How to Sell Your Business and Achieve a Successful Exit

Selling a business you‘ve worked so hard to build is a major decision that involves careful planning. As an entrepreneur, your business is likely your largest asset, so it‘s critical to maximize its value and find the right buyer when you‘re ready to move on. By taking the right steps and assembling a strong team of advisors, you can achieve a successful exit and secure your financial future.

Preparing Your Business for Sale

Most business sales processes take anywhere from 6 months to over a year from start to finish. To help ensure a smooth transaction and maximize your business‘s value in a sale, here are some key steps to take in the years leading up to your exit:

1. Get Your Books in Order

Serious buyers will want to see at least 3 years of detailed, accurate financial statements that have been reviewed or audited by an outside CPA firm. Make sure your bookkeeping is up to date and follows generally accepted accounting principles (GAAP). Consider upgrading to a more sophisticated accounting system if you‘re still using basic software.

It‘s also important to have clean, well-organized records for things like customer contracts, employee records, intellectual property, and any other key assets or agreements. The more transparent and buttoned-up your financials and records are, the more confidence buyers will have.

2. Boost Your Bottom Line

Buyers are ultimately interested in your business‘s future earnings potential. In the 1-2 years before going to market, look for ways to increase revenue, expand into new areas, improve margins, and boost your bottom line. Consider raising prices, cutting underperforming product/service lines, renegotiating supplier contracts, or finding other operational efficiencies.

Avoid the temptation to slash costs in ways that could hurt the business just to temporarily boost profits. Buyers will perform due diligence to sniff out any short-term moves that aren‘t sustainable. Instead, focus on profitable growth and building a strong, stable earnings history.

3. Reduce Owner Dependency

If your business is overly dependent on you as the owner, it will be less valuable to potential buyers. A business that can thrive without the founder is more attractive than one that will fall apart when you leave.

To reduce owner dependency, focus on building a strong management team, delegating responsibilities, documenting key processes and information, and ensuring your company can operate smoothly without you there every day. If you‘re the face of the brand or your relationships drive a lot of the revenue, start transitioning those roles to others.

4. Protect Your Intellectual Property

If your business involves any proprietary technology, processes, products, or brands, work with an attorney to get patents, trademarks, and copyrights in place. Buyers will want to know that your IP is protected and that they have clear rights to use it. The same goes for any key contracts, licenses, or franchise agreements – make sure they are current, valid, and transferable to a new owner.

5. Resolve Any Outstanding Issues

Is your business involved in any lawsuits or regulatory disputes? Do you have any environmental liabilities or unaddressed problems with physical assets? If so, work to get those issues resolved before trying to sell.

Any lingering legal, financial, or operational problems will be uncovered in due diligence and could delay or derail a sale. It‘s better to deal with them proactively than to let them become obstacles once you have an interested buyer.

Timing Your Sale

When it comes to selling a business, timing is everything. Ideally, you want to go to market when your company is performing well and the economy and your industry are strong. Trying to sell during a downturn or when your business is struggling will make it much harder to get the valuation you want.

Of course, it‘s not always possible to time things perfectly, especially if your exit is triggered by personal circumstances like a health issue or partnership dispute. Generally, though, here are some signs it may be a good time to sell:

• Your business has been growing consistently and is expected to continue expanding
• You have a strong management team in place who can maintain operations
• The economy is healthy, financing is cheap and accessible, and overall market conditions are favorable
• Your industry is thriving and seeing strong interest from buyers/investors
• You‘ve lost the passion for the business or identified another opportunity you want to pursue
• You‘re nearing retirement and ready to start transitioning out
• You need to raise capital for the business but don‘t want to take on investors or debt

Even if you‘re not ready to sell immediately, it never hurts to start preparing. Begin organizing your financials, making the business less owner-dependent, and taking steps to maximize value now. That way, you‘ll be ready to move quickly when the timing is right or an attractive unsolicited offer comes along.

Understanding Your Business‘s Value

Getting a realistic valuation for your business is critical for pricing it appropriately and negotiating with buyers. Most owners tend to overvalue their companies, so it‘s important to set reasonable expectations.

The value of your business will depend on a variety of factors, including:

• Financial performance (revenue, profits, growth rate)
• Size of your market opportunity
• Strength of your brand and customer base
• Barriers to entry for competitors
• Quality of your physical and intellectual assets
• Stability and talent of your management team
• Scalability of your business model
• Health of your industry and the overall economy

There are several methods for valuing a business:

1. Discounted Cash Flow

This method involves projecting your company‘s future cash flows and then discounting them back to the present at a rate that reflects the riskiness of the business. The sum of those discounted cash flows is your business‘s estimated value. This approach focuses on the cash-generating potential of your business.

2. Comparables

This valuation looks at what similar companies in your industry have sold for recently. Investment bankers maintain databases of sale prices for companies of different sizes and sectors. By finding comparable companies, you can estimate a multiple of revenue or earnings that an acquirer might be willing to pay for your business.

3. Multiple of Earnings

The most common valuation approach for established companies is a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). The multiple varies widely by industry but is meant to account for growth prospects, profitability, risk, and other key factors. Depending on your sector and size, your company might be worth anywhere from 3x to 10x EBITDA as a general range.

To hone in on a more precise valuation, you‘ll want to meet with professional advisors or have a formal appraisal done. A certified public accountant (CPA) who specializes in business valuation can conduct an objective assessment. An investment banker or M&A advisor can also help you estimate value based on their knowledge of your industry and previous deal experience.

Assembling the Right Deal Team

Selling a business is a complex undertaking with a lot of moving parts. To get the best outcome, you‘ll want a skilled group of advisors on your side. Here are the key players you‘ll want to enlist:

M&A Advisor or Business Broker

For larger companies ($5-$10M+ in revenue), an investment banker or M&A advisor can help market your business to a wide range of potential strategic and financial buyers. They will work with you to craft marketing materials, identify a list of targets, contact and screen buyers, solicit offers, and negotiate key deal terms.

For Main Street businesses, a business broker serves a similar intermediary function on a smaller scale. Brokers will list your business for sale (confidentially), contact a network of potential buyers, arrange meetings/visits, and assist with negotiations and closing. Either way, an experienced intermediary who knows your industry will be an invaluable ally.

Transaction Attorney

There are many legal considerations involved in selling a business, from reviewing NDAs with potential buyers to negotiating the purchase agreement and other closing documents. An attorney who specializes in M&A transactions will ensure your interests are protected and help you navigate any legal hurdles that arise.

CPA and Tax Advisor

Selling a business has major tax implications, both for the company and for you personally. You‘ll want a CPA on your team who can advise on the tax consequences of different deal structures and help minimize your tax liability. They can also assist with financial due diligence and ensure the accuracy of your accounting records.

Wealth Manager

Once the sale is complete, you‘ll need a plan for managing the proceeds. A wealth manager can help you update your financial plan, invest the money prudently, and make the most of this liquidity event. They can also connect you with estate planning attorneys and other professionals to get your affairs in order post-sale.

Finding the Right Buyer

When you‘re ready to exit, there are several types of buyers you may encounter:

Strategic Buyers

These are typically larger companies in your industry (or a related sector) who believe your business would be a good strategic fit with theirs. They‘re usually willing to pay a higher price than financial buyers because they see synergies and competitive advantages in combining the companies. The downside is they may want to integrate your business more fully with theirs.

Financial Buyers

These buyers are mostly private equity (PE) firms that want to acquire profitable, growing companies for a 3-7 year holding period, then sell at a higher price. PE firms typically target businesses with over $1 million in annual earnings before interest, taxes, depreciation, and amortization (EBITDA). They can often pay in all cash at closing, but will likely want to keep you on for a transition period to smooth the ownership change.

Individual Buyers

For smaller Main Street businesses, you‘re likely to get interest from individuals, often former corporate executives looking to buy themselves a job. Individual buyers normally need seller financing and have a lower budget. They can be a good fit for businesses where the owner wants to phase out gradually.

To find the right buyer, you‘ll want to cast a wide net while also doing some proactive outreach. Listing your business for sale confidentially with a business broker is the best approach for smaller companies. They can discretely market the opportunity to a large pool of potential buyers.

For larger businesses, your M&A advisor will develop a list of targets and reach out directly to drum up interest. Likely buyers include competitors, larger companies in your industry looking to expand, and companies in adjacent industries that could benefit from your products/services.

Your advisor may also suggest contacting private equity firms focused on your sector. PE groups are constantly looking for solid acquisition opportunities and have large amounts of capital ready to deploy.

Negotiating the Deal

Once you have interested buyers, the negotiation process begins. Here‘s where an experienced M&A advisor really earns their fee. They will solicit offers from multiple parties to create competitive tension and maximize your leverage.

Key deal terms you‘ll need to focus on include:

• Total purchase price
• Amount of cash paid at closing
• Any seller financing or earnout payments
• What assets and liabilities are included/excluded
• Length of owner transition period
• Non-compete agreements for owner/management
• Reps and warranties you‘ll have to make about the business

Your advisory team will work to negotiate the most favorable terms and ensure you‘re not giving away too much or taking on undue risk. Ideally, you want to get as much cash at closing as possible while minimizing your post-closing liabilities and obligations.

Closing the Deal

Once you have a signed letter of intent with your chosen buyer, the due diligence process will begin. The buyer will dig into every aspect of your business to validate what you‘ve told them and look for any red flags.

Common due diligence requests include:

• Detailed financial information
• Customer contracts and sales pipeline
• Employee details and HR records
• Intellectual property rights
• Physical asset appraisals
• Environmental assessments
• Legal matters
• IT and security audit

You and your team will need to be responsive to information requests and work to resolve any issues that come up. Due diligence can be time-consuming and stressful, but being organized and forthcoming will keep the process moving.

Simultaneously with due diligence, you‘ll be negotiating the definitive purchase agreement and other closing documents with the buyer. This is where that M&A attorney is critical to making sure everything is buttoned up properly.

Depending on the nature of your business and the buyer, you may also need certain third party approvals to close the deal. For example, you might need consent from key customers or suppliers to transfer their contracts, or regulatory approval if your industry is highly regulated.

The whole closing process typically takes 60-90 days, but can vary quite a bit based on the complexity of the deal. Once all the paperwork is signed and the money is wired, the deal is done!

Life After Selling Your Business

Selling the business you built from scratch is a huge milestone. After you‘ve handed over the keys, take some time to celebrate what you‘ve accomplished and decompress.

But there are still some important housekeeping items and big decisions to make:

Tie Up Loose Ends

Make sure you‘ve transferred all assets, assigned contracts, and completed all the legal requirements to fully transfer ownership to the buyer. Provide introductions and continued support during the agreed-upon transition period to ensure a smooth handoff of customer and supplier relationships.

Handle the Proceeds

Work with your CPA to properly record the sale proceeds and pay any necessary taxes. Then your wealth manager can help you allocate the after-tax windfall. They‘ll assist with updating your financial plan, re-assessing your risk tolerance, and investing the money in alignment with your goals.

Plan for What‘s Next

Some entrepreneurs struggle with no longer going to the office every day and being the boss. It‘s a good idea to develop a plan for how you‘ll spend your time and find meaning outside the business.

You might use some of the proceeds to fund your next venture, either as a founder or investor. You could take on advisory or board roles to stay engaged in the business world. Or maybe you want to travel, take up new hobbies, and spend more time with family.

The beauty is, selling your business gives you immense freedom to write your next chapter. By following a disciplined exit planning process, assembling a strong deal team, and being smart with your liquidity, you can move on to the next phase with confidence.