What is the Best Way to Sell a Small Business

Most people are going to sell their business just once in their lifetime. This exit event will not just be the culmination of a lifetime of work, it can also provide financial support for generations to come. So, it makes all the sense to look for ways to maximize the value you derive from selling your business and carry out the sale in a hassle-free way.  

When we talk about the best way to sell your business, it doesn’t only mean maximizing the number of bids and total sale price, but also maintaining confidentiality throughout the process, closing the sale within a reasonable time – plus, mitigating any potential liabilities that may otherwise come up post-sale. 

In this post, we are going to shed light on some key aspects of selling your business smoothly and deriving the maximum value. 

What is the Selling Process for a Small Business?

The selling process of a small business has several key stages starting from preparing to sell to ensuring a smooth transition.  While the specifics may vary depending on your business’s size and industry, here are the broad steps: 

  1. Valuation and documentation: The process typically starts with organizing financial records and determining their value with the help of a business broker like Raincatcher. 
  2. Marketing: Next, your business broker is going to take the business to the market, attract potential buyers, and drive buyer competition. 
  3. Negotiation and LOI: Once qualified buyers are shortlisted, your business broker is going to negotiate the terms of the sale including the price, payment terms, and transition period. Interested buyers then issue a letter of intent (LOI) expressing genuine interest in your business. 
  4. Due diligence: Now the potential buyer is going to conduct due diligence to look into all areas of your business and documents to verify authenticity. 
  5. Closure and transition: Successful due diligence leads to the closure of the deal. Once the final sale and purchase agreement is signed, there may be some additional responsibilities to ensure a smooth transition. 

 

While this is a brief overview of the selling process, we also compiled a comprehensive guide on  ‘How to sell a business’ that explains the process in greater detail. 

How Do I Sell My Business Successfully?

You can successfully sell your business through solid preparation and strategic execution. Begin by ensuring your financial records are authentic and up-to-date (Here is our post to help you in this : ‘What Paperwork do you need to sell a business’). Moreover, get a valuation done by a competent business broker to set the right expectations and address the potential deal-breakers (errors in financial records or visible operational issues.)

While all sellers want to sell their businesses successfully, several pitfalls may derail the exit process: 

  • too much customer concentration
  • inaccurate, incomplete, or inconsistent financial records or legal or operational documents
  • not having assignable client contracts
  • Working with a business broker or M&A advisor who doesn’t have a track record in your industry
  • tax issues like unpaid taxes
  • unresolved shareholder disputes

 

Since selling a business has many moving parts, it’s recommended that you work with a business broker who has worked with businesses of your size and industry.  They can drive competition to discover the best value while you can focus on managing day-to-day business operations. 

How are Small Businesses Valued?

There are multiple methods of valuing a small business, such as the asset-based approach, income approach, and market approach. 

The asset-based approach considers tangible assets such as equipment and inventory, along with intangible assets such as brand reputation or intellectual property. 

The income approach focuses on the earning history of the business through methods like  Capitalization of Earnings or Discounted Cash Flow analysis. This is the most common way to evaluate privately held companies.

In the market approach, your business’s value is determined based on the value of recently sold similar businesses, similar to how real estate is valued. However, the market for private businesses is not as transparent as the market for homes, so this is why it is critical to work with a business broker or M&A advisor who has a track record of selling companies in your industry and has a finger on the pulse of the market to know what a business is worth.

Remember that the valuation of a business is affected by factors like industry trends, market conditions, competitive landscape, and future growth potential. Seeking assistance from a business broker or M&A advisor can provide tailored insights and ensure an accurate assessment of the business’s value. 

What Do Small Businesses Typically Sell for?

The price at which a small business typically sells depends on several factors such as industry, profitability, growth potential, and market conditions. It’s also important to note that for small businesses (under $1M in profit) there are more sellers than there are buyers, so some small businesses find it difficult to sell at all.

Generally, small businesses can sell for anywhere from two to four times their annual seller’s discretionary earnings (SDE). SDE is a metric to show all of the total cash flow that is available to the owners. Salary, distributions, retirement contributions for the owner’s benefit, etc. 

Note that there can be a significant variation in this range based on the specific circumstances of your business. For instance, businesses in certain desirable industries, or that are experiencing high growth, or have unique intellectual property can command higher multiples when they are well represented in an auction process by a capable business broker or M&A advisor.

How to Sell My Business for the Maximum Price?

To sell a business for the maximum price, it helps to work with an expert business broker (for companies under $2m EBITDA) or M&A advisor (for companies over $2m EBITDA) who has had success in working with companies of your size and industry. For instance, at Raincatcher we have industry-specific experts who have collectively eclipsed $1B in sell-side transactions.

Having a solid business doesn’t ensure the best selling price on its own. Your business broker needs to drive buyer competition to discover the maximum price for your business. At Raincatcher, we do this by customizing an auction process to drive buyer competition for our client’s companies. We do this by marketing businesses to strategic buyers and financial buyers to get multiple bids.

The right business broker or M&A advisor is going to leverage its industry experience, implement a targeted marketing strategy, and efficiently negotiate with resourceful buyers to help you sell your business most profitably. 

What are the Risks of Selling a Business?

If you are working with the wrong M&A advisor or business broker, you are going to encounter some risks such as valuation discrepancies, market fluctuations impacting demand, financial discrepancies during due diligence, and the potential for customer and employee unrest. 

In addition, you should align yourself with a capable team of advisors who will help you manage legal compliance and contractual obligations alongside tax implications and negotiation challenges. Additional risks can also arise while securing financing for buyers and understanding contingencies and escrow provisions. When this risk presents itself, the deal can simply fail to go through. 

Related Content

The method of payment is an important consideration while selling a business. Buyers may present some deal structure as part of their bid. Our post about business deal structure discusses earnouts and seller notes (installment payments)

When you work with an expert business broker like Raincatcher, we have experience in mitigating these risks. We can also introduce you to other professionals such as M&A attorneys and tax advisors suited for your industry. Contact us today for a consultation and explore how we can help you sell your business in the best possible way.