Selling their profitable business is often the goal of most entrepreneurs.
Unfortunately, it can be an extremely long process that can have many obstacles and is akin to riding an emotional rollercoaster. Selling a profitable business is definitely a decision that shouldn’t be taken lightly.
Most of what’s written below will apply to selling well-established businesses outside of the eCommerce realm, as well.
While we’ve tried our hardest, it can be nearly impossible to cover every different area of getting the deal and closing it quickly and effectively. However, this guide was created to help you understand exactly what goes into the process of selling a successful online business.
Understanding How to Value Your Business
Most times, businesses that are generating less than $1,000,000 in yearly earnings are going to sell using a valuation method referred to as Seller’s Discretionary Earnings or SDE.
To calculate your SDE, combine your pre-tax profits and your own compensation.
To give you an example, if your business generated $200,000 in profits last year and you are paying yourself a $75,000 salary, the SDE of your company would be $200,000 plus $75,000, or a total of $275,000.
SDE is a way for you to calculate how much the business is worth to you as the owner.
When buyers are trying to figure out how much your business is worth to them, they are typically going to use a multiple of your SDE. In most cases, the multiple will range from a 1.5x to 3x multiple of your SDE value.
Finding the multiple is reliant on a few key factors:
● The growth and performance of your business over time.
● The size of your market and future growth potential.
● The ability to defend your business model.
● How you’ve organized and structured the business.
● How involved you are in managing the day-to-day operations.
● Profit margins and the capital required to sustain the business.
● How in-demand your business model is.
● The overall size of your business.
Any business that has experienced downward trending revenues within the last 3 years, or has financials that are poorly organized and hard to understand is likely to sell for 1.2 times the SDE.
On the other hand, a business that has developed a strong brand sells proprietary products and has consistently grown from year to year would be seen as a better investment and could fetch a 3x SDE multiple.
How to Value Your Business
Finding the real-world value of your business is part art and part science and at the end of the day, the business is really only worth what a buyer is willing to give you for it.
You should be able to figure out a rough estimate of what the business is worth without actually having to commit to selling it off.
Spend time researching similar businesses.
One strategy is to spend time studying the listings of similar businesses and get a feel for what the market will sustain.
You’ll get an idea of how much other businesses are worth and can see how their valuations stack up against the business you’re thinking about selling.
Here are a few different sites you can use to find other businesses being sold.
Some examples listings on Digital Exits –
Obtain feedback from your peers.
Getting an outsider’s point of view will help you separate yourself from the business and get an idea of what the outside world thinks about your business.
Having an outside perspective is critical, especially when your peers understand business or are buyers that regularly buy and sell businesses.
Spend time talking with a broker.
A good broker is going to understand your business model, understand the market and know what buyers will typically pay for your type of business. Spending some time with them before you decide to sell can be a huge benefit to you down the road.
A broker can help you figure out how to get the maximum value, what areas of the business can be improved to raise your multiple. If you like, the broker can also help you through each step of the deal and lower your risks of getting burned.
Place a value on your assets.
The assets and inventory that your business holds are valuable and their value is typically negotiated separately than the value of your actual business.
For instance, a business that is valued at a $150,000 SDE and is being sold for a 2.5x multiple of $375,000, could have around $25,000 in inventory that will get added to the final sale price.
In other words, the value of the business will be $400,000.
While this is a general rule that’s great to follow, it’s not always set in stone.
The amount of inventory that you’re holding relative to the revenue that you’re generating can have a big role in the multiple you’ll be able to ask for.
To give you another example, let’s assume that the business is worth a $250,000 SDE but is required to hold $1 million in inventory and working capital to sustain itself.
The capital that’s required to generate the revenue is so massive that many buyers won’t see the value in buying the business.
There are other buyers that simply do not believe the inventory should be added onto the final value of the site and should naturally come with the business.
Some buyers are going to persist and want the inventory included in your price. The reasoning behind this is that the inventory is required to run the business so it’s nearly impossible to, or shouldn’t be, sold separately.
If you’re selling an eCommerce site, it’s going to require you to include the inventory to sustain the business. Whether you stack this value onto your asking price or you negotiate its value after the sale, the end result will typically be the same.
If you or your buyer insists on selling it separately, the inventory should be sold at cost.
The one exception to this rule is if you have a ton of old inventory or excess inventory that is hard to move. A smart buyer is going to negotiate that you discount the cost of this inventory because it’s seen more as a liability than an asset.
Figuring out exactly what excess inventory means can be a tedious aspect when you’re negotiating the sale of the business. It’s relatively safe to say that if your business has held onto certain parts of your inventory for more than 12 months it could be considered excessive.
Placing a fair SDE multiple on the business and then adding the value of any inventory you hold that sells in less than 12 months is a great move. You’re going to have a hard time finding a buyer that thinks this approach is unreasonable.
Getting Your Business Ready to Sell
It’s generally best to ensure you have at least 6 to 12 months to prepare the business for the sale.
Waking up one day and deciding to sell off your profitable business instantly is going to cost you a lot of money and should be avoided at all costs.
The 6 or 12 months leading up to the sale, or even longer if you can, can help you prepare the business properly and make the selling process go much smoother.
While this does take more time, the decision to wait can add hundreds of thousands of dollars to the final asking price. It’s not unheard of for business owners to fetch 200% more money when they plan the exit versus opting for a quick sale.
Here are the steps you should be taking when you’re trying to get the most value from the sale.
– You may need to grow the business 12 months prior to the sale, if you are looking to grow from a SEO & Content Marketing point of view our team at Prosperity Media has worked with several companies who have had 7-8 figure+ exits.
Start getting lean.
The 12 months leading up to the sale of your business isn’t the time to be making long-term investments or sinking your money into high-risk strategies.
When you are negotiating a final sale price with your buyers they are going to be looking at the most recent 12 months to determine the business’ value. That means any time you’re able to save money and cut excess spending, you’re going to be increasing the amount you can ask for from the sale.
Each dollar that you keep in the business will generate between 100% to 300% in the final asking price.
Now, you don’t necessarily want to harm your current business for the sake of getting more out of the sale. Just limit any discretionary spending and work on eliminating as much wasteful spending as you can.
Great ways to do this are to purchase subscription packages for services you regularly use 12 months in advance, in order to take advantage of any discounts being offered. Cancel any subscriptions and services that you aren’t using.
Reducing wasteful spending and being very intentional about where and how you’re spending money leading up to the sale can have a huge payoff for you.
Get your financial house in order.
It’s easy to understand why and how it happens. Most entrepreneurs are too busy running the business to properly manage their books.
One of the best things you can spend money on when you’re nearing the sale date is an accountant.
Working with them to get your financial house in order and make your books clean and easy to understand will pay off huge when it comes time to begin negotiations with a buyer.
Not only is it going to make marketing your business to buyers that much easier, but it will also make crafting your sales prospectus easier and make your offer more attractive to them.
Messy financials will mean that the buyer will need to dig even deeper during their due diligence to recreate what’s happening in your business because you haven’t laid it out clearly for them.
This is going to have a negative impact on how much they’re willing to offer you.
When buyers see that you have your books in order, it’s going to make it easy for them to realize that you aren’t trying to hide any nasty surprises in the books.
A good accountant is worth their weight in gold and getting them to help you get your financial house in order is a small investment that pays off huge every single time.
Escape from your shared resources.
When you run multiple different businesses, you likely have resources that are being shared between each of them.
For instance, you may have a single phone number for each of your customer support help desks or even use the same hosting account for multiple different businesses.
If this is the case, you’re going to need to start separating them.
The buyers will want to be able to transfer those accounts to themselves, which means you need to have accounts that are dedicated solely to the business that you’re wanting to sell.
You’ll want to do it sooner than later to allow the stats and analytics to begin collecting so they can be verified by your buyer before they purchase the business from you.
It can be kind of a pain to work through at first if you have shared accounts, but doing it will create less confusion and make the transfer process happen faster after the sale goes through.
Understand the costs of a quick sale.
A quick sale will likely cost you quite a bit of money. Let’s look at an example to see what I mean. We can run some calculations to determine if waiting 12 months to prepare is a better option than selling now.
Let’s assume that your business has generated $200,000 in profits and that you have a large amount of wasteful spending, your marketing is trending downwards and your sales have dropped around 15%.
Because of these factors, you could legitimately sell the business for a 2x multiple, which would deliver $400,000 today.
Now, consider what’s possible with 12 months of preparation.
By focusing on your marketing again, cutting down wasteful spending and increasing your sales, you could get your profits up to $275,000.
With the income trending upwards, you could ask for a 2.75x multiple.
After 12 months of work in this scenario, your business would be worth $756,000 to a buyer.
Is waiting 12 months’ worth an extra $356,000 to you?
At the end of the day, you’ll have to make that decision. Regardless which decision you do make, using this example will help you figure out how much waiting 12 months is worth and whether waiting that long is a good decision.
Selling the Business Yourself vs Working with a Broker
When selling your business, there are two different strategies you can use: either sell the business yourself, or work with a broker to get the business sold.
There are pros and cons to each different strategy.
Pros of working with a broker.
● Reputable brokers have a network of buyers they can put your business in front of.
● They know what the markets are currently doing and understand trends and value multiples.
● Brokers can walk you through the process of selling your business and stand by your side from the beginning until the business has sold.
● They can assist you with building the sales prospectus that buyers want to see.
● They will help you during the negotiation process and work with you to vet buyers.
● They can assist you with contracts and escrow so that you’re protected during the deal.
Cons of working with a broker.
● Selling with a broker is going to be more expensive than selling the business yourself. They typically have a 10% to 20% fee for their service.
● Some brokers will work on getting the business sold quicker instead of for the maximum price, to get paid quicker.
● Finding a reputable broker is required if you want to have a good experience.
● Most brokers do not usually allow direct communication between the buyer and the seller.
If the thought of finding a buyer and working through the negotiation process on your own seems intimidating, working with a broker could be well worth the expense.
However, if you have a financial background and are familiar with the process, marketing your business to be sold may be the best option for you.
If you do work with a broker, make sure that you’re asking for and verifying references.
It’s also worth asking for a sales prospectus that the broker has created for a business similar to yours to figure out the level of quality the broker is going to put behind getting your business sold.
Building Your Sales Prospectus
The first thing you’re going to need to do before you list your business for sale on the open market is to build your sales prospectus.
It’s going to be an in-depth brochure that quickly shows buyers the key metrics they’re going to be concerned about when they’re thinking about buying the business from it.
It’s also going to be the first thing you send to them.
Prospectuses tend to vary in quality, so spending time putting together a thorough, well thought-out prospectus will give your buyers their first impression of your business.
A good prospectus can help move the process along, while a bad one could kill any offers.
This process does take time, with some taking upwards of 1 week or more to properly assemble and format. Spending extra time here can easily add 25% to your final sale price.
Here’s what you should be including in your prospectus:
● The history of your business.
● Why you’re listing it for sale.
● Detailed financials, included revenue and expenses.
● A minimum of 3 years’ worth of financials.
● Detailed summaries of your expenses.
● The details of the inventory you have on hand.
● Detailed explanations of expenses the new owner will incur.
● Where your traffic is coming from.
● Your overall traffic trends.
● Your conversion ratios and order values.
● Revenue and conversions by traffic source.
● Information about your products.
● Detailed contributions of your top 25 products to your overall sales volume.
● The competitive strengths of your business.
● Opportunities that exist for the new owner.
● The nature of your competition.
● How the business is structured.
● The software and services you use to sustain the business.
● How you’ve built your team and how involved you are in the business.
● The number of suppliers and details about your relationship.
It seems like a lot of information, but go over this list one by one and you’ll have the details your buyer will want to see. Once completed, format it so that it’s easy to read.
Understanding Different Adjustments
Add-backs, if you’re not familiar with the term, are additional expenses that get added back to your income. They’re typically unusual or one-time expenses and should not take away from the value of your business.
For instance, having your website redesigned or taking a trip that you expensed to the business.
Add-backs can be considered a delicate area. It’s wise to add back as many things as you can to help boost the profitability of your business and increase your sales price.
You want to avoid going overboard, though, because if your buyer digs into your financials and sees that you’re trying to include illegitimate business expenses, the red flags are going to be raised.
Because of this, keep your add-backs as low as possible.
The best strategy would be to run the business as lean as possible, especially in the 12 months leading up to the sale, making sure that you are deducting the expenses from your own personal income.
Deduct any ongoing expenses from the earnings of your business, though. For instance, if you are paying $100 per month for help desk software, make sure that it’s deducted from your expenses. It should also be taken out of the final value of the business since the buyer will have the same costs after they buy the business from you.
Being transparent is the goal when you’re trying to sell your business. It is going to foster goodwill between you and your buyer and will make the negotiation process substantially easier and smoother.
Things to avoid disclosing.
One thing you will want to keep in mind is that you’ll need to avoid including details that you don’t want to disclose until the negotiation process begins.
You’ll also need to realize that you are going to be disclosing quite a bit of information about your business that you may not necessarily be comfortable disclosing.
Because of this, you will need to ensure that the details included inside are kept confidential by anyone interested in buying your business. They will need to sign a non-disclosure agreement before they’re able to view the details.
It’s an unfortunate case that many buyers want to look through your prospectus as competitive intelligence and will not actually keep the information private.
Due to this fact, it’s important not to share any details that are critical to the sustainability of your business or those details that have given you a competitive advantage in the marketplace.
Keep your suppliers private, as well as your best-selling products and any pertinent information that’s considered to be highly proprietary or systems and processes that you have specifically developed over the course of building your business.
It’s recommended that you keep this information private until you have a signed letter of intent (LOI) from a buyer that has already put down earnest money.
If you are selling the business through a broker, make sure that you’re always reviewing and approving the prospectus before it gets sent to their list and that you are comfortable with the information contained inside of it.
Listing Your Business For Sale with an NDA
Now that you’ve made the business look great in your sales prospectus, it’s time to get it listed on the open market.
If you are working with a broker to sell the business, they should have handled everything up to this point. They can email your summary to their network of buyers to start generating interest.
Any party that is interested in digging deeper into your business will have to sign an NDA.
When a buyer signs an NDA, they are legally bound to keep the sensitive details inside your prospectus confidential and will not pass the information onto other people.
Now, NDAs aren’t always ironclad. They can be hard to enforce in many countries, especially when you’re trying to enforce them across country borders. That being said, they are definitely better than nothing.
If you do not have an NDA you can already use, you can hire an attorney to have one created.
You will also need to use an attorney to have your asset purchase agreement created.
You can also consider listing the business for sale on an online marketplace like Flippa, but this option isn’t necessarily recommended unless your business is on the smaller end of the spectrum.
If you use an online marketplace, you will have to disclose a lot of information about the business and most of that information is going to be made public during the auction phase.
Evaluating Different Offers
The offers that you get from buyers can vary wildly. Often, the price being offered by a buyer isn’t all that should be considered.
You’re going to want to approach every offer that’s submitted with skepticism. Doing the deal is a complex process that will require your attention to every detail. Make sure that the buyer can secure proper financing or has the cash on hand to buy.
That may not be something you’re able to do, or something that your buyer is going to be able to do when they are trying to win the deal.
There are a couple different things you should look for when you’re thinking about different offers: the buyer making the offer and the financial details.
Financing the Sale
When it comes to paying for your business after they’ve made an offer, some of the most common strategies buyers will use are below.
Selling for Cash
All-cash deals are, for the most part, what nearly every entrepreneur hopes for when they’re selling their business.
If it’s possible for you to sell the business for all cash, it’s highly recommended that you take it and consider being flexible on your final asking price. Being flexible will help move the closing process along and reduce contingencies.
All told, selling for pure cash makes for a much cleaner and faster deal with less red tape.
However, if a buyer does offer you cash for the business, you’ll need to verify that they actually have the cash on hand — the entire amount.
Allowing the Owner to Finance
When an owner is offering financing to the buyer, part of or all of the final purchase price is going to be financed and the buyer will put up a portion of cash to close on the business, with the remainder being paid out to the owner over time.
Effectively, you are acting as a bank and giving the buyer a loan against the business.
Owner financing deals can be difficult and most entrepreneurs do not like them because of that reason.
When you’re selling a business, you want to eliminate as much risk as possible.
This is especially true if you’re trying to get the maximum value from the business.
If this is the case, why would you want to incur more risk on your part by allowing the owner to finance the deal through your own bank account? You’re then taking on the risk of the business tanking. There’s really no upside for you.
With this being said, you don’t always have to turn away owner-financing deals, especially if the terms are short enough that you can receive the entire buyout amount in a short period of time.
Finding Banks & Using Loans
Before you start accepting offers from buyers that are securing bank loans, make sure that you verify the buyer’s ability to actually get the loan.
If they haven’t gotten pre-approval from the bank, you should be digging into their credit history and should consider holding off accepting until you have proof from the lender that the buyer will actually receive the loan.
Earn-outs are deals being made where you’re going to hold off receiving a percentage of the purchase price until the business has hit goals that the buyer has put in place. The goals are typically tied to the business’ revenue and net income.
Agreeing to one of these deals is largely dependent on you.
Earn-outs do make a lot of sense if your business is rapidly growing.
If you’re confident that the growth of the business hasn’t been a fluke, you could consider taking a portion of the deal and arranging it in an earn-out, then allowing the buyer to finalize the deal once their own revenue goals have been hit.
Evaluating a Potential Buyer
While understanding the details of your buyer’s financing is critical, you’re also going to need to understand who your buyer really is.
Selling your business is a highly complex process and even the best deals are going to require significant amounts of work that require trust between you and your buyer.
That means you’re going to want to do the deal with a buyer that you like and trust.
If dropping your final asking price by, say, 10% means you will get the chance to work with a buyer that you like and trust, it’s well worth the payoff when compared to accepting a full-priced offer from a buyer that you may have an uneasy feeling about.
One of the worst situations you can find yourself in is spending upwards of three months trying to secure the deal, only to find out that the buyer has flaked and you have to start from the beginning again.
Here are a few factors you’ll need to consider when you’re evaluating a buyer:
● Does the buyer have prior experience running or buying and selling businesses?
● Have they followed through with what they said they were going to do, especially during the smaller moments that didn’t require as much dedication?
● Do you consider them to be a professional or do they have other work online that you can verify they are who they say they are?
● Have they communicated well with you over the phone and through emails?
It’s in your best interest to be picky and make sure you’re judging every buyer that comes your way.
Pay attention to your interactions with them. If their emails are hard to read or sloppy or they fail to get back to you when they say they’re going to, your red flags should be raised.
Small problems that happen early in the negotiations can become big problems down the road when the process becomes far more complex.
There’s quite a bit that you’re going to need to consider when you’re looking at offers, so make sure you aren’t focusing too much on the sale price itself and that you’re actually paying attention to who you’re selling to.
Getting a Letter of Intent
Once a buyer has agreed to some basic terms of the deal, the next step is a letter of intent — or LOI (Letter of interest)
The LOI serves as the agreement to be followed between you and the buyer and lays out the basic terms needed to move the deal into the closing stage.
Here is what an LOI should have covered:
● How the deal will be structured, including financing details and the final purchase price.
● How long it’s going to take the buyer to perform due diligence and move towards closing.
● What terms and circumstances you have agreed to, where you or the buyer can cancel the deal if the terms aren’t followed or the circumstances haven’t been met.
● What’s being included in the deal, such as your trademarks, inventory, website, etc.
● How long you are making yourself available during the transition period.
● Whether you can entertain offers from other buyers during the closing period.
● How much money is being required to secure the deal and whether it is refundable if the deal falls through.
While you need an LOI to move forward, it’s important to understand what an LOI is and what an LOI isn’t. It is NOT a binding agreement that says your buyer HAS to purchase your business.
Most LOIs that come across your desk are going to be open-ended. Meaning that a buyer can walk away if they find something in your business that they do not like or believe has been misrepresented.
That means an LOI is simply a document that ensures both parties are operating on the same page and helps them move the deal toward the closing stages.
It does not guarantee that a sale is being made, though.
Deals can and do fall apart after an LOI has been submitted and it happens quite a bit.
This is one of the key reasons you need to work with a buyer that you trust to keep the deal alive.
Accepting Earnest Money
Earnest money is what buyers are going to be required to pay once submitting their LOI and helps them show that they are serious about buying the business.
The amount of earnest money you require is largely dependent on the size of the deal.
If your deal is worth six figures or more you will want to accept around $5,000 for every $100,000 to $200,000 of the deal’s value.
This isn’t necessarily a rule that’s carved into stone. When the deal is worth more money, you’ll want to ask more in earnest money to ensure your buyer is serious and you’re not wasting your time.
Make sure that your LOI has details about the circumstances where a buyer can receive a refund on their earnest money or if that’s even a possibility.
Performing Due Diligence
Due diligence begins once an LOI has been submitted and signed and allows the buyer to start discovering more about your business.
The buyer is going to want to see everything possible about your business. Unless you have provided them with good reasons, you are going to need to offer them access to dig deeper.
Savvy buyers are going to bank on their due diligence and are going to require you to disclose vendor agreements, all of your bank and financial statements, tax returns and all of the accounting statements.
Buyers may also come to your physical location to verify that your operations are as you say they are, if you have one.
There have been entire books written on performing proper due diligence and ensuring that buyers are not buying businesses that have tons of undisclosed risks.
Fortunately for you, the process lies entirely on your buyer to perform and your only concern is that they handle the process as quickly and as smoothly as possible.
You can help move the process along by having a majority of the following information available from the beginning and helping your buyer decipher what’s contained inside.
Parts of your business you’ll want to have available are:
● The previous 12 to 18 months of bank statements.
● Tax returns from the last 3 years.
● The previous 12 to 18 months of credit card statements.
● Processing statements from your credit card processors and merchants.
● Access to any software and apps you use to sustain the business.
● Access to your documentation, SOPs, processes and systems.
● 3 years’ worth of financial statements with line item breakdowns.
It also is highly important that you do your research on the acquisition here is a guide we wrote on the topic – https://www.domainer.com.au/it-pays-to-do-your-homework/
If you are looking to buy a online business and need someone to do analysis pre purchased Prosperity Media offer this service.
Confidentiality is essential if you have made it to the point of accepting an LOI and the buyer has begun their due diligence.
You’ll need members of your team to maintain confidentiality because they are likely to notice someone new poking around in your business and wonder what is going on.
When this happens, figuring out what to tell them can be difficult.
Many business owners simply choose not to disclose the fact that they are selling the business. This is primarily to keep from raising alarms with key employees and to keep them from leaking key details to the public.
If you trust your team and know that they aren’t going to publicly disclose private information, telling them what is going on could also keep them from getting spooked.
The end result comes down to how comfortable you are with telling them that you are selling the business.
If you run a larger team or a larger business and have larger consequences of the information being public as a result, you may want to keep the buyer performing due diligence a secret.
How Long Should Diligence and Closing Take?
The time between your buyer signing the letter of intent and you working together to close the deal is largely dependent on how big the business is and how complex your operations and books are.
If your business has minimum inventory and a small team, your buyer is buying the business with cash and you have disclosed all the information your buyer needs to make a decision, you could be closing the sale within 30 days or less.
If your business is larger, has a big team, huge inventory and is at the higher end of the asking price spectrum, you could expect the deal to take significantly longer. It will also take longer if it’s being financed by a third party. The diligence and closing in this scenario could take upwards of 6 months.
When you are negotiating the LOI with your buyer, make sure that you leave a reasonable amount of time for closing without getting into excess.
You want to make sure that your buyer is motivated to close, because in case they back out, you want to be able to move on and find a new buyer as quickly as possible.
Structuring Your Asset Purchase Agreement
Your asset purchase agreement is a legally binding document that you’ll sign when you’re ready to close the deal and start transferring ownership to your buyer.
It can be thought of as a letter of intent that’s been given steroids.
The LOI is short and to the point, laying out the terms that both parties are going to follow to move forward with good faith that they both have intentions of closing the deal.
The asset purchase agreement, though, is the legally binding contract that lays out every aspect of the deal in great detail.
Depending on whether you have gone through the process before, you may want to get a lawyer involved in this part of the process. An attorney can save you a ton of headaches and help expedite the closing of the sale.
Typically, one party will offer to create the first draft of the asset purchase agreement.
If you and the buyer will agree, you should be the one to create the asset purchase agreement. Doing so will cost you more money up front, because of attorney’s fees, but you gain the advantage of drafting the initial copy that is written and designed with your benefit and protection as the foundation.
Once you’ve created the initial draft, you’ll have to pass it to your buyer to get reviewed by their own attorney. Sometimes, revisions will be requested, with the document going back and forth until it reaches a version you both agree to.
The process of crafting an asset purchase agreement typically takes a few weeks to complete, so you’ll want to make sure you begin working on it at least one month before you enter into the closing phase.
Most attorneys are going to charge between $3,000 to $5,000 to create an asset purchase agreement. This will usually include the first version draft and a few rounds of revisions, along with reviewing any changes that have been made by your buyer.
Asset Purchase vs Stock Purchase
When your deal is being done inside of the United States, there are two different ways you can structure it: either through an asset purchase or through a stock purchase.
Most business deals are going to be structured as an asset purchase agreement, while some will still use the stock purchase agreement, so it’s helpful to understand the difference between both types.
During an asset purchase agreement, buyers are only buying the assets associated with your business. They aren’t going to be liable for any problems that arise, issues, or potential lawsuits from any dealings you’ve done in the past.
The assets associated with your business are going to be moved from your legal entity to the buyer’s legal entity once the deal has closed.
During a stock purchase agreement, buyers are purchasing the stock of your business. This means that they will assume any liabilities that could arise as a result of your previous actions.
Stock purchase deals are far less common and will require your business to be structured as a C-Corp or S-Corp, which many of the businesses that solo entrepreneurs build are not.
Other implications, like how the gains are taxed to your buyer, could also be issues that help you determine how you’re going to structure the deal. It’s always best to talk to a tax attorney or a certified public accountant if you’re confused.
Closing the Deal
The closing happens when both you and your buyer sign the final purchase agreements and the buyer wires the money to you, officially taking over the business.
Is Escrow an Option?
Using an escrow service to transfer the funds is always recommended. This way, you’ll know the funds are there to pay you when the transfer is complete.
Some buyers will require that their funds remain in an escrow account until the entire business has been transferred to them. Given the large amount of money they are spending, it’s a wise choice on their part.
The Transition Period
Once you have reached the transition period, your business has been sold and funds have already been transferred to your accounts.
While the risky part may be behind you, you will most likely have to help your buyer transition into taking over your business. You’ll need to provide the support they require to make sure they have the best chance to succeed.
How much training and help you’re willing to offer or even provide during this period should have been outlined in the LOI you negotiated with the buyer. At a minimum, you should be there to support your buyer for at least 4 to 6 weeks.
It can be tempting for you to check out and step away from the process once you’ve gotten the money deposited into your bank, but you should do whatever you can to help your buyer succeed.
You’re doing this not only because it’s what is right to do, but that buyer may also want to purchase other businesses from you in the future.
The 30 to 60-day time period after the sale is a great time to:
● Schedule training to help your buyer become familiar with critical aspects of your business.
● Be ready to answer any questions that the buyer has.
● Update any and all billing information to your buyer’s information.
● Change ownership of all accounts associated with the business to your buyer’s accounts.
● File the necessary paperwork with the local government to ensure you are no longer associated with the business.
● Close any accounts that were tied to the business when you owned it.
After the transition period has ended, your obligations to the buyer are entirely up to you.
Occasionally, there will be times that your buyer doesn’t realize what an appropriate level of involvement is and will continue to ask for high-level support well past what was outlined in the LOI.
If this happens, you may need to have a frank discussion with them about what you are willing to do and what you are not willing to do when you’ve passed the agreed-upon timeframe.
Ready to Sell?
If you’ve found yourself in a position of wanting to sell your profitable business, working with a broker is one of the best moves you can make.
They can help you work seamlessly through the process and put your business in front of buyers that are ready to buy.
Digital Exits is one of the most reputable brokers that has a long history of helping sell established, profitable businesses and they understand the process, so you don’t have to get bogged down trying to figure it all out on your own.