What we're talking about 

As a founder, you might choose to sell your business for a variety of reasons. You could be looking for a return on the time and money you've already invested, or you might be looking for a new challenge because this business no longer works for you. Regardless of why you're moving on, you want to make sure that your business is sold at the right time, at the correct price and to an appropriate buyer. Professional service firms will be on hand to assist with the exit process.

Why it's important

Getting a business to a stage where it's ready to be sold is an incredibly impressive achievement. In the US, a total of 8,647 businesses were sold in 2021 at a median sale price of $324,500. To avoid a sale price well below what your business is worth, there are a few mistakes you'll want to avoid. These range from selling when revenue is down, listing at a price that's too high or too low, not having your books in order or failing to implement the correct information barriers prior to negotiation (ie, non-disclosure agreements).

Ideally, you want to sell your business when your company is performing well in terms of sales growth, cost control (ie, expenses) and profit margins. You should also consider the economic conditions within your industry and in the wider market – this can have a significant impact on your company's sale price. It's recommended that you start the process of selling a company at least two years before you intend on signing the dotted line. Although you may not want to start a business by thinking about selling it, it's worth considering an exit strategy so that you're prepared should the day come. If you're looking to create a business that you'll sell in the future – as opposed to one that'll provide you with your own income stream – you'll be in a better position when it comes down to deciding between offers.

Things to note

There are two ways to sell your business. When selling a business, you can choose between a share sale and an asset sale. An asset sale is where you sell anything of monetary value that's owned by the business (eg, buildings, land, equipment, inventory, trademarks or customer lists). A share sale – or stock sale – is where you sell the shares (units of ownership) in the company. Bear in mind that only incorporated businesses can do a share sale. To figure out what's best for you and your business, it's worth speaking to a financial advisor.

It's hard to go back. Giving up ownership of your business will mean that you have little to no influence over the future direction of the company. New owners can change the core values of the business and treat your employees differently from how you'd envisioned. It's also highly unlikely that you'll be able to rejoin the business later unless you retained a minority shareholding in the business. A countermeasure to this would be to sell the business' assets while keeping hold of the trademark and brand. 

Outline any potential risks. Every business carries its own risks – eg, seasonal sales fluctuations, high overhead costs or supply-chain risk. If you're honest about the potential risks that you've identified in your business and take active steps to address and mitigate them where possible, you're more likely to have a successful sale process. Misrepresentation will land you in legal trouble – so it's a good idea to work with legal counsel and advisors throughout the process. Bear in mind that a prospective buyer will probably have their own advisors who'll perform financial, tax and legal due diligence – reviewing your company's historical information to ensure they're aware of any risk. Remember, a buyer will view your business through a different lens – what you see as irrelevant, they may view as an opportunity.

How to find a buyer for your business

1. Make sure it's right for you. The most common reasons for selling a business are usually burnout, retirement, or to realize value. If you're burned out, you might feel like selling the business now, but you could regret it further down the line. If you're worried about losing control of your business, there are plenty of other less drastic avenues to pursue (eg, hiring a new CEO to run the day-to-day operations). 

2. Get an initial valuation. It's unlikely that you've ever sold a business before, but there are some people who sell multiple businesses every week. These types of advisors (eg, brokers, merger and acquisition advisors and corporate finance attorneys) will be able to tell you how much your business is worth – and make sure that you get the best possible exit deal. Valuation fees can be relatively low depending on the nature of the business. Make sure you provide all of the relevant financial information to the valuer so that they can make their assessment accurately.

3. Speak to your accountant. To ensure that you have enough time to get your books in order ahead of any negotiation phase, consider working with an external accountant to audit your financial statements a year or two before the sale. You'll need to consider how a sale will affect your employees' contracts, supplier relationships and customer lists – as well as any intellectual property issues and tax requirements of the sale.

4. Consider the tax implications. Any sale will have tax implications – especially if you stand to make a capital gain. Speak to your tax advisor and legal counsel to help determine the best type of sale for you and your business.

5. Identify prospective buyers. It's easier to sell a business if you know the prospective buyer. Competitors or companies in related industries are usually good prospective buyers because they stand to benefit from taking your expertise and resources in-house and the market share that your company possesses. Many businesses are deliberately created to disrupt the market and encourage an acquisition by a larger player (ie, the end goal isn't to be the dominant player, but to be snapped up by the dominant player for profit).

6. Take your business to market. If you're a small business owner, you can list your business on brokerage sites (eg, BizBuySell, Flippa and Business Exits) anonymously. These sites are good for connecting you with potential buyers in different markets who you probably wouldn't have considered contacting or been able to find by yourself.

7. Stay close to the deal. Pulling off a sale requires constant attention. Ideally, you'd have two or three potential buyers in case your preferred buyer pulls out. This can also help drive up the price in the bidding process. Stay on top of any requests from potential buyers – aim to respond within 24 hours. Make sure you're also regularly communicating with your advisors and pushing your lawyers to move documents forward as quickly as possible. 

8. Get it in writing. Once you agree on a price with the other side, you'll likely need to complete a bill of sale that confirms the transfer of ownership over to the new buyer. Potential buyers and their advisors should be signing confidentiality agreements so that your business and personal information is protected. If you're not staying on at the business in any capacity (eg, advisor or director), you might also be required to sign a non-compete agreement, which will prohibit you from taking existing customers away from the company and starting a competing business for a fixed period.

Key takeaways

• If you're at all unsure about whether you want to sell, make sure you've spoken to some trusted advisors and exhausted all other avenues.

• You'll need to decide between an asset sale and a stock sale.

• To maximize your chances of selling your business at the right price, you should start planning at least two years before your ideal sale date.

Level up 

Perspective. From Harvard Business Review magazine, here's how to find fulfillment when selling your business.

Example. When you're trying to get inside a buyer's head, it can help to come at the questions from the other side – what would you look for when buying a business?

Tool. If you're looking for advice about selling your business but want to keep costs down, business mentorship organizations such as SCORE offer free counseling.

A version of this article was published in the Courier Workshop newsletter. For more deep dives into essential business concepts, sign up here.