There are five phases to selling your business:
- Pre-sale work
- Broker listing and offers
- Due diligence
- Closing
- Post-closing
Pre-sale work
The majority of buyers purchase the assets of the business versus purchasing stock. Sellers are required to liquidate the corporation. The accounting records, financial statements, legal documents, and compliance with regulations must be ready for buyers to examine. Any existing bank lines of credit must be paid off at the time of the sale closing. If there are any issues with the assets, contracts, or employee obligations, it is best to take care of them before listing your business for sale to make it as attractive as possible to potential buyers.
Broker listings and offers
A buyer will make an offer based on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Most businesses sell between 4 to 6 times EBITDA; buyers will pay more for businesses in growing industries. It is essential to work with a broker that is familiar with your industry and knows your business.
Once your business broker establishes the relationship, they will prepare a business profile to present to potential buyers. Potential buyers will make offers based on your profile, EBITDA, and sales. The best offers are all cash and with no future earnings obligations or earn-outs. Most offers will include a holdback if there are unforeseen issues with the business; these funds are held in escrow for 12-24 months.
Due Diligence
Once you have selected the buyer, the due diligence process will begin. This phase could be as short as 60 days. During this phase, it is imperative to keep your EBITDA consistent; any fluctuation could result in the buyer requesting a price adjustment. Ideally, the due diligence period is short.
Closing
Closing will be done with an escrow agent and your attorney. Until now, all balance sheet numbers have been estimated; you now have the final numbers. The funds are wired, and your business is officially sold.
Post close
After closing, the buyer will control the business. If issues arise due to undisclosed liabilities, the holdback funds will be used to reimburse the buyer.
Selling a business can be stressful and intimidating, whether it is your first time or you have sold several businesses. Surrounding yourself with a competent team, a strong broker, a knowledgeable attorney, and an experienced CPA is paramount.
For more information, please get in touch with Ron Stumpf at LSL CPAs (714) 569-1000.
