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Ten Steps to Selling a Small Business

  • March 16, 2020 8:15 AM
    Message # 8833818

    If, after evaluating your options, you decide that selling your business to a third party is the right exit strategy for you, you will quickly experience that it is a very emotional and stressful process.   

    The steps to selling a company are not black-and-white, nor clearly defined. The lines blur, steps get skipped, some get added, or become a roadblock. Understanding a basic framework will give you some idea of how close or how far you are getting to (or from) the closing table. 

    Like most business owners, you probably have never sold a business before. Some prefer to engage the services of a Certified Business Intermediary (CBI) to help them through the process, and others feel comfortable doing it themselves. Either way, the steps are similar, but the added stress of selling your company, while also running it, can be overwhelming. 

    Step One:

    Calculate a realistic sales price for your business. There are various ways to determine the value of a business. For small business owners, the most common way is a multiple of the Sellers Discretionary Earnings (SDE), also known as Owner Discretionary Cash Flow (ODCF) or Owner Benefit. All these terms are interchangeable, but it is essentially the amount of cash a full-time working owner can expect to achieve once they purchase the business. Once this number is determined, a correct multiple of this number will be applied, taking into consideration your industry and financial performance. 

    Step Two:

    Identify who is your ideal or most probable buyer.  Who is the most likely candidate to buy your business? Is it a competitor, an employee, a company looking to add products or services to their current customer base, or is it a buyer wanting to leave corporate America and control their destiny with the security of proven cash flow? You will use this information to build a marketing strategy to target those buyers and attract their attention. 

    Step Three:

    Develop a Confidential Information Memorandum (CIM) that highlights the strengths, opportunities, and past and projected financial performance of the business.   Depending on the business size, value, complexity, and most likely buyer, this memorandum can be a simple one-page document or 50 pages or more. The goal of the report is to provide a high-level overview of the company. You want to get the buyers excited about pursuing the opportunity further and you aim to answer their most important questions. Buyers will use this information to present to the bank, partners, investors, or their spouse. 

    Step Four:

    Market the Business Confidentially.  Now that you understand the value of your business and you have created a compelling opportunity to attract buyers, it’s time to implement the plan. However, you don't want to give too much information away until you know for sure you have a qualified buyer. For example, you should prevent your customers, competitors, vendors, and employees from finding out your business is for sale.  

    Step Five:

    Screen and Qualify Buyers.  When you begin to market your business for sale, buyers start to inquire. You don't want to give away all the information about your business until you know you have a qualified buyer. It's essential at this step to verify their net worth, liquid capital available and that they have the experience necessary to run your business successfully. If a buyer is qualified, you must get a Non-Disclosure Agreement (NDA) to protect your confidential information in case they decide not to move forward. If you feel the buyer is qualified and you have an NDA in place, you should be relatively comfortable giving them the Confidential Information Memorandum and talking more about the opportunity. 

    Step Six:

    Negotiate an initial offer.  At this point, the buyer is only relying on the information you disclosed to them through the CIM and personal conversations; however, they have not verified the facts. The goal is to give them enough information so they feel comfortable in submitting a Letter of Intent (LOI) or Term Sheet. This document is generally a non-binding agreement that outlines significant terms and conditions of the potential purchase. Typically negotiated at this phase are the purchase price, the terms, the non-compete and employment agreements, the date of the closing, the due diligence time frame, and giving the buyer exclusivity for a period of time. 

    Step Seven:

    Help the buyer quickly complete their due diligence process.  Once an agreed-upon initial offer is negotiated, the buyer will provide a list of items they wish to examine. Time kills deals, so it is vital to get them the information promptly. Examples of information requested in due diligence are tax returns, financial statements, bank statements, accounts receivable, aging reports, employee payroll reports, intellectual property, etc. In addition, they may want to evaluate your operations, human resources, legal issues, vendor relationships, technology, business assets, and working capital needs. 

    Step Eight:

    Negotiate a final purchase agreement.  When the buyer becomes comfortable with due diligence, they will have their attorney draft a purchase agreement. The purchase agreement will have additional provisions than were previously negotiated in the LOI. A variety of things can happen at this point, depending on what was discovered in due diligence. In this document, you will have representations and warranties for both the buyer and seller, and contingencies that must be satisfied before the deal can close. This document is legally binding and can be very complicated, so you should have an attorney review the purchase agreement with you. 

    Step Nine:

    Satisfy open contingencies and close the deal.   Once you satisfy all contingencies, you can go to the closing table and money will exchange hands.  

    Step Ten:

    Transition the business.  Most likely, you will have to assist the buyer with the transition post-closing. You will transfer utilities, phones, software, employees, etc. to the new buyer's company.  

    Before you start the process of selling your business, it is advisable to contact a Certified Business Intermediary (CBI) to see how they can add value to your unique situation.  

    By: Justin Sandridge, CBI

    Murphy Business Sales


    Click here to download a FREE report “Steps to Prepare Your Business to Sell”

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    Last modified: March 16, 2020 8:17 AM | Justin Sandridge
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