Small businesses make up 99.9% of U.S. businesses and employ 60.6 million people, according to the U.S. Small Business Administration. In 2018, over half of U.S. business owners were age 55 and over. As many baby boomers prepare to retire, questions surrounding selling a small business are more relevant than ever.
But retirement isn’t the only motivation a business owner may have when deciding on an exit strategy and succession plan. Whether you’re ready for your next opportunity, facing health challenges, or need liquid cash to meet other obligations, selling is often an unavoidable stage in the life cycle of a closely-held private business.Use this small business sale checklist to help plan and prepare for one of the most significant transitions in the life of your company:
- Get yourself and your company transition-ready.
- Choose your personal exit strategy and sales approach.
- Gather and prepare business records and documentation.
- Determine the value of your business.
- Find a buyer (or create your own).
- Negotiate purchase agreements and all related terms and conditions.
1. Prepare yourself and your business for the changes ahead.
While it’s important for you to understand and articulate why you want to sell your business, you also need to be ready to answer potential buyers’ questions with integrity. Buyers typically look for consistently profitable companies with clearly defined future potential. If you or your company aren’t performing well, it’s not fair to expect a premium price or a smooth path to the sale.
Starting your preparations well in advance (preferably in terms of years, not months) creates the opportunity to strengthen the business: revenue, profitability, customer base, long-term contracts, and more. Depending on your exit strategy, leadership succession planning and preparing employees for the changes ahead should also begin early if possible.
2. Evaluate your choices and choose an exit strategy.
When it comes to exit strategies, you have choices — so it’s wise to investigate and compare the pros and cons of each, including:
- Winding down and liquidating
- Third-party sale
- Initial public offering (IPO)
- Merger or acquisition
- Friendly buyout by family or management
- Employee Stock Ownership Plan (ESOP)
While potential selling price is often the most important factor in the decision, you may be surprised to discover that selling your business to an ESOP can offer tax and sale structure advantages. While an ESOP sale guarantees fair market value, notes and other structural options on a seller-financed transaction can net some business owners 90-110% of the fair market sale price. And an ESOP’s tax advantages mean a potentially lower tax rate than you’d see with a third-party sale.
ALSO READ: How Do the Smallest ESOPs Succeed? Key Facts for Small Business Owners
Other important aspects to consider include what happens to your employees, your customers, your vendors, and your community. Not all sale options offer the same opportunities for stability and continuity that an ESOP sale can deliver. But ultimately, the decision is yours.
3. Gather and prepare all relevant business records and documentation.
Business records and documents aren’t only required for the company valuation, buyers’ due diligence, negotiations, and the final sale transaction. They’re also helpful for you to make informed decisions as you move forward. Assembling documents in advance helps you see all aspects of your business clearly, so you can make confident choices moving forward. Here’s a good list to get started:
- Business tax returns (past three years)
- Financial statements (past three years and YTD)
- Business formation documentation
- Cash flow statements
- Financial ratio and trend analysis
- Business plan and revenue projections
- Asset depreciation schedule
- Fixtures, furnishing, and equipment values
- Intellectual property — patents, copyrights, trademarks
- Accounts payable
- Accounts receivable
- Outstanding loan agreements and liens
- Customer list and major contracts
- Vendor information
- Employee information
- Real estate/lease agreements
- Licenses, certifications, registrations
- Insurance policies
- Operation and policy manuals
4. Determine your company’s value.
At this phase of the game, it’s a good idea to talk with a business broker and/or an ESOP expert, who can put you in touch with the professionals you need. A valuation professional uses a systematic approach to set a realistic expectation for your business’s value, whether for sale on the market or to determine fair market value if you decide to sell to your employees via an ESOP.
Valuation methods include capitalization-based approaches like discounted cash flow, market approaches based on comparisons using multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), revenue, asset-based valuation, and others.
Most third-party valuation professionals use several methods in a weighted formula, based on research about your industry and other vital business details.
5. Find (or create) a buyer for your business.
Depending on the exit strategy you choose, this step could be the most stressful, or possibly the most predictable. It can take months or even years to find the right buyer — underscoring the importance of planning your exit strategy years in advance, if possible. In general, the larger the deal, the longer it can take. Many businesses can find a buyer and close within 9 months, but be ready for a much longer process, depending on market conditions and other factors.
If you choose to sell your business to an ESOP, expect a more predictable timeline. Most ESOP sales take six to 12 months to complete, but as little as 90 to 120 days can be realistic with the right expert advice and committed leadership. Unlike other small business sale options, an ESOP creates an internal market and a built-in buyer. The ESOP trust purchases the company on the employees’ behalf, and the ESOP becomes not just a business structure, but also a qualified retirement plan for employees.
Whether you choose a third-party sale or employee ownership, expect to learn a lot in this stage of the process.
6. Negotiate and close the sale.
If you’re working with a business broker or an ESOP professional, expect guidance and advice throughout this step. Third-party sales, mergers, and acquisitions can all be very stressful both on the seller and on employees. The due diligence process can involve a lot of attention to the details of your business. It’s not uncommon for the tumult and anxiety to affect morale, and it can even lead to turnover — which, depending on other conditions, can affect business performance and value. So proceed with care.
Third-party sale negotiations can include strategic premiums, and that can be exciting. But it’s important to keep in mind that many strategic offers involve competitive buyers who may have a plan to take over your customer book and dismantle your business, potentially leaving your employees jobless.
If you’re selling to an ESOP, you can exercise more control and predictability throughout the process. Because the business valuation is based on fair market value and the ESOP trust is a friendly buyer, ESOP sale negotiations often center around seller notes and optimizing the cash and tax advantages, so that you get the right balance of liquidity and tax deferrals to achieve your post-ownership goals.
Perhaps best of all if you love what you do, those goals can even include staying on with your company as an employee. Like all employees, you can earn back an ownership stake in the ESOP, and you can ensure that leadership, employees, customers, and vendors are all well-prepared for your exit.
Next Steps Toward Selling Your Small Business
Businesses in nearly every industry have the potential to become successful ESOPs, and many business owners find that, after considering taxes on sale proceeds, seller-financed notes, and other structural and tax benefits of an ESOP sale, they can net a final return that compares favorably to third-party offers.
The best way to find out if an ESOP is right for your company is to start with a no-cost, no-obligation feasibility analysis with an expert at ESOP Partners. Click the link below to request yours today, and start your succession planning early.