How to Sell a Small Business: The 4-Step Process

Three questions every seller asks

If you're thinking about selling your business, you probably have at least three questions. What does the process look like? How long will it take? And where will you need to be involved? Over the course of the next seven minutes, I'll walk you through a sale from the first phone call through to closing day and hopefully answer all three of these questions. I'm Ed, I'm a business broker and the founder of Sundance Financial. We help sell small businesses all over the U.S.

The four stages of a sale

Now almost every sale we work on follows four key stages. There's valuation, preparation, marketing and closing. For each one of these stages, I'll tell you what happens, how long it takes and what you'll typically find that your part is.

Stage 1: Valuation

So the first stage and probably one of the most important stages is valuation, which can typically take up to a week. It generally starts with a 15-minute call where we ask you a few questions and give you our initial view of what we think we could get you for your business. If you decide this is something that's worth exploring further, we then perform a more detailed review of your business's financials and do what's called a recast of the financials. That means that we adjust your reported numbers to calculate what's called seller's discretionary earnings or SDE and to show you the true underlying economics of your business.

Finally, we share an opinion of value built on real transaction data for businesses that have sold similar to yours and explain what the market is likely to value your business at and why.

Your part in the valuation

Now your part here is relatively small. You take the call with us, you send us your recent tax returns and financial statements and the rest you can leave with us.

Stage 2: Preparation (CIM and SBA pre-qualification)

Now, if you find that you're comfortable with the valuation and decide to move forward, stage two is called preparation, which typically takes about two weeks. This is where we formalize our engagement and then prepare what's called a CIM, or Confidential Information Memorandum. This is the marketing document that tells you the full story of your business for serious buyers. We might also in parallel pre-qualify the business for SBA financing. That tells us upfront what a bank would be willing to lend against the business and it also makes the process much smoother down the track for buyers who can then line up their financing with a little bit more confidence.

Setting up the data room

Now, importantly, during this stage, we also start to set up what's called a data room, which is an organized set of the financial, legal and operating documents that buyers will ask for a bit later in the process.

Your part: where you're most involved

Now, the preparation stage is where you're likely most involved in the process. Pulling together all those documents can take a bit of time and we'll be asking you a lot of questions about the business to make sure that we can present it accurately and in the best light to potential buyers. Now this part can obviously be a little bit tedious, but I think it's time well spent because a good CIM and a robust data room are really key to a smooth sale and in particular key to a smooth due diligence process, which I'll come back to in a second.

Stage 3: Marketing and buyer screening

Now stage three is marketing. This is usually the longest part of the process and can take three to six months if the business is priced appropriately. We source our buyers through our own proprietary networks as well as major business marketplaces and importantly, we make sure that your business is never named in marketing and that every buyer is screened for capability and fit and signs an NDA before they learn about you, who you are or what your business is.

Buyer conversations

Once a serious buyer has been identified, we introduce them to you. That's usually an introductory call at first and then a few follow-up conversations as they get to know the business. Now these conversations are where buyers start to get really comfortable with you and the business and they're ultimately what lead to serious offers.

Comparing offers

When these serious offers do come through, we help you compare them on not just price, but also structure and risk and we work with you to develop your overall negotiation strategy.

Your part: keep your eye on the business

Your part in this phase is really handling those buyer conversations. We handle the sourcing and screening so that you don't waste your time with tire kickers and we'll also prepare you for the questions you're likely to face and the framing of answers that will make a difference to the buyers. The most important thing during this stage however, and where I see a lot of business owners tend to slip up, is to keep your eye on the business itself. It's critical to keep the business running as normal because buyers will watch how it performs during the sale.

Stage 4: Closing and the letter of intent

The fourth and final stage is closing which can take up to two to three months. It generally starts with a letter of intent or an LOI which is a serious but non-binding offer that sets out the price and key terms of the sale.

Due diligence

Once that LOI is signed, we then move to due diligence where the buyer goes through the data room to wrap their heads around the business and its operations. Depending on the business, some buyers might also ask for a site visit as part of the due diligence process. Now we help field their questions where we can and make sure that the entire process stays on track for closing. Finally, we help negotiate the final purchase agreement alongside your attorney and help you develop a transition plan as well as support you through to closing day.

Your part in closing

Your role during this stage is really signing the LOI, answering the buyer's questions that only you can answer, working with your attorney on the final purchase agreement and ensuring a smooth handover of the business to the new owner. Now this is the stage where a lot of the work that you put in upfront in preparing the business and in particular preparing the data room tends to pay off.

Closing day and handover

After that it's closing day, the purchase agreement is signed, the funds are transferred and the business you've built passes onto new hands. After a short transition period which you'll agree with a new owner where you help them settle in, you're free to move on to whatever's next for you.

Recap: the three questions answered

So back to those three questions. First, what does the process look like? It typically contains four key stages: valuation, preparation, marketing and closing. Second, how long will it take? The process can run about six to twelve months end-to-end from the first call you make to us through to closing day. And then finally, where will you be involved in the process? You'll mostly be involved in the preparation component where you're pulling together the key documents for the data room. After that your involvement is really at the key moments which is meeting the serious buyers, deciding which offer to proceed with and handing over to the new buyer at the end of the process.

In between, your most important job is really to keep an eye on the business and make sure that it's running as per usual.

Deep dives on each stage

Now, this video is the overview. Over the next couple of weeks I'll be releasing a deep dive on each of these four stages. We'll go through each stage step by step including exactly what you'll need to do as part of each.

Book a free 15-minute call

If you're thinking about selling, the easiest first step is a 15-minute call. You'll leave with an initial view of what your business could be worth and whether or not a sale makes sense right now. There's no obligation and it's strictly confidential. You can request a call like that in the link just below this video.

More on valuation

Now, if you want to go deeper into valuation in the meantime, I've already made a few videos on this part of the process. I've got an explainer on SDE and what it is, I've got a walkthrough where I calculate it using a real business tax return line by line and a four-part series on the different ways in which a small business can be valued. I'll leave links to all of those videos below this video. As always, I'm Ed from Sundance Financial and I'll see you in the next video.