How to Sell a Business: A Charlotte Broker's Complete Guide

Oftentimes, for many business sellers, the value of their business is a substantial asset in their overall portfolio, oftentimes exceeding the value of their retirement savings and their home equity.

But oftentimes, they are so closely involved in running their business that they fail to accurately prepare for listing their business for sale to get the highest and best price. The closest analogy would be a fixer-upper house doesn’t command the same purchase price as a house that is turnkey ready for a home buyer to move into.

This is not a criticism on the business owner or their business skill sets, because we understand that running a business is oftentimes more than a full-time job.

However, selling a business is oftentimes the largest financial event in many owners’ lives, and careful consideration needs to be taken to make sure that they do not leave any money on the table and that they sell it for the highest and best realistic price. You get to only do it once.

This guide provides a comprehensive overview of the steps required to sell your business.

Overview

Selling a business can take 8 to 12 months from engagement to closing, and runs through six stages: establish a defensible valuation, fix what buyers will flag, assemble your documents, market confidentially to screened buyers, negotiate a Letter of Intent, and answer buyer’s questions or provide documentation during due diligence to closing.

1. Start with an honest number

Before anything else, you need a defensible idea of what the business is worth. Not some arbitrary number, or a gut hunch for what you think the business is worth, but a number based on recent business sales of similar size businesses with similar earnings.

For Main Street to lower-middle-market businesses, business brokers and appraisers look at Seller’s Discretionary Earnings, discounted cash flows, and EBITDA to determine an appropriate listing price for the business. Once that is determined, depending upon whether EBITDA or Seller’s Discretionary Earnings is used, a forward multiple is applied to the earnings of the business, typically over a two to three year time horizon.

So, if your business throws off $400,000 a year and sits in a typical range, depending upon the business and historical comparables of other similar businesses, you may reasonably expect anywhere between $600,000 to a million and a half, depending upon similar businesses with similar revenue and similar earnings.

Industry averages for sale prices are also dependent upon the category of business in which the business operates. For example, an owner-operator remodeling or construction firm will trade at a lower multiple than a business with high recurring revenue that does not rely on a key owner or key manager being involved in the daily operations of the business.

2. Anticipate buyer questions and address them before they are brought up

A good business advisor or broker can guide you through the necessary steps to get your business ready for a sale. And the best time to do that is typically one to three years before you anticipate listing the business for sale.

These are some red flags or items of concern that many buyers would feel uncomfortable with:

• Messy books. If a buyer’s accountant cannot tie your tax returns to your company financials, they may assume the worst and discount the price accordingly. Historically, most banks and buyers will look at the last three years of your tax returns and business financials to provide a reasonable snapshot of the earnings of the business.
• Customer concentration. If one client accounts for a substantial portion of the business revenue, a buyer sees a business that could lose a substantial part of its income should that client leave.
• You. If the business heavily relies on you and your involvement, and the knowledge that you have about its operations and sales, it could be viewed as a risky business to purchase, with so much of the knowledge of the business operations tied to one individual. Therefore, it’s important to have good operations documented, and staff that understands how to run your business in your absence.

We work through them in maximizing value before you sell.

3. Get your paperwork in order

Many sellers are surprised at the amount of information that a bank and a buyer will request about business financials. This really should come as no surprise.

A seller should be prepared to quickly close out each month’s books with accurate financial reporting, and be prepared to show historical track records of how the business has performed financially, with trailing 12-month comparisons, year-over-year comparisons, and detailed reports should there be a heavy customer concentration with a limited number of customers.

At minimum, have ready:

• Three years of business tax returns
• Three years of P&L statements and balance sheets
• Current year-to-date financials
• Your lease, with assignment terms confirmed
• Equipment list showing what conveys
• Revenue broken down by customer or category

The full list is in the due diligence checklist.

4. Market the business confidentially

This is what buyers worry about the most, and rightfully so. If employees, customers, or competitors learn that the business is for sale before you are ready, it could substantially undermine the value of your business and could cause real damage.

A good process protects you. The business is marketed confidentially — buyers see financials and the history of the business and its potential, but do not see the name or location until they sign a nondisclosure agreement and prove that they are qualified.

For more information, read how to sell your business confidentially.

5. Screen the buyer

Many people who inquire about your business will never actually buy a business. Some simply are not ready, some say that they’re ready to purchase a business but are not ready to, and some may be other sellers who have similar businesses who are curious as to what your business is and how you have priced it. For this reason, oftentimes only a small group of potential buyers is genuinely qualified, financed, and serious.

The job for the broker is sorting out real buyers from tire kickers, confirming their seriousness, financial capabilities, background, and timelines are realistic. That is what the business sale process is built around.

6. Negotiate a mutually acceptable transaction framework

A serious buyer submits a Letter of Intent setting out price, structure, and major terms. We break it down in the letter of intent explained.

Then comes due diligence, with a buyer submitting a list of questions and materials that need to be answered in order for them to have satisfied their investigation of the business. It can sometimes seem intrusive, but rest assured, it is a normal process.

It is a necessary step for buyers to be comfortable with the business and oftentimes a rather large financial investment that they are prepared to make in their future. It is perfectly natural.

The best defense is to have your business financials ready to be evaluated, your operational manuals in place, key agreements with customers in place, licenses in place, and general operational best practices well documented. For more information, read why business sales fall through.

7. Close, then transition

Most sales include a transition period where you stay on for a few weeks or months to hand off relationships and knowledge, and train the buyer on how to run your business.

How long does it take to sell a business?

Plan on eight to 12 months from engagement to closing for a healthy, well-prepared business, but longer if the books are inconsistent or the business has declining revenues and earnings.

For more information, see how long it takes to sell a business.

Conclusion

If you take one thing from this, preparation is key. Clean books, healthy margins, increased revenue, increased earnings, and an accurate valuation of your business are critically important to help you achieve the final number that you are seeking.

If you want a confidential conversation about what your business might be worth and whether now is the right time, reach out.

Mark Herrmann is the founder of Trustmark Mergers & Acquisitions in Charlotte, North Carolina. This article is general information, not legal, tax, or financial advice.