Part of the reward of being a small business owner is seeing your hard work pay off over the years. The many sacrifices you made for your business can all seem worth it on the day you close a deal to sell your company. But if you are dreaming of that day, it will take some work to get you across the finish line.
Small business acquisitions increased in 2021 and outpaced pre-pandemic levels in the fourth quarter, according to a report from BizBuySell. Sales were up 24 percent in the first quarter of 2022 compared to the previous year.
More than 8,600 small business transactions closed in 2021. Businesses sold for an average of $325,500—a record high that BizBuySell attributed to buyer competition for a limited number of strong performing businesses. Businesses that thrived during the pandemic were the top acquisition targets, while many owners who struggled during the pandemic said they were waiting for a recovery before making their exit.
That time might be now. More business owners are choosing to sell in 2022, and more than half are citing retirement as their motivation. However, a third of small business owners said their business is currently strong. On the buyer side, 25 percent want to capitalize on emerging opportunities, in particular essential service businesses that are likely to be popular in both strong and weak economic climates.
The owners who build a business from scratch are often the heart and soul of the enterprise. They wear many hats and yet also manage to be more than the sum of these parts.
While this may have been a winning strategy while you were running the business, when the time comes to sell it, you should no longer be the primary selling point. After all, a potential buyer is buying your business—not you. They want a strong-performing business—not a strong-performing owner.
If your business has managed to stay up and running for years, it is probably in no small part because you were doing many things right. But you need to be able to describe what those things are to another person. In other words, the success needs to be replicable. And that means having structures, or standard operating procedures (SOPs), that answer the following questions:
Your company’s finances will come under scrutiny during the formal due diligence process. But even before the due diligence investigation occurs, any serious buyer will want to look at your financial documents, including
This is just a short list of the documentation needed for a future business sale. You should work with professionals such as an attorney and an accountant to prepare a full list of documents needed during the sale process. Because this could take a while, do not wait until the eleventh hour to get your finances in order.
Once you have a seller in place and have negotiated a sales price, congratulations—you are on the verge of selling your business. But before you pop the champagne, there are a few legal hurdles to clear.
The sales agreement is the contract that governs the sale of the business. Adjustments, broker fees, and any other details relevant to the sale (such as how you will run the business until the sale is final) must be included and agreed upon. Once the agreement is signed, both parties are bound by its terms.
However, not all business transfers are conducted in this manner. Instead of selling a business, perhaps you are handing it over to family members. If that is the case, there are issues such as estate and gift tax obligations and succession planning to keep in mind. According to a recent survey from CNBC, fewer than 30 percent of small business owners who plan to sell their business have a succession plan.
In addition, state laws and governing documents such as an LLC operating agreement may have provisions about selling or transferring a business. You need to make sure that the transaction is legal and abides by the process that you established at the time of formation. Otherwise, the deal could be dead on arrival.
Selling a business is the last stage of a long and hopefully rewarding journey. The earlier you start preparing your business for sale, the better positioned you will be to close the deal when the right opportunity presents itself. This may be your first time selling a business, but our law office has advised many small business owners on sales and related issues. We can provide a valuable third-party perspective while advocating for your interests: call or contact our office today to set up a meeting.