How to Sell a Small Business: Start Here

You have decided you are ready to sell your business. So, what next? The “how” of selling is complex and can be time consuming. In this post, we cover how to sell a small business, from preparing to sell to whether or not to engage a broker.

Know Why You are Selling

The first question a prospective buyer will ask is probably, “why are you selling?” After all, your business is—or should be— an attractive opportunity for them, and they will wonder why you want to part ways with it. While people sell for many reasons, below are some common ones:

Retirement

Burnout

New Interests

Health Issues

Partner Conflict

Whatever your reason is, it is important to identify it and be ready to answer a buyer’s questions. If you are uncertain if now is the right time to sell your business, take a look at this blog.

Timing is Everything

The first question is if it is the right time personally to sell your business. The second question is if the business is ready to be sold. In short, the best time to sell is when the business looks the most attractive to potential buyers. What makes a business desirable?

One of the main things a buyer looks for is growth: has the business grown sustainably in the past, and does it show signs of being able to continue that growth? If there is a strategy already in place for future growth, this looks even better. Another question is competitive advantage. While a large competitive advantage is ideal for obvious reasons, the advantage should also be sustainable; a sustainable advantage points to continuous future growth. Buyers will also look for a track record of business operations, such as finances in order and important documents updated.

An intangible area is the employees. Is the team united toward a common goal and motivated to work? Are employees capable or talented?

It often takes time to get financial, legal, and other important documents in order. This is why it is a good idea to start preparing to sell early.

Preparing for the Sale

It often takes some amount of preparation to get the company ready for the sale, thus it is wise to start this process a year or two prior. There are things a company can do to enhance growth prospects such as expanding marketing efforts. If your company has equipment, repairing broken parts or updating old models is also a good idea. In addition to improving business operations where possible, you will need to collect and make copies of important documents.

Prepare Documents

Organize financial statements for assets, liabilities, and income. Include legal documents such as a lease. You will also need tax returns for the past three to four years and should include operational documents for things like employee information, vendor contact lists, and business structure.

Part of the preparation process is deciding whether to work with a broker or not. A business broker can help with the details of how to sell a small business, serving as an intermediary between the buyer and seller.

How to Sell a Small Business with a Business Broker

There are many reasons to engage a broker when selling a small business. Brokers assist in a variety of ways, from helping with the initial valuation to final closing documents. For many business owners, working with a broker is the right decision. Selling a business is complex, and it is out of most owners’ area of expertise.

Why Sell a Small Business with a Broker?

Save time: Running a business is time consuming, but so is selling a small business. Working with a broker gives the owner time to ensure business operations continue as usual, which is extra important before a sale.

Company valuation: Brokers provide a professional valuation of your business, which is key to asking for a fair purchase price. Their knowledge of current market trends and the valuations of similar businesses helps them set the right price for your business.

Access to buyers: Brokers have a large network of potential buyers, increasing the likelihood that you will find the right buyer for your business. This also makes it more likely you will have more than one interested buyer, making the process more competitive and helping you receive a higher offer.

Industry expertise: Brokers have experience negotiating with buyers, helping you receive a fair price for your business. They also understand the ins and outs of necessary paperwork such as contracts and final closing documents.

Why Not Sell a Small Business with a Broker?

While knowing how to sell a small business is complicated and brokers bring a lot of value to the table, there are reasons not to work with a broker.

Cost: Brokers can be expensive. Typically, brokers charge a fee based on the Lehman Formula. It was developed by the Lehman Brothers in the 1960s and is the most common fee structure for merger and acquisition (M&A) transactions. The basic Lehman formula structure is as follows:

5% of the first $1 million in the transaction
4% of the second $1 million
3% of the third $1 million
2% of the fourth $1 million
1% of the remaining amount

Sometimes brokers opt to charge a flat fee instead, also a percentage of the transaction. Usually brokers ask for some of the fee in advance, to cover expenses.

Potential conflict of interest: Just like a real estate agent selling a home, brokers can be motivated to earn their fee. This may mean wanting to close a deal quickly rather than making sure to find the right buyer.

Lack of control: Just as a broker helps manage the process, this means you have less control over the process. The broker controls who the business is marketed to, how it is marketed, and the sale terms. Some business owners may prefer to take this on personally.

How to Sell a Small Business Without a Broker

While working with a broker is often the right choice, there are situations where it may make sense to sell without one. For example, if the buyer is someone already connected to the business— such as a partner, or the management team, or a family member— there may be no need to market the business externally. In other cases, the owner may be approached by a buyer or receive a handful of competitive offers without marketing the business.

Why Sell a Small Business Without a Broker?

Lower cost: Avoiding transaction fees is a good idea if there is no reason to engage a broker.

No risk of a bad broker: Without using a broker, there is no chance of the broker falling victim to a conflict of interest or marketing the business poorly.

Seller control: Without a broker, the seller has more control over the marketing process and the terms of the deal. Some business owners may prefer this option as selling a business can feel very personal. However, taking control of the sale process also means investing a substantial amount of time— which can be difficult while running the business.

In any case, choosing to sell a small business without a broker means sacrificing the broker’s expertise. That can mean the business owner having to spend time learning the market, understanding valuations of similar businesses, and taking on complex processes like due diligence.

Final Thoughts

Choosing to sell a small business with or without a broker is highly situational. The choice depends on a myriad of factors as well as the seller’s personal preference. When making the choice for your own business, it is important to take time to weigh the pros and cons. While a broker’s services are expensive, the cost can be more than worth it when it comes to securing the right buyer.

If you are contemplating what is next for your business and have questions about using a broker or not, please contact us. We would be happy to help.

How to Sell a Small Business FAQ

How Much Does it Cost to Sell a Small Business?

The cost of selling a small business depends on if you choose to use a business broker or not. When using a business broker, the cost is frequently determined by the Lehman Fee structure.

How Long Does it Take to Sell a Small Business?

On average, it takes 6 to 12 months to sell a small business. While it may take less time to find the right buyer, necessary processes like due diligence can be time consuming.

How Do You Determine the Value of a Small Business?

Getting a professional business valuation is the best way to determine the value of a small business. Business valuations are frequently based on a company’s EBITDA multiple.

How Much Should a Small Business Be Sold for?

It depends on the industry, purchase prices of similar businesses, and current economic conditions. The EBITDA multiple valuation method is a good place to start.