We’ve previously published a very successful Guide To Selling A Business – For Millions.
However, many of our clients aren’t only interested in the steps required to sell their business for the highest price possible. Clients also wanted to know how to sell their business quickly.
As a business owner, you naturally want to sell your business as quickly as possible at the highest price. However, achieving both these goals can be difficult.
The bigger your business is, the more complex the transaction can be, and buyers want to spend more time doing due diligence: going through your legal & financial documents, customer records, employee records, contracts with vendors and so forth before committing to the purchase.
The better organized and prepared you are, the faster this process will be. In addition, you’re also more likely to get a higher price if your documents are clear and well organized. Buyers love organized sellers!
In this post, we’ll discuss the 10 steps you need to follow to maximize your chances for a quick sale at the highest value possible.
What’s a Quick Sale?
First off let’s discuss what a quick sale really means. There is no simple answer to “how fast can I sell?”, because it largely depends on the size of your business and how organized your books and records are. Smaller companies are easier to sell for the simple reason that there are more buyers available and there’s less risk involved.
On the other hand, larger businesses tend to involve more complex transactions that take more time. This occurs due to more sophisticated buyers, higher dollar amounts at stake, and the increased due diligence that buyers expect.
Data from BizBuySell shows that the median sale time for a business is somewhere around 150 days (approximately 5 months).
BizBuySell is a website that brokers and sellers can use to list their businesses. They generally focus on deals under $100mm. The focus on smaller deals is likely to skew the data towards firms that sell more frequently.
Here at BizSold we deal with middle-market businesses, and our average sale rate is 90-120 days (3-4 months). Over time we have also noted a decrease in the time required to sell. One significant advantage at BizSold comes from our internal email list and the high net-worth contacts we have established. This helps us sell a business very quickly.
To summarise, for a middle-market business, for a quick sale you’d be looking at a period of 3-9 months.
Now you have a good understanding of what a quick sale can mean. It’s time to look into what it takes to actually sell your business quickly at the highest price!
10 Steps to Selling Your Business Quickly For The Best Price
Having sold over 500 businesses, we’ve learned the nuts and bolts of what it takes to close a sale quickly at the highest value possible. We’ve narrowed this down to 10 key factors that you should follow.
You must implement some of these steps during a longer timeframe to ensure they’re effective. That’s why you should start considering them as soon as possible. Even if you’re just starting out your business!
1. Have an Exit Strategy
In the thrill of starting and running a business, many entrepreneurs forget about exit strategy, or simply don’t give it the importance it deserves.
Let’s face it – the exit strategy for most startups involves the owner selling the business, not an IPO.
Selling your business is actually the culmination of all the effort, money, and sweat you’ve put into running it. It is the pinnacle of all your efforts! And it’s extremely difficult to have a successful sale unless you plan for it – from the very beginning if possible.
In fact, up to one-third of businesses end up closing while they’re still successful because owners haven’t adequately planned their exit. Don’t let this be you.
Decide When You’ll Sell
The first thing to do is to set a target as a timeline or as a revenue goal when you want to sell your business. This can help you avoid a major pitfall. Every entrepreneur naturally intends to sell at the peak of their industry; however, this is very difficult to gauge. It’s more important to sell when your company is growing as this can help you get a higher multiple.
If you wait too long and your business starts declining, then your multiple will decrease abruptly. You may then struggle to sell or even face the possibility of being unable to sell at all.
Decide On The Type Of Sale
The second thing you need to decide is how to sell the business. When selling your business, here are the options you have available:
- Sell 100% of the company.
- Sell a stake in the firm.
- Take an earn out and sell 100% of the business.
Selling 100% of the firm may be the quickest option out of the three. It’s also the option that’s most likely to free you from having to work in the company. However, keep in mind that you’re liable to get a lower total value compared to the earn out method. This happens mostly because the buyer assumes a higher risk when you simply sell 100% of the business.
In case of selling 100% and taking an earn out, the buyer will pay you for part of the business at first. However, you’ll be under contract to stay with the company for a specified transition period (typically several years). In this period you have to meet (or exceed) certain key performance indicators that you mutually agree on. Receiving the earn out is conditional on meeting the performance criteria. This generally allows you to get a higher total pay if you’ll assume the risk.
Selling a stake in the business can enable you to sell only a part of the company. However, the buyer will be purchasing ownership in the firm’s assets and liabilities. For this reason, the buyer will want to do more due diligence, making the sale process longer. Whereas in simply selling 100% of the business, you’d usually sell just the assets.
When choosing amongst the three options, you must also take into considering what motivates you to sell. This can also play a significant role in the type of sale you commit to.
Regardless of the chosen option, selling your business can be one of the biggest and best financial decisions you make.
Once you have chosen your preferred exit strategy, it’s time to structure your business around it.
We will be explaining how to do this in the following steps.
2. Have Clear & Organized Legal, Financial, and Business Documents
To speed up the sale process, it’s imperative to be prepared for the due diligence period.
Typically, lack of preparation can give the buyer higher leverage to negotiate down the asking price. It would also drag out the time it takes to finalize the sale.
In addition, the buyer’s confidence diminishes if you present him or her with poorly prepared and unclear documents.
We have produced a guide about How To Prepare For Due Diligence, and we HIGHLY recommend that you check it out before you continue. In the guide, you can find all documents you will need to have prepared for due diligence.
We recommend that you approach a broker with this information organized and ready to go. This can significantly shorten the time it takes to find a buyer and close the deal.
3. Ensure That The Business Can Run Without You
Buyers are not generally interested in acquiring a job or a business where they have to spend 40+ hours per week working. The majority of buyers expect to acquire a business that can run smoothly without the owner.
It is understandable that in the early stages of a business the entrepreneur is working in the day-to-day activity. However, if your exit strategy happens to be selling your business, you must install a management team. You can’t be the key employee.
Buyers want to understand the ins and outs of your management team. We recommend that you prepare an organizational chart which lays out your key employees, their roles, and their salaries. In addition to your organizational chart, you should also have an Instruction Manual for your business. This manual would contain Standard Operating Procedures (SOPs) that each employee is responsible for carrying out.
These should be well-organized and held together along with your employee files. The more comprehensive you make these documents, the more comfortable the buyer will feel with the business.
If it applies to your business, you should also put in place automated marketing, advertising, and sales programs. The more you automate your business, the less personnel it needs, and the more efficiently and profitably it can run.
Finally, you must decide which employees are critical to running your business. Consider these questions:
- Which employees would be difficult to find replacements for?
- Which employees are paramount for the day-to-day operation of the business?
- Does any employee hold key (undocumented) knowledge necessary to run the business?
- Are there any employees that are likely to leave if you sell the company?
Often times employees can play a vital role in the business. That’s why it is important to buyers that key employees will remain on after the sale. We’ll be discussing this in the following section.
4. Make Sure You Plan For Key Employees
There’s almost nothing worse for a buyer than to buy a great business and then find out that one of its key employees wants to end his employment contract immediately.
As a business owner looking sell quickly at the best price, here’s one essential step you must take. You must convince your buyer that you have taken measures to keep key employees during the transition phase and afterward.
And let’s make this clear. Planning for key employees isn’t something you should do a few weeks before deciding to place your business for sale. It’s something you have to start doing months (or sometimes even years) in advance.
We recommend you form an incentive plan to retain key employees. A key employee is anyone who is either hard to replace, or essential to the functioning of the business. Incentive plans should include the following considerations:
- An equity incentive plan to be paid at the time the company is sold. This can be in the form of a % of the sales price or a fixed amount. Typically a % of the sales price better incentivizes employees.
- Paying an earn-out at a later date after the sale of the business, usually within the first 1-3 years.
- Using an employment contract that offers salary and bonus incentives based on the number of years the employee is employed for.
- Often the buyer will want a new employment contract written up and signed by key employees prior to closing.
Presenting these incentive plans to the buyer can help boost their confidence and speed up your sale.
5. Get High-Quality Legal Representation
A good lawyer is critical in the M&A process and can easily make or break a deal. He or she will help you organize and prepare the proper paperwork, make amendments to the purchase agreement (whether it is a stock sale or an asset sale), and verify clauses regarding representations & warranties.
Purchase contracts can range from a few pages to several hundred pages depending on the size of the transaction. It’s essential you have competent legal counsel that can walk you through the in’s and out’s of a transaction.
Additionally, a good transaction lawyer can help you negotiate important deal points. These are aspects such as representations and warranties, escrow holdbacks, indemnifications, and many other crucial matters.
If you’re selling stock in your company instead of just the assets, a good lawyer will also help negotiate which liabilities the buyer will be assuming and which will remain with you.
However, if you’re not careful with selecting the right lawyer, he or she can also become a deal-breaker. For example, if a lawyer’s ego starts getting in the way, the deal is very likely to fall apart. We’ve seen it happen countless times.
So be careful!
You want to hire a lawyer that can represent your interests without killing the deal. A good lawyer is someone who is willing to make strategic concessions, while continually moving the transaction forward.
6. Set A Reasonable Asking Price
The valuation of your business is an essential piece of the puzzle. Having a proper valuation and going to market at a realistic price is critical to selling your business.
If your initial asking price is too high, serious & sophisticated buyers will not even look at your business.
Not to mention that starting at the wrong asking price can lead to significant delays in sale or closing time. Definitely not ideal if you want a quick sale.
In order to start off on the right foot, you have to get an accurate valuation. A good mergers & acquisition firm can provide you with a comprehensive and accurate business valuation. You should look for a company that has an in-house CPA or CPA on staff.
At BizSold, our valuations start by recasting your financial statements to identify your EBITDA with sellers discretionary earnings added back. Once we have your EBITDA and cash flow, we will create a proforma financial statement. This income based valuation method gives the best results. This is then used to compare the business against similar sales in the industry.
This value is then factored by certain criteria that buyers tend to take into consideration. For internet companies, here at BizSold the valuation factors we consider are as follows:
We assign a weight, ranging from 0.1-5.0 to each of those factors. We consider values as follows:
- In the 0.1-2.0 range as sub-par business performance.
- In the 2.5-3.0 range as average performance.
- Above 3.5 as exceptional performance.
Through the application of the Multiple of Discretionary Earnings and comparable sales, we determine the recommended initial asking price.
If you want to get the highest asking price possible, you should take into account all the factors listed above. You should also prepare to show how your business excels in these criteria.
Why not find out how much your business is worth right now?
We have a FREE online valuation tool that you can check out!
7. Have A Large, Diversified & Loyal Customer Base
Let’s be honest here. Buyers are inherently skeptical. Anything that can increase risk will be a red flag to a buyer. And having a handful of customers that make up the majority of your revenue will scare off many buyers.
The fear is that if the entire revenue is reliant on only a few customers (or on mainly a few large clients) if those customers cancel, then your whole operation is at risk.
That’s why buyers typically prefer companies whose customer records and contracts show a diverse customer base; enterprises that are not overly reliant on a few large clients.
This is another one of those considerations you should take into account from the very beginning.
Creating a large and loyal list of clients goes hand in hand with another great business asset: strong branding.
So we recommend that you build a strong brand around your business and invest in strong intellectual property. These will become precious assets when you go to sell your business. It’s one of the key things that buyers may be looking for.
8. Post Growing Revenue & Profits
This is one of the most important pieces to achieving the best price possible for your business. If you want to cash out at a higher multiple, then you need to show a path to continued growth. In addition, you must also show a history of proven growth in your revenue and profits.
Buyers want to see a business that has consistently achieved growing revenue and profits. Here’s an example of what buyers like to see:
In addition, buyers also like a business that is in a growing industry.
There’s a reason restaurants typically sell at around 2x cash flow while software companies can sell for as high as 7x cash flow. It’s called GROWTH.
A restaurant doesn’t have tremendous growth potential. On the other hand, a software company could scale to sell its products to millions of consumers or businesses worldwide.
Ideally, you should sell your business while you’re still actively growing if you want to achieve the best price possible. The problem with this is no one can predict when their business or industry might take a downturn. If you have any doubts, it’s best to start thinking about selling. A company that has downward growth is likely unsellable.
9. Audited or Reviewed Financials Can Be Key
Financial records are the key to any business sale. They are the most important documents of the sale process. To achieve a quick sale, make sure you keep clean and organized financials and records (as discussed in step 2).
But if you want to increase your value and get a quicker sale having a financial review or financial audit can be key. Reviewed or audited financials give buyers peace of mind that your business has accurate financials. Sophisticated buyers need to have some assurance that the financial information you present is accurate.
The bigger your sale price is, the more you should consider having a financial audit over a review.
The essential difference is that, in an audit, an industry qualified CPA will corroborate disclosures from your financial statements with:
- Physical inspections.
- Third party confirmations.
- Analysis of your internal control systems.
- Other industry-specific procedures.
This ensures the highest degree of certainty regarding the accuracy of your financials.
On the other hand, during a review, a CPA will only make inquiries to you and perform analytical procedures on the data you provide. This won’t include testing the accounting records themselves.
Although having a financial audit can be a very expensive (and long!) process, we highly recommend it for larger businesses looking to make a quick sale and increase their value. Smaller business will often find that a financial review is often sufficient to speed up the sale.
And remember that preparing the financial audit or review in advance, before you go to your broker, can significantly reduce sale time.
10. Get Access To The Right Buyers
To sell your business quickly at the best price you need to market it confidentially to the right buyers. The right buyers are groups or individuals who want to purchase a business and have the necessary access to capital.
Buyers generally come from several categories. Some are employees looking to becoming business owners for the first time. Some are more seasoned entrepreneurs, and some are existing competitors seeking to expand. Others are institutional investors looking for a profitable acquisition.
Depending on the size of your business, there are different groups of buyers you should be reaching out to.
Businesses doing over $1mm a year in cash flow become attractive to private equity groups. They are typically the target of institutional investors. On the other hand, first-time buyers and seasoned entrepreneurs are the most frequent buyers of smaller businesses.
Marketing a business to the right buyers confidentially requires strict procedures and the right networks.
Brokers are the best and quickest way to get access to the buyers you’re looking for. In addition, sell-side brokers have the experience required to help you negotiate the highest price for your business.
Here at BizSold, we have a list of 50,000+ high net worth buyers who are always looking to buy new businesses. If you have a medium-market business, we can help you confidentially market your business and find the right buyer fast.
This brings our guide to an end. You should now have a clear understanding of the steps required if you intend to sell your business quickly at the highest price.
Step #1 – having an exit plan – is essential, and it will typically influence all the other steps you take.