The 9 Step Process to Selling Your Business
You’ve spent the better part of your life growing your business - putting in a lot of time, effort, and energy and now it’s time to sell.
When it is time to sell, your objective is to get top dollar and to do this, you'll need to review every step of the 9-point selling process.
1. Determine what your business is worth.
Step one is getting a valuation. This can be a difficult task for many owners as the true valuation of your business is not the value while you're still at the helm...but the 'transferable value'. The transferable value is the value an investor or potential buyer will consider.
Factors you’ll want to consider when placing a value on your business include the business's sales numbers and profit margin.
What are your revenue sources? How much profit does your business generate when compared with similar business? Is there recurring revenue? What's driving new sales and is that sustainable?
What are the company's growth trends? Which channels do new customers come from, and what's the breakdown of each?
In the bigger industry picture, what's the business's market position? How reliant is the business on the owner? What systems and processes are in place?
Part of the valuation process is also looking at the historical sales of similar businesses and comparing your business to those.
2. Gather and Create your documentation.
Once you’ve determined your business's value, now you’ll want to prepare your documentation and the proof you'll need to show potential buyers. Potential investors or buyers will want to see hard numbers and verifiable facts when considering the purchase of your business.
Also, if any of the information comes back as suspicious, buyers can use this to lower their asking price or pull out from a deal altogether.
To start, you'll need to gather your historical profit and loss data (preferably three to five years' worth), along with your historical balance sheet. A potential buyer will want to see a summary of your financials (tax returns, bank statements, etc.), as well as a summary of the business and a summary of operations.
Next, we have the marketing, you'll need to demonstrate your marketing strategies, as well as your products and features. Customer lists, a summary of customer sources, and your business's sales history will need to fit alongside a competitor landscape overview. You need to produce a company growth plan that explains how the company will continue to perform after you’re gone.
3. Develop the "BOS" Business Operating System
For many investors and buyers, they will want to see your operating system and procedures manual – the Business Operating System. This explains every detail from how new customers are on-boarded to how employees troubleshoot problems.
The establishment and documentation of all business procedures, roles and accountability systems demonstrate that the business can be maintained profitably after the sale. Repeatable and teachable operating procedures ensure the business is successful without being reliant on any one person. It includes the procedures used in the business to generate its revenue and control expenses, as well as the methods used to track how customers are identified and how products or services are delivered.
4. Determine if you should you sell on your own or use a broker.
Selling on your own is the best course of action if you're selling your business to a family member or employee.
Utilizing a broker can be considered if you want to put the business to market and attract multiple buyers. Not all brokers are created equal. You want to do your homework.
In B.C. some brokers will put together a marketing plan for your business and advertise it online. While others will also contact competitors or prospects from similar industries to create interest.
The main thing is to make sure you do your homework when choosing a broker.
5. Find a buyer.
The ideal buyer pays you what you want, they have the best terms, and are the ideal fit for the business after the sale closes. Your buyers can come from your personal network, your broker's network, and quite often your competitors.
Externally, you may find potential buyers among your suppliers, or private equity firms.
6. Get an offer.
An offer generally comes in the form of a letter of intent (LOI), a formal offer someone makes to acquire your business, including an offer price and terms. Once you accept this LOI, you allow the buyer to move forward exclusively into a deeper due diligence period, where he or she will investigate the claims you made about the business and verify them. A LOI is a nonbinding sales agreement, not a contract for sale.
As a seller, you need to consider the buyer's identity, offer price, and deal terms before moving forward. You should also look at the owner financing terms, non-compete terms, exclusivity, and closing timeline. It's also good to look at the post-sale support terms to see what's expected of you after the deal is done.
7. Buyer due diligence.
Due diligence is the exclusive period of time a buyer uses to verify your claims. It’s during this period a purchaser can request everything from merchant statements, bank statements, to credit card statements. You may need to provide customer lists and suppliers' contact names.
Buyers who want firsthand accounts may ask for interviews with your staff, your customers, or subcontractors. They may ask to see the contracts suppliers and staff have signed, as well as current and historical tax returns and balance sheets.
You can also expect to have to provide a BOS - Business systems and processes overview.
8. Review the legal offer and complete the sale.
After due diligence is completed, a purchaser will make a formal offer or pass on the deal because it didn't pass due diligence. If purchasing, the buyer writes up a contract for sale that outlines the details of sale. Also included might be the non-compete, training, and support terms are determined.
9. Offer post-sale training and support.
Most often, there is a 4 to 26 week period of support for the buyer after the deal has closed if the owner's not staying on as an employee. This is a standard practice to assist the buyer in learning the particulars of the day-to-day management. The length of time and exact training that a seller provides is entirely contingent on what was negotiated in the terms of the deal.
Often, the seller may just want to transition into retirement and so a consultants fee is included as part of the purchase price to have a consultant stay behind and work with investor or new owner.
Create a Business That Can Thrive Without You
You have worked hard to build your business and make it what it is today. It is essential to seek professional advice and support to maximize your return when you sell your business.
Author - Joe Griffith
I've been consulting with clients since the 90's in various capacities. I launched my first start-up when I was 25. I've since built and sold 4 start-up business since then. For the past 8 years business owners have paid me to develop systems and procedures for their business.