Selling a business represents the culmination of years of hard work and personal sacrifice. For many American entrepreneurs, it's not just a financial transaction but the closing of a significant life chapter. Yet surprisingly, most business owners spend more time planning their next vacation than preparing for arguably the most important financial event of their lives.
The truth? A growing business will always sell quickly at a better price, and taking time to properly prepare can significantly improve your final sale value. In this guide, we'll walk through the critical steps for preparing to sell your business in the American market, helping you avoid costly mistakes and position your company for maximum value.
1.) Prepare Your Finances
Money talks when selling a business. Clean books and strong numbers will do more for your sale price than anything else.
Clean Up Your Books
Make your financial statements reflect business reality. Remove personal expenses from company accounts. Pay yourself a reasonable salary instead of manipulating it for tax reasons. Deal with old inventory sitting on your shelves. Identify one-time expenses that new owners won't face.
Business buyers look at your numbers with suspicion. The cleaner your books, the less reason they have to negotiate your price down.
Show Growth Potential
Smart buyers aren't just purchasing your past. They want your future, too. Show them where growth could come from. Point out customer segments you haven't tapped, products you haven't launched, or operational improvements you haven't implemented yet.
2.) Make Yourself Redundant
Most small businesses rely too heavily on their owners. Buyers will pay more for a company that won't fall apart when you leave, so your aim when preparing to sell is to make yourself redundant - as counterproductive as that might sound. You want to get the business to a stage where it can run smoothly by itself. Here’s how:
Systems and Processes
Write down how your business actually runs. Create simple manuals for daily operations, customer interactions, and vendor management. Don't overthink this. Basic documentation helps buyers see they're buying a system, not just your personal relationships and knowledge.
Build Your Team
Start giving your managers real authority now. Make sure multiple people understand each critical business function. When a buyer sees capable people who will stay after you're gone, they'll feel more confident paying top dollar.
Fix Your Physical Assets
Take care of repairs you've been putting off. Update outdated equipment. Make sure your facilities comply with current regulations. These issues always come up during buyer inspections, and fixing them proactively keeps them from becoming negotiation points later.
3.) Legal and Compliance Work
American businesses face plenty of legal risks. Addressing these issues before listing your company prevents buyers from discovering problems and demanding discounts.
Contract Review
Gather all your important agreements. Look at customer contracts, vendor agreements, leases, and employment documents. Pay attention to whether these contracts can transfer to a new owner or require permission for the sale.
Protect Your IP
Make sure trademarks, patents, and copyrights are properly registered. Secure ownership of your website domains and social media accounts. Put confidentiality agreements in place to protect trade secrets.
Handle Legal Problems
Legal disputes scare buyers away. Try to settle outstanding employee issues, customer complaints, and vendor disagreements before listing your business.
4.) Tax, tax, tax
The tax bill from selling your business can shock unprepared owners. While you need personal tax advice, here are some basics to understand.
Structure Matters
How you structure the sale affects your tax bill:
Asset sales give buyers better tax treatment but typically cost sellers more in taxes.
Stock sales usually result in lower taxes for sellers but buyers prefer not to buy this way.
Some deals qualify for tax-free treatment, at least temporarily.
State Tax Issues
State taxes vary dramatically across the US. If you live in California or New York, expect a much higher tax bill than in Texas or Florida. Some sellers even move before closing to reduce their liability.
Most tax experts agree you should start planning at least two years before selling your business. Many strategies require implementation well before finding a buyer.
5.) Valuation Basics
Tip: For a detailed breakdown of how to value a business, including the different methods and formulas involved, read this article.
How To Value a Business
Small businesses typically get valued in three ways:
Income approach looks at your earning power and cash flow.
Market approach compares your business to similar ones that sold recently.
Asset approach tallies up what your stuff is worth minus what you owe.
Most small and medium-sized businesses sell based on a multiple of earnings. Your industry, growth rate, and customer diversity determine the exact multiple.
Get Professional Help
Use tools like BFS's ValueRight for a quick estimate. Serious sellers should also talk to business appraisers who know your industry.
Fix Value Problems
Look for issues that hurt your value. Red flags include too much business with one customer, outdated equipment, and inconsistent profits. Fix these problems before buyers discover them.
6.) Working With Advisors
Selling a business gets complicated. Most successful sellers bring in experts to help.
Business Brokers
For businesses worth under $5 million, brokers typically want some money upfront ($0-$15,000) plus a commission when you sell (8-12% of the price).
For larger businesses, M&A advisors charge heftier upfront fees ($20,000+) with lower back-end commissions (3-8%).
Good advisors create competition among buyers, handle complex paperwork, buffer emotional negotiations, and keep your sale confidential.
Attorneys
Find a lawyer who specializes in business sales. Your regular business attorney probably lacks this expertise. Transaction attorneys understand purchase agreements, warranties, non-compete terms, and transition agreements.
Tax Advisors
No professional relationship affects your final take-home cash more than your tax advisor. They help structure your deal, document deductions, and plan for post-sale money management.
7.) Due Diligence
Buyers will investigate every aspect of your business before closing. Understanding what they look for helps you prepare.
Financial Review
Expect buyers to examine several years of financial statements and tax returns. They will verify your revenue claims, analyze your expenses, and assess your working capital needs.
Operations Investigation
Buyers will check customer and vendor relationships, study your production methods, test your quality systems, and evaluate your technology.
Legal Examination
Expect scrutiny of your corporate records, regulatory compliance, pending lawsuits, intellectual property, and employment practices.
Data Room Setup
Create a secure online space to store all these documents. Organized, complete records speed up the sale process and build buyer confidence.
Sale Prep Timeline
Start preparing early. Here's a rough schedule:
18-24 Months Before Sale
Get a ballpark valuation. Clean up your books. Fix major business weaknesses. Talk to tax pros. Reduce your personal role.
12-18 Months Before Sale
Implement growth initiatives. Build up your management team. Resolve legal problems. Start talking to advisors.
6-12 Months Before Sale
Finalize your valuation expectations. Complete financial cleanup. Document your business processes. Choose your broker.
3-6 Months Before Sale
Create marketing materials. Set up your data room. Start identifying potential buyers.
Final Thoughts
Selling your business closes a chapter of your life. The ending depends largely on the work you do before listing.
Look at your company through a buyer's eyes. What would make you nervous about buying this business? Fix those issues now.
As the source material notes, "a growing business will always sell quickly at a better price." Smart preparation means addressing issues before buyers discover them, creating clean financial records, and building a team that can run without you.
Want better results? Talk to business brokers who know your industry. Their advice can help turn your years of work into the best possible payday.
FAQs About Preparing a Business for Sale
How do you prepare a business for sale?
Start with your financials: clean up messy books and normalize owner expenses. Build a management team that can run things without you. Get your legal house in order by organizing contracts and resolving disputes. Talk to a tax pro early, since structuring can dramatically impact what you keep. Get a realistic valuation, create a comprehensive data room, and give yourself time, ideally 12+ months of preparation.
What is the best way to sell a small business?
It depends on your company's size. Mom-and-pop businesses under $500K often sell through word-of-mouth or online listings. Mid-sized companies ($500K-$5M) typically need a business broker with industry connections. Larger operations benefit from specialized M&A advisors who can create competitive bidding scenarios. In all cases, confidentiality is crucial until you're ready to announce.
How do you value a business quickly?
Most industries use earnings multiples as a quick valuation method. Small businesses typically sell for 2-3 times Seller's Discretionary Earnings, while larger operations might fetch 4-7 times EBITDA, depending on the industry. BFS's ValueRight tool provides rapid estimates based on comparable sales data. Remember that "rule of thumb" valuations are just starting points. Your specific circumstances may warrant a premium or discount.
