6 Step Guide to Selling Your Small Business

Selling a business is a life-changing event — whether that change is financial via a large exit, a lifestyle change to enter retirement, etc. But the process of selling your hard-built business can be intimidating… especially if you're a first-time seller. So, how do you do it well? What information do you need? What roles do you need filled? What collateral do you need to prepare?

At City Different Investments, we routinely sit across the table from entrepreneurs and business operators as a buyer. We know what the process looks like from the buy side, so we have unique insight into how to prepare a seller for this life-changing process.

If you’re thinking about selling your small business, we put together a six-step guide to aid you on your journey.

Step 1: Determine your “Why”

Owners of small businesses decide to sell for a variety of reasons (seeking a large financial exit, retirement, burnout, diversification needs, etc.). Whatever the case, it’s important for a seller to reflect on their personal reasons. This will be one of the first questions a potential buyer asks; it will help in structuring an appropriate deal, and it's an important exercise to ensure you are, in fact, ready to part ways with a business you may have spent the majority of your life building.

Exploring a sale can be a lengthy and expensive process, and it's important to go into it with a clear understanding of why you’re pursuing this path.

Step 2: Assemble Your Team

Aside from the employees that make up your operational team, a business sale often requires building a separate team with transaction experience. It’s important to have a trusted team of advisors to guide you through the process. That team usually includes some combination of a business intermediary, an accountant, a financial advisor, a tax advisor, and an attorney (but can certainly include others depending on industry, deal complexity, etc.).

Collectively, this group of advisors can help you make sense of the various legal documents involved in a sales process, determine an appropriate valuation for the business, organize the materials needed in due diligence, advise on deal structure, find potential buyers, and help you understand the tax ramifications of a particular deal structure.

Step 3: Prepare the Business

Preparing your business for a sales process should ideally be started months (if not years) before you plan to finalize a transaction. This planning process entails two key elements — crafting your story and organizing diligence materials.

You already have a deep understanding of your business's operations. Crafting your story entails looking at your business from the eyes of a potential buyer. Take an honest assessment of the strengths and weaknesses of the business and yourself as a leader. Being honest about the current state of the business, its risks, and its growth potential will help build credibility and trust with a potential buyer. It’s also a human instinct — we respond to narratives, so hone in on what yours is and why it’s a compelling story for someone to purchase (or invest in).

The second element of preparing the business is to organize diligence materials. Every buyer will be different, but this generally entails financial statements for the last 3-5 years, tax returns, copies of contracts, business formation documents, customer lists, asset lists, lease documents, etc. A business intermediary will often help build out a digital data room with copies of these materials that are easily accessible to an interested buyer.

Step 4: Valuation

If you don’t have experience in business valuation, this is where a trusted intermediary can be worth their weight in gold. Yes, value is ultimately in the eye of the beholder, but it's still important to have an idea of how the market is likely to value your business. This will empower you as a seller to have realistic expectations of your business's worth (or a good frame of reference from which to negotiate a better deal).

There is no one perfect way to value a business, but the most common approaches include finding an intrinsic value based on discounted cash flow analysis or a relative value based on what multiple buyers have paid for similar firms in your geography or industry.

Financial performance is obviously important, but there are other factors a buyer will consider when evaluating your business (things like your involvement in day-to-day operations, key employees, unique IP, long-term contracts, best-in-class service, a healthy and diverse customer base, ongoing capital expenditure needs, historical stability, and future growth prospects).

The bottom line here is that valuations (and valuation methods) can vary based on industry and buyers, but many of the core necessities are common across companies.

Step 5: Find the Right Buyer

It’s not enough to find a buyer… you need to find the right buyer. You want to align on values and goals for not only the transaction but also goals for the future of the firm. Depending on your objectives, the right buyer could be a family member, a current employee, a competitor, a strategic acquirer, or an institutional buyer (like us). Through the diligence process, it’s important to understand the buyer's objectives and their financial capability to close a deal and to ensure they align with your specific exit objectives.

Step 6: Pass the Baton

Let’s say you’ve done steps 1-5 above — you’re happy with the sale terms, you found the right buyer, and you’re ready to sign on the dotted line… now begins the transition process to that new buyer.

This process can look very different depending on whether or not you negotiated a predetermined transition period (or if you are even staying involved in the business post-transaction).

What’s most important during this stage is to maintain transparent communication with the buyer to make it as smooth of a transition as possible.

What else do you need to know?

Although this guide lays out key considerations in a typical transaction, in practice, every deal looks slightly different. There is no one “right” way to sell a business (although there are plenty of wrong ways to do it).

We’re always looking to partner with (and invest in) great businesses and ownership groups. That’s why we created City Different Acquisitions in the first place — we know there are amazing small businesses with owners looking to exit (or take on investors) for a host of reasons. We like to think we’re a great option if/when you start considering a sale. If you don’t know where to start — or would just like to have an institutional investor as part of your process — give us a shout. We’d love to chat about your sale!

The information contained in this communication has been designed for general informational, illustrative, and educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security. Moreover, the information provided is not intended to provide any investment advice whatsoever. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. No discussion or information contained herein serves as the provision of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal, tax, or accounting advice.