How to Sell a Business in Four Steps
Whether you own a small family-run business, a single-member LLC, or a large corporation, the general steps of selling a business remain the same. The process may require you to seek the help of specialized individuals, from business valuation experts to attorneys. Knowing the basics of the selling process is crucial to ensure you get a fair price for your business.
1. Have the Business Valued
You want to make sure that you get a fair price for your business. In order to determine its worth, locate a business appraiser to conduct a valuation of the business. The appraiser will conduct a thorough investigation of the business’s finances and prepare a detailed report regarding its worth. Any prospective buyers will look to this report as the official document evidencing the business’s value, so it is important to have this done at the beginning of the process. If the valuation comes back with an indication that the business has areas of concern (equipment is broken, etc.), take the time to address them prior to the sale. A prospective buyer will likely notice any unfixed issues and this may risk the deal falling through.
2. Sign a Letter of Intent
The Letter of Intent (“LOI”) does exactly what you’d think: it states that you intend to sell the business and that the buyer intends to purchase it. It also lays out the terms that you and the buyer will discuss before you enter into the purchase agreement. Even though an LOI is not a binding contract, it establishes that you are serious about entering into the transaction. You aren’t guaranteed to sell the business at this point, but you can only get out of the transaction with good reason (i.e. you find a problem when you perform due diligence, explained below, the buyer goes bankrupt, etc.)
3. Perform Due Diligence and Talk to a Financial Professional
The prospective buyer will want various financial documents from you, in order to confirm that the business is in good financial condition. You will need to gather the business’s accounting and records, financial statements, bank statements, tax returns, the Operating Agreement or Bylaws, any contractor/vendor/employment agreements, Secretary of State information, licensing/zoning information, etc. This is the most lengthy step in the process of buying and selling a business and can often take months to complete. It’s also a good idea to create a summary packet for the prospective buyer. Include an overview of how the business is conducted, as well as an operating manual.
You should also create a financial plan for once the sale is complete. How are you going to handle the profits from the sale? Will you use them to buy another business or invest them in a retirement fund? Talk to a financial professional about your options and learn about any tax consequences that may result from the sale.
4. Negotiate the Purchase Agreement and Close
After due diligence is performed, the parties will discuss and negotiate the terms of the purchase agreement. A purchase agreement is a formal legal contract that outlines the terms of the sale. It’s typically is signed by the parties shortly before officially closing, with a “bill of sale” signed at the closing date. Once the closing is complete, the buyer will become the new owner of the business.
Are you considering selling your business? G&G Law can help with that! Contact us.