Congratulations, someone wants to buy your business! Now, you have two options: hire a broker to deal with the negotiations and paperwork or learn how to sell a small business without a broker, keeping a higher percentage of your profits.
This article will cover several key aspects of selling your business:
When you’re finished reading, you’ll have a good understanding of how business 💼 sales work and where to find advanced resources on specific parts of the process.
I am not a legal professional, accountant, or business sales broker. This article is only meant to give you a basic understanding of how to sell a business, not to replace professional legal or financial advice. If you choose to sell your business without a broker, please still seek legal counsel to draft and finalize contracts.
When it’s beneficial to sell without a broker
The first thing you need to understand is what brokers do and what you’ll be required to do on your own if you decide not to hire one.
A business broker 🤝 is someone who helps you understand the value of your business, vet potential buyers, negotiate the terms of your sales contract, and transfer your business to its new owner once the sale is complete. They also make sure your sale follows local laws and regulations. In most cases, they don’t charge anything up front; they take their fees from the sale itself.
Pros and cons of HIRING a business broker
They can help you understand the market and typical values for businesses like yours
They’re versed in local laws and regulations around business sales and can help you keep things legal
They know what clauses to look for in contracts to make sure you’re protected AND that you get the best deal possible
They can help you find buyers if you don’t have one lined up
They know what to look for when vetting potential buyers
You’ll spend a lot of money; many brokers will take 10-12% of the sale total
Finding a qualified broker can take several months and multiple interviews with potential brokers
If you work in a specialized industry, you might actually know more about the market values for similar businesses than they do
Pros and cons of selling your business WITHOUT a broker
You keep all the money from the sale
You can research the market and laws instead of looking for a broker
You need to do a lot of research to understand your business value, the existing market, and local laws and regulations
You have to do all the paperwork yourself
So, should you hire a broker?
You should learn how to sell your small business without a broker if:
- ☑️ You already have a trusted buyer lined up.
- ☑️ You are confident in your ability to navigate complex negotiations and legal processes.
- ☑️ You have a good lawyer and CPA prepared to help you with key aspects of the sale.
On the other hand, you should hire a broker if:
- 🤝 You’re not confident in your ability to research and understand local laws and regulations.
- 🤝 You hate doing paperwork and/or aren’t confident in your ability to deal with the paperwork involved in a business sale.
- 🤝 You don’t have a buyer lined up and need help to find someone qualified.
How to sell a small business without a broker
Still want to sell your business on your own? You can do it 😎 with this five-step process:
1. Make sure your financial records are buyer-ready
You’ll need to have a firm grasp of your business’s financial position over the past few years in order to establish its value properly. Plus, once negotiations start, your buyer will review those documents with their CPA. You want to make sure it’s easy for them to get the information they need and process your documents ahead of the sale.
👉 There are five types of documents the buyer will want to look at before they make their first offer:
- Profit & loss statements for three to five years
- Balance sheets
- Bank statements
- Federal tax returns
- Year-to-Date profit & loss statement
Once an offer is discussed, a 30-day period of due diligence begins, during which the buyer will want to look at all the financial documents for your business. This includes things like receipts, invoices, and leases. We recommend working with a CPA to get these documents organized in a buyer-friendly manner.
👉 For more information on how to organize your financial documents, check out Morgan & Westfield’s guide to preparing financial documents for a business sale.
2. Valuate your business
Valuating your business establishes what its overall value is to buyers.
👉 There are a couple of ways to do this:
- Valuate your business on your own. There are many strategies you can use to valuate your website or business, including a variety of online website valuation calculators and business valuation calculators. These tools ask for some basic information about your business, such as the number of years you’ve been in business, your industry, and your annual revenue, and use that information to calculate an estimated value. You can also get an estimate on your own by multiplying your annual revenue by three to five.
- Go to an expert. You can also hire a consultant to valuate your business. In some places, you can even find entire firms dedicated to business valuation, with no requirement to hire a broker for the full process.
Either way, remember that valuation is just a guideline. Your buyer is, in the end, the one who determines the value of your business when they decide what they’re actually willing to pay. The buyer is also looking to make a profit, which means that the amount they’re willing to pay will typically be somewhat less than the estimated value. Go into negotiations with an understanding of how much you’re willing to compromise on price.
3. Qualify potential buyers
This next step might not seem important if you’ve already got a buyer lined up, but interest isn’t enough to run a successful business. Moreover, you owe it to the business you’ve built, your own reputation as a business owner, and any employees you have to make sure that the person buying your business is qualified to run it going forward.
👉 There are a few questions you should ask right when an offer is made:
Vetting your buyer with these questions can help you ensure that your business is in good hands going forward.
4. Draft and sign a Letter of Intent
A Letter of Intent (LOI) is a document that establishes a buyer’s intent to purchase a business, along with the terms and conditions of the sale.
👉 There are several key things to include in an LOI:
- Your full name and the full name of your buyer.
- The nature of the purchase.
- The period of exclusivity that exists for negotiations (how much time the buyer has to complete the purchase before you seek other buyers).
- Assignment of responsibility for various costs involved in the sale (establishing who pays what).
- A withdrawal clause allowing the buyer to back out of the transaction at any time if they’re not provided with the expected gains.
- Closing conditions for the transaction.
An LOI may also be preceded by a confidentiality agreement to keep the details of the sale private. Check out the BDC guide to LOIs for more information. You can also find Letter of Intent templates online, though I strongly recommend working with a lawyer to draft this document.
5. Negotiate and finalize the sale
Now that you have a basic structure laid out for the sale, it’s time to negotiate the details in a Definitive Agreement. This is a larger legal document that finalizes the details of the purchase and transfer of ownership, including:
- Names, addresses, and contact information of both the seller and the buyer.
- A solicitation clause that specifies whether these negotiations are exclusive.
- The agreed-upon purchase price.
- Payment and financing structure, outlining whether the purchase will be made all at once or in installments + when payments are due.
- A complete list of the assets being purchased, including valuations and warranties.
- An Intangible Assets list for any intellectual property involved in the sale.
- Termination clauses outlining whether each party can terminate the sale and, if they can, under what circumstances the sale can be terminated. Termination fees will also be listed here.
- Closing conditions and costs, including cost distribution. Note that costs are typically split evenly between the buyer and the seller.
- Earnouts clauses that define whether the seller can expect any future payouts from the success of the business.
- Confidentiality agreements to protect the details of the sale.
- Indemnification clauses that shift post-sale costs or losses from the buyer to the seller.
Definitive Agreements are also often supported by a variety of other documents, such as non-compete agreements and lease or rental agreements for any property being transferred.
Due to the complicated nature of Definitive Agreements and supporting documents, you’ll need to work closely with both your own attorney and the buyer’s attorney at this stage. This will ensure that all of the terms are fair and also compliant with local laws and regulations.
Your step-by-step business sale plan
Skipping the broker when you sell your small business can help you make the highest possible profit from your business sale, especially if you already have a buyer lined up. However, even with a buyer, you’ll need to do a lot of work 🧑💼 to make the sale run smoothly. Here’s a template plan that you can use when closing the deal:
Most of all, be sure to take your time and do the paperwork properly, with the help of a lawyer and CPA where applicable.
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