay a certain period to help the new owner get acclimated. In some cases, if you’ve negotiated an earn-out, you’ll want to keep driving revenue for the business. Or, if the seller used financing, you’ll want to set them up for success to ensure they continue to profit and will be able to keep paying you.
To make closing as efficient as possible, document and organize everything as much as possible.
Now that you have a better understanding of what selling a small business looks like, you’re hopefully a bit more prepared with how to proceed should you decide you’re ready to let go of yours. We hope that by breaking down this process step by step, it’s more digestible for you and that you feel equipped with the resources necessary to make the sale of your small business a success.
We want to remind you that you do not have to do this alone. Baton is here to guide you every step of the way. Are you ready to learn more about the next steps for selling your business? Reach out to Baton today and we’ll help you get started with a complimentary and confidential valuation.