The 5 Phases of Selling a Business

Did you know that in 1978 it only took 57 days to sell a business? Compare that to today, when you’ll see three out of four businesses NEVER sell, and the average time to sell is almost a year.There are ways that you can more effectively sell your business. This article outlines a 5-phase strategy for selling a business more easily and with less hassle.The Upfront WorkYou’ll see below that what you do before you start to sell a business is as critical as what you do once you put your business on the market. Preparation is critical to successfully selling a business, as is having a clear and concise process. A good business broker will understand this, and won’t have you sign a contract until you fully understand how businesses get sold today.Phase I – The First MeetingThose business owners who take the time to do all the preparatory work of selling a business stand a much greater chance of actually selling, and will sell for more money with better terms.In the first meeting, your business broker and you will discuss your financial history, your employees, and your market. He’ll try to understand where you’re strong in the market, and where your competition is stronger. Ideally, he’ll already know your market, perhaps better than you.The goal of the initial meeting is to see what you need to do to make your business attractive to buyers. It’s a waste of your time (and money) to just sign up with a broker because he says he’ll get your asking price. Remember that 3 out of 4 businesses don’t sell because they’re not in a position to sell.Your broker should give you an honest assessment, and let you know if you need to go back and add value to your business before proceeding.Once you’re ready, you’ll move to Phase II.Phase II – Learn More, Do Research, and Add ValuePhase II is where your business broker starts to take over. He or she will do a tremendous amount of research, including analyzing five years of your financial records. He’ll perform a financial recast for you, research what has recently sold in your area or market, and then hand you a short list of specific ways that you can add value to your business before putting it on the market.This phase is crucial to your success. You’ll take the time to “recast” your financials into reports that are easily digested by potential buyers and their banks. You’ll want to put all your financial records in terms that enable them to quickly see if the business will give them the profit and income they want.Taking the time to add value, even if it’s just on paper, can make or break your sale in the long run. You won’t have to do everything your broker successes, but it’s a good idea to at least clean up your financial records so that there are no hidden problems for the buyer.In Phase II, you’ll decide when will be the right time to sell your business. It may turn out that the best time for you to sell is five or more years down the road, after you’ve done all you could to build value and prepare yourself and your family for the sale.Everything has to be put on the table during this phase. You want to provide the buyers with all the information they need to make educated decisions about buying or not buying your business. Time spent wisely in this phase can cut months off of the due diligence phase.Phase III – Marketing Your Business to BuyersThere are six distinct steps in this phase.Step 1: Get the agreement signedYou should not have signed an agreement with your business broker before this phase. Why? Remember that I said that you might not be ready to sell for a few years? Your agreement with the broker is a short-term (usually a year) contract to sell your business. It’s in yours and your broker’s best interest to only sign the agreement when you’re ready to sell.Step 2: Create the marketing materials and packageWhen you’re ready, your broker will create a marketing package that contains everything prospective buyers need to make a go/no go decision.The marketing package is a 50+ page “book” that includes all your relevant financials, detailed information about your business, information about your employees and company, and even photos if applicable.You’ll include relevant plant information, equipment lists, leases, and contract arrangements. You’ll also provide relevant information about the potential growth of the business, the industry trends, and potential issues that may cause problems down the road. Full disclosure is vital to your successful sale because if there’s a problem or issue, the buyer WILL find it during the due diligence phase.As you can imagine, your business broker will spend a great deal of time preparing your marketing package. However, the hard work that’s put into this phase will reap great rewards in terms of the price and terms you get for the sale.As your broker is creating the marketing package, he’ll simultaneously be putting together a pre-screened list of potential buyers.While many brokers send information to potential buyers one at a time, you’ll want to find a broker who contacts all potential buyers simultaneously. I’ll explain why in a moment. This list should be reviewed with you before any materials are distributed.Step 3: Market the businessThis is where things get interesting. Your broker will send all potential buyers a short message (phone, email, mail) announcing the availability of your business. Your broker may also list your business for sale on one or more online “market places” that list businesses for sale. While these can work well for small businesses, they are far less effective for the “middle market” (businesses that sell for over $1 Million).What they receive is a “blind summary” that gives them enough information to decide whether to proceed and get additional information. Your privacy is protected, and they won’t discover who you are until they’ve signed a non-disclosure agreement and have demonstrated that they have the financial means to buy your business. That final step of demonstrating financial ability is even more important today than it’s ever been in the past.Step 4 – Refine the buyer listNow, you’ll choose a short list of potential buyers with whom you’ll want to move forward. Ideally, you’ll have at least two and up to four or five very good buyers. These are the buyers who truly understand the value of your business, and are in a good position to move forward with the sale.Step 5 – Meet with the potential buyer(s)Now, your broker and you will meet with the potential buyers for an hour or two. They’ll want to get a better understanding from you about your business, the opportunity, and the risks. They’ll ask some very pointed questions, which is why you should spend so much time up front in preparation.Any objections or issues they uncover may cause them to turn away or bid a lower price.Step 6 – Put the business up for auctionYour goal is to create a “bidding war” for your business. You’ve talked with two or three buyers, and each is convinced that they’ll benefit from owning your business.They’ll submit bids, all at the same time. You provide a specific date for bid submission so that all bids arrive at the same time.This enables you to easily compare all the offers that are on the table, see how they stack up against each other, and make a wise selection in choosing the best offer that also has the best likelihood of completing!Phase IV – The Due Diligence PhaseThe due diligence phase of selling a business is really the toughest part, and it’s where most deals fall apart. The reason you spend so much time up front, and why you fully disclose the good, bad, and ugly about your business is that buyers WILL find all the issues during this phase.You run the risk of the buyer backing out or reducing their offer to compensate for the new issues they’ve uncovered. Remember that the buyer’s attorneys and bankers are actively looking for potential problems and risks, so if you’ve already disclosed everything, they will have nothing to find.They’ll do financial audits, environmental audits, information technology audits, and generally invest quite a bit of time (months in some cases) looking through your business.Phase V – Closing the DealUsually, the final phase starts at the same time as the Due Diligence phase. You’ll get all the paperwork in order, conduct final negotiations, draft additional agreements and exhibits, and get everything ready to go for signing and closing of the deal.Then, once the funds have been put into your bank account, you can start the party!For more information about selling your business, please contact Kris Karlson at Bowman/Hanson, California Business Brokers.

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