How to Sell a Small Business

As a small business owner, the decision to sell your company represents one of the most significant transitions in your entrepreneurial journey. Whether you're planning for retirement, pursuing new opportunities, or facing personal circumstances that necessitate a change, selling a business requires careful planning and execution.

Since selling your business takes a lot of work, time, and legal understanding, we asked Bill Thrush, Managing Partner of Friedman, Framme & Thrush and a LegalShield provider lawyer, for his thoughts on selling a business:

"Selling a business can be a complicated process. First, you want to make sure you enlist the help of a lawyer. There will be a great deal of legal documents that are needed, and you want to make sure those are done correctly.”  

Many entrepreneurs eventually reach a point where selling a small business becomes the right strategic move. Common reasons include:

• Retirement or desire to pursue other interests
• Partnership disputes or changes
• Health issues or family circumstances
• Market timing and favorable economic conditions
• Burnout or desire for a career change
• Inability to compete with larger businesses
• Significant profit potential from a timely sale

Before diving into the process of how to sell a small business, it's important to evaluate if you're truly ready. This major decision should align with both your personal and professional goals. If you think you’re ready to begin the sale or are just curious as to the process, read on to see what to do next.

Preparing your business for sale

Before listing your business on the market, proper preparation is essential to maximize your sale price and attract qualified buyers. When it comes to selling a small business by owner, presentation matters tremendously.

"You want to get your business valued. It will be very difficult to sell the business unless you know how much it is worth. In the process of doing that (or in advance of it) you will want to make sure your financials are up to date and clean. Make sure all books are balanced and accurate," emphasizes Bill Thrush.

Check these off your to-do list of steps for preparing your business for sale:

• Organize financial records
  • Gather 3-5 years of profit and loss statements.
  • Prepare current balance sheets.
  • Document tax returns and ensure compliance.
  • Create cash flow statements showing consistent revenue.

• Enhance business operations
  • Streamline processes and document procedures.
  • Resolve any ongoing legal issues or disputes.
  • Update equipment and facilities as needed.
  • Secure intellectual property through proper patents, trademarks, or copyrights.
    ‍
• Address customer and employee concerns
  • Strengthen customer relationships and demonstrate loyalty.
  • Ensure key employees are properly incentivized to stay.
  • Consider confidentiality agreements during the sale process.
  • Develop a transition plan for new ownership.

Remember that first impressions matter tremendously when selling a small business. Buyers want to see a well-organized operation with clear documentation and promising financials.

Determining your business value

One of the most challenging aspects of selling a small company is determining its actual worth. Proper valuation ensures you don't leave money on the table while still pricing attractively enough to generate interest.

There are several common approaches to business valuation:

• Asset-based valuation: Calculates the worth of all business assets minus liabilities
• Earnings-based methods: Uses multipliers of revenue or earnings before interest, taxes, depreciation, and amortization (EBITDA)
• Market-based comparisons: Examines recent sales of similar businesses in your industry
• Discounted cash flow: Projects future earnings and discounts them to present value

"Once you are valued, then you have to find a willing buyer. Depending on the type of business, there are headhunters that can help you do that," notes Bill Thrush.

These are some common valuation mistakes to avoid:

• Overvaluing based on emotional attachment
• Failing to account for market trends in your industry
• Ignoring the role of intangible assets like reputation and goodwill
• Not considering the strength of customer relationships and contracts

Professional business appraisers can provide an objective assessment, which can be particularly valuable when selling a small business by owner without broker assistance.

Common ways to sell your business

When considering how to sell your business, several pathways exist, each with distinct advantages and considerations:

Selling to an individual buyer

This traditional approach to selling a business involves finding an entrepreneur interested in taking over your operation. Selling to a single buyer means a potentially faster sale process, possbily at a higher sale price. But it does require that you find a qualified buyer, which can be challenging and raises confidentiality concerns.

Merging with another company

Combining your business with a complementary organization can create mutual benefits. It offers the potential for ongoing involvement, and even tax advantages in some cases. However, it could mean that your negotiations will get significantly more complex.

Selling to employees (ESOP)

Employee Stock Ownership Plans (ESOP) offer a gradual transition while rewarding loyal staff. This helps to preserve company culture, offers potential tax benefits, and gives you the ability for a gradual transition. Be prepared for a complex setup, which could result in lower initial payout.

Using a business broker

Professional brokers specialize in selling a small business, handling marketing and buyer screening. Using a broker gives you access to larger buyer networks, as well as confidentiality protection and a professional’s negotiation expertise. You may find yourself with less personal control, and you could end up paying a hefty commission fee of 5%-10% of the sale price.

"Then negotiate the deal, and close it," advises Bill Thrush, summarizing the final stages after finding a buyer.

Negotiating the sale

Effective negotiation is crucial when selling a small business by owner. Beyond just the headline price, numerous factors will determine if the deal truly meets your needs.

Key deal terms to understand:

• Purchase price and structure: Cash at closing, seller financing, earnouts, or equity
• Asset vs. stock sale: Different tax implications and liability considerations
• Non-compete agreements: Restrictions on your future business activities
• Transition period: Your role after the sale (if any)
• Contingencies: Conditions that must be met before closing

The due diligence process allows buyers to verify all aspects of your business before finalizing the purchase. Be prepared for buyers to investigate many areas of your business, including financial statements and tax returns; equipment and inventory condition; real estate leases, ownership documents and more. Potential buyers will also want to check out your employee information and agreements; pending litigation or compliance issues; and customer and supplier contracts.

Avoid negotiation pitfalls when selling a small business by following these tips:

• Stay professional despite emotional attachment.
• Don't hide problems—they'll likely be discovered.
• Keep multiple interested buyers when possible.
• Document all agreements in writing.
• Maintain confidentiality throughout the process.

Legal and financial considerations

The legal framework of selling a business involves several key documents that protect both parties.

You want to ensure that these essential legal elements are included:

• Letter of intent (LOI): Outlines the proposed deal terms before formal contracts.
• Purchase agreement: The binding contract detailing all aspects of the sale.
• Due diligence documents: Records provided to the buyer for verification.
• Transition services agreement: Defines your post-sale involvement.

The structure of your sale significantly impacts tax consequences:

• Asset sales: Buyer purchases individual assets rather than the entire entity.
• Stock sales: Buyer purchases your shares or membership interest in the business.
• Merger or acquisition: Companies combine through various legal structures.

Each structure carries different tax implications and liability exposures for both parties.

Tax implications of selling a business

When selling a small company, understanding tax obligations helps you retain more of your hard-earned proceeds. Capital gains taxes represent the primary tax consideration for most sellers.

Depending on how your business is structured and the sale arrangement, you may owe some of these taxes:

• Federal capital gains taxes (short-term or long-term)
• State income or capital gains taxes
• Ordinary income taxes on certain assets
• Potential recapture of depreciation
• Self-employment taxes on certain payment structures

To potentially minimize tax impact, consider installment sales to spread income across multiple tax years. You can also explore tax-free reorganizations if merging with another company. Allocate purchase price strategically across different asset classes. And as always, consult with tax professionals well before the sale.

The IRS requires specific reporting for business sales, including:

• Form 8594 (Asset Acquisition Statement)
• Schedule D and Form 4797 for reporting gains and losses
• Form 6252 for installment sales

Closing the sale

The last step in selling a small business involves finalizing agreements and transferring ownership. This critical phase requires attention to detail to ensure a smooth transition.

Steps to successfully close the deal include:

• Finalizing contracts
  • Review all agreements with legal counsel.
  • Ensure all contingencies have been satisfied.
  • Obtain necessary third-party consents (landlords, suppliers, etc.).
  • Prepare closing documents and schedules.

• Transferring ownership
  • Coordinate the exchange of funds.
  • Transfer licenses and permits where possible.
  • Update insurance policies and beneficiaries.
  • Notify key stakeholders (timing depends on confidentiality needs).

• Managing transition
  • Train the new owner as agreed.
  • Introduce key customers and suppliers.
  • Transfer passwords and digital assets.
  • Ensure employee transition plans are implemented.

"Make sure all books are balanced and accurate," advises Bill Thrush, emphasizing the importance of clean financials through the closing process.

Successfully selling your small business

Successfully selling a small business requires patience, preparation, and professional guidance. By understanding the process and planning ahead, you can maximize value while ensuring a smooth transition for employees and customers.

Key takeaways for anyone considering selling a business:

• Start planning at least 1-2 years before your desired exit.
• Build a team of professional advisors (attorney, accountant, broker).
• Focus on increasing profitability and streamlining operations before the sale.
• Document all processes and systems to demonstrate transferability.
• Prepare emotionally for letting go of your business.

How LegalShield can help with selling your small business

When selling a small business, having proper legal guidance is essential but can be cost-prohibitive. LegalShield's Business Plus Supplement offers affordable legal solutions specifically designed for small business owners navigating complex transactions like business sales.

LegalShield Business Plus provides key features that you need, such as direct access to experienced attorneys; document review services; legal consultation; assistance with regulatory compliance; guidance on employee transitions, and more! We also provide 24/7 emergency assistance for covered legal matters, giving you peace of mind that you can access help whenever you need it.

With plans starting at affordable monthly rates, LegalShield ensures you have legal expertise throughout the entire process of selling your small business. Their network of dedicated provider law firms can review essential documents, advise on negotiation strategies, and help you navigate potential legal pitfalls.

By becoming a member with LegalShield before and during your business sale, you gain peace of mind knowing experienced attorneys are protecting your interests without the excessive hourly rates typically associated with business transaction lawyers.

For more information on how LegalShield can support your business sale plans, visit our website or contact a representative today.

_____________________________________________________________________________