Selling a business

Selling a business is a complex process that typically takes 6-11 months from preparation to closing. Starting preparation 18-24 months before going to market is ideal for maximizing value.

57 steps across 12 sections

1. 1. Clarify Goals and Timing

  • Define your objectives: maximize price, ensure employee continuity, quick exit, legacy preservation
  • Determine your timeline and ideal buyer profile (competitor, financial buyer, individual entrepreneur, PE firm)
  • Assess personal readiness — emotional, financial, and lifestyle considerations

2. 2. Organize Financial Records

  • Prepare at least 3 years of clean financial statements (income statements, balance sheets, cash flow)
  • Normalize/recast financials — add back owner perks, one-time expenses, and discretionary spending to show true Seller's Discretionary Earnings (SDE) or EBITDA
  • Ensure tax returns match financial statements
  • Clean up the books — resolve outstanding receivables, write off bad debts, reconcile accounts

3. 3. Get a Professional Business Valuation

  • Seller's Discretionary Earnings (SDE) Multiple — Most common for small businesses (<$5M revenue). Typically 2-4x SDE depending on industry, growth, and risk factors
  • EBITDA Multiple — For larger businesses. Industry multiples typically range from 3-8x EBITDA
  • Discounted Cash Flow (DCF) — Projects future cash flows and discounts them to present value
  • Asset-based — Net value of tangible and intangible assets; used for asset-heavy businesses or liquidations
  • Comparable Transactions — Based on sale prices of similar businesses in your industry

4. 4. Assemble Your Professional Team

  • Business broker — Charges 5-10% of sale price; handles valuation, marketing, buyer screening, and deal facilitation. Most useful for businesses valued under $5M
  • M&A advisor/investment banker — For larger deals (typically $5M+); charges lower percentage plus retainer
  • Transaction attorney — Drafts and reviews purchase agreement, handles legal due diligence
  • CPA/tax advisor — Structures the deal for optimal tax treatment; handles final returns
  • Financial planner — Helps plan for post-sale wealth management

5. 5. Market the Business

  • Broker creates a Confidential Information Memorandum (CIM) / prospectus
  • Business is listed on marketplaces (BizBuySell, BusinessBroker.net, etc.) without revealing the name initially
  • Interested buyers sign a Non-Disclosure Agreement (NDA) before receiving identifying details
  • Broker qualifies buyers for financial capability and serious intent

6. 6. Receive and Evaluate Offers

  • Indication of Interest (IOI) — Non-binding document from buyer covering basic financial terms
  • Letter of Intent (LOI) — More detailed; outlines purchase price, deal structure, due diligence timeline, exclusivity period
  • Evaluate offers on total value (not just price): terms, earnouts, seller financing, transition requirements, employee treatment

7. 7. Due Diligence

  • Buyer's team examines the business in detail:
  • Financial records and tax returns
  • Customer contracts and concentration
  • Employee agreements, benefits, and potential liabilities
  • Legal matters (pending litigation, IP ownership, regulatory compliance)
  • Operational processes and systems
  • Real estate leases and equipment condition
  • Typically lasts 30-90 days
  • Seller should prepare a data room (virtual or physical) with organized documents

8. 8. Deal Structure: Asset Sale vs. Stock Sale

  • Buyer purchases individual assets (equipment, inventory, customer lists, IP, goodwill)
  • Buyer gets a step-up in basis for depreciation/amortization purposes
  • Buyer can cherry-pick assets and typically does not assume unknown liabilities
  • Seller tax treatment: Gains are taxed at different rates depending on asset category — tangible assets may trigger ordinary income (depreciation recapture at up to 37%), while goodwill is taxed at capital gains rates (1...
  • Most common structure for small business sales
  • Buyer purchases the ownership interests (stock or LLC membership interests)
  • All assets AND liabilities transfer with the entity
  • Seller tax treatment: Entire gain typically taxed at capital gains rates (15-20% + 3.8% NIIT for high earners) — generally more favorable for sellers
  • No step-up in basis for the buyer
  • More common in larger transactions or where contracts/licenses are non-assignable

9. 9. Non-Compete Agreement

  • Nearly universal in business sales — seller agrees not to compete within a defined geographic area and time period (typically 2-5 years)
  • Tax treatment: Payments allocated to non-compete agreements are taxed as ordinary income (up to 37%) for the seller, not capital gains
  • Buyer amortizes non-compete payments over 15 years
  • Both parties have incentive to negotiate the allocation carefully — seller wants less allocated to non-compete (ordinary income); buyer wants more (deductible)

10. 10. Negotiate Purchase Agreement

  • Seller's attorney typically drafts the agreement
  • Key provisions: purchase price, allocation of price among assets, representations and warranties, indemnification, closing conditions, escrow holdback, transition terms
  • Escrow holdback (typically 10-15% of purchase price for 12-18 months) protects buyer against post-closing claims

11. 11. Close the Transaction

  • Sign all closing documents
  • Transfer of funds (often through escrow)
  • File required state and local transfer documents
  • Notify employees, customers, vendors, and government agencies

12. 12. Post-Sale Transition

  • Seller typically assists with transition for 30-90 days (sometimes up to 1 year)
  • Transition plan should cover: customer introductions, employee communication, operational training, vendor relationships
  • Remaining seller financing payments (if any) are typically secured by the business assets

Sources

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