Selling Your Business to an Outsider
You have spent years building your business, but at some point, the time will come for you to sell the company and exit.
While many business owners choose to keep the company in the family, that is not always realistic. Family members may not have the interest or skills needed to run the business. In such cases, selling the company to an outsider makes more sense.
The average time it takes to sell a business is around six to twelve months, but the exit planning process typically takes longer. Optimizing a business for sale may involve modifying operations to make it more appealing to buyers and investors.
The Importance of Pre-Diligence
Author John Warrillow stresses the importance of pre-diligence, or creating a competitive landscape for a business before the sales process even begins. This entails assembling all of the important metrics about a company—such as revenue and churn rate figures—that a buyer would care about. Pre-diligence can help to value a business more accurately and arrive at a fair purchase offer.[1]
With adequate lead time, business owners can modify operations to make their company more appealing to potential buyers. Exit planning can take two or three years. The actual time to sell a business after listing, though, is six to twelve months, depending on factors such as price, complexity, and structure.[2]
An Owner’s Checklist
In addition to preparing a pre-diligence package about a company’s financials, owners should have the following items on their pre-sale to-do list:
● Business valuation. The median sale price of a business is usually slightly below the median asking price. Although a business is ultimately worth what a buyer is willing to pay, a professional third-party valuation can provide a realistic estimate of value and a starting point for negotiations.
● Clean records. Expect all things related to a business’s finances, from real estate and equipment, to income and tax returns, to be scrutinized. Ensure all records are accurate, organized, and easy to review to maximize transparency. The price that a potential buyer is willing to pay can drop and a sale can fall through due to financial red flags.
● Taxes. It is logical to focus on an acceptable sale price during the pre-sale period. It is also important to consider how much of the proceeds of the sale the owner will retain. At the federal level, owners may have to pay long-term capital gains taxes. Some states also have a state income tax that could apply to a business sale. The business’s structure, the type of sale (assets versus stock), and the terms of the sale (e.g., cash, equity rollover) can additionally affect tax liability. The proceeds from the sale of a successful business may be substantial, so it is also important for the seller to consider whether their estate could be subject to federal or state estate taxes.
● Business broker. Great entrepreneurs are not always great salespeople. Business brokers are experts at identifying potential buyers, listing the business in the right places, and obtaining the best price. Some may also be qualified to perform a business valuation or assist buyers with financing. Brokers usually charge 5 to 10 percent of the sale price, but a good broker may cover their own fee by facilitating a faster sale and a higher negotiated sale price.
● Legal considerations. Selling a business comes with a host of legal considerations. Among the documents typically needed to close a sale are a letter of intent, sales agreement, noncompete agreement, asset listing, employee agreement, intellectual property agreement, assignments of lease, and security agreement. The seller’s attorney will prepare the necessary contracts and work with the buyer’s attorney, accountant, and other advisers on due diligence matters. There may be other legal obligations for the seller as well, such as notifying creditors, obtaining director and shareholder approval for the sale, and filing tax documents.
Selling Your Company? Call a Business Attorney
The final leg of a business sale can be the most difficult to get through. Skillful negotiations, careful drafting of legal documents, and clear communications between buyer and seller are critical to closing the deal. You have worked hard for years to build a successful business. Hiring a business lawyer to advise you during the selling process can make things go smoother and ensure your interests are protected. Please contact us to schedule a consultation with our business attorneys.
[1] Eric Turnnessen, Subscription Entrepreneur, Episode 166, The Smart Way To Sell Your Business with John Warrillow, MemberMouse (Mar. 18, 2021),
https://membermouse.com/podcast/john-warrillow/.
[2] How Long Will It Take To Sell Your Business?, BizBuySell, https://www.bizbuysell.com/learning-center/article/how-long-sell-business/ (last visited Apr. 3, 2024).
