What Entrepreneurs Need to Know Before Selling a Business

Thinking about selling your small business? Now may be the right time to contemplate selling — or at least considering an exit strategy.

Amid COVID-19, studies have shown that the majority of advisors see today’s market as a seller’s market for businesses valued between $2 to $5 million. Small businesses in essential industries, such as delivery and eCommerce, are also considered to be in high demand and may be ripe for a sale to interested buyers.

No matter how confident you are that it’s time to sell, the process of selling a business can still be very overwhelming. Here are some key considerations to keep in mind that can help make the process less stressful and rewarding.

Do you know how much your business is worth?

You may think you know the worth of your business, but rather than guesstimate it’s important that you first conduct a business evaluation. Get a realistic idea of what the company is worth from an objective and outside source.

A professional evaluation gives you the basis for gauging offers and determining which ones are viable and what you can expect from the sale. You may get an evaluation of your business from a number of sources including accountants, business brokers, and investment banking firms.

Consider how prepared you are to sell your business.

Many entrepreneurs will sell their businesses for a variety of reasons. Some entrepreneurs may feel as though they were able to lead their business to great success and are ready to go out on top. Others may be anticipating serial entrepreneurship and plan to start another business after they sell this one.

Aside from mentally preparing to move on, it’s critical to prepare your financial paperwork. Your business should be in good shape to attract buyers with solid balance sheets and an understanding that the company may be run without you present.

Recognize that it takes time to sell a business.

Selling a company, regardless of how profitable it may be, does not happen overnight.

Typically, it takes about six to nine months to sell a business. For the purposes of planning, it’s best to think at least a year out. You’ll need to use this time to think strategically about all aspects of the business from whether or not the company is in good standing with the state to its intellectual property to communicating with your team as well as the buyer to make sure everything is in order.

Will you sell the business completely or keep a portion of the percentage?

When selling a business, entrepreneurs may choose to sell their entire company and liquidate 100% of their equity.

However, not all entrepreneurs choose this option. There is also the option of recapitalization, which changes a company’s capital structure. In this situation, the owner likely retains a minority share in the business’ interest — usually around 10 to 40%. This gives the existing owner of the business an incentive. They can sell a portion of the business and earn a bit of money. They receive the added investment, and a bit of freedom to enjoy more flexibility.

So, should you sell the entire company or keep that portion of the percentage? Ultimately, the answer has a lot to do with the ongoing viability of the business and how invested you, the entrepreneur, is in the growth of the business. Much of the decision will tie in with your plans for an exit strategy. In the event that you plan to completely move on, you may decide to fully sell the company. There may also be a scenario in which you sell a portion of the business and have interested investors or buyers with management expertise. These may be possible competencies that your business does not yet have that will allow it to grow in the long run. Many entrepreneurs may see that as a fantastic reason to stay partially invested in the ownership of the business. They are able to maintain some ownership interest and remain involved in the business for the opportunity to see the business grow and thrive.

Are you incorporated as an LLC or corporation?

What does a business formation have to do with selling a business? Quite a bit more than you may realize! As mentioned earlier, it will be critical for buyers to examine if your business is in good standing with its state of incorporation. You’ll need to make sure your corporate documents are in order well before discussing whether you’ll sell the business.

A few due diligence essentials to take care of include the following:

• Have you incorporated as a corporation or formed a limited liability company (LLC)? Incorporating a business essentially allows the business to become separate from its owner. Buyers will be more hesitant to buy a business for sale that is incorporated as a sole proprietorship. This entity does not provide limited liability protection and may be more of a risk than that of an incorporated business. They are seeking out entrepreneurs that have incorporated businesses that are all set up with a structure in place.
• Does the business have its proper state IDs and business licenses? Depending on the type of business you run, it is critical that you have the proper licenses to run the company as directed by your city, state, and industry laws. Buyers will want to know what kinds of licenses you have in place so they make sure that these business licenses are all set up. If you need to provide additional information, like certificates or doing business as names (DBAs), you may need to show these as well. Create a folder to store all of these documents both physically and in a cloud storage system.
• Did you file for any trademarks and/or copyrights? If you have filed for federal registration of these marks with the Secretary of State, make sure you have documentation regarding this intellectual property available for review. In the event that you needed to register a patent, this information should be organized and available to show potential buyers as well.

Are you ready to draft a letter of intent?

A letter of intent is often abbreviated as LOI. It is a document that outlines between the buyer and seller the key terms and conditions of the sale in a legal agreement.

Once the business is in good standing, you feel confident it is successful and ready to sell, and you have agreed on general purchase prices, you will then put these items into your letter of intent. Additionally, your letter of intent must be able to include information about assets sold to the buyer as well as assets the seller will keep and terms of the seller’s noncompete agreements.

A well-drafted LOI will help buyers get the sales documents right on the first draft to prevent from being subject to further negotiations. Without the LOI, you may end up negotiating the business deal and legal language at the same time. This requires multiple drafts, more time and money spent on legal fees, and may frustrate all legal owners involved in the process. By getting the agreements settled early on, you’ll be ready to be off and rolling with an assigned LOI that allows the business to be officially in a motive sale.