How to Sell a Small Business by Owner
As a business owner, let’s say had a good run, and you are ready to sell your business. You call a broker and they tell you the cost for them to sell your business is 10% of the value of your business, or a minimum of $15,000. I know this happens because I have been a business broker in the past. Brokers can charge at LEAST this much – some even charge retainers whether or not a listing sells.
However, your business is small – it is just you after all (and a few contractors). A 10% cut would really cut into your earnings! When I was brokering full time, I saw dozens of small businesses needing to sell, but felt like it was difficult to justify the cost of a broker.
This is why most small business owners should consider selling their small business by owner. I like to call it FSBO your small business. Business brokers are hungry for listings, but it doesn’t mean an owner can’t learn how to sell a small business by owner.
Selling a business is quite similar to selling a house, and it only takes knowing a couple nuances for someone to be able to list their own business for sale.
My goal is to at least give you an idea of what it takes to sell your small business on your own.
#1: Prepare to Sell
To sell your own business, you have to get your business to a state where it can be understood by a buyer. This includes things like updating your bookkeeping, reconciling your bank accounts, labeling all your expenses properly (no ‘miscellaneous’ expenses!).
It also involves either clearly marking, or better yet, removing, all personal expenses you have run through the business.
The most difficult (but still important) element of preparing your business to sell, is to lower the reliance of the business on you. This means creating standard operating procedures or instructions manuals, or outsourcing a lot of the administrative tasks of the business. Not many people want to buy a business and have to marketing, sales, bookkeeping, compliance, paperwork, scheduling, customer service… on top of actually fulfilling the service or product.
#2: Value the Business
The price you ask for the business may be the biggest factor in being able to sell the business yourself. Often times, sellers have overly-inflated expectations of what their business is worth. The general rule of thumb is that the value of your business is the average of the last 3 years of seller discretionary cash flow (or SDE). How do you calculate SDE? You start with your net income, then add back interest, non-cash expenses (depreciation and amortization), and other personal expenses un-related to the business. You can also include large one-time purchases that aren’t typical of the expenses of the business.
Once you have this average SDE number across the last years, you should multiply it between 2 and 4. This is called the SDE multiplier. Essentially the lower risk the business is for a buyer, the higher the SDE multiple can be.
To get a sense of what multiplier to use, use existing listings on BizBuySell to find the average SDE multiple of your type of business. To calculate the SDE multiple, divide the asking price by the SDE or cash flow reported by the business.
#3: Market the Business
Marketing the business is the next critical process of listing your own business for sale and it starts with the Seller Prospectus, Confidential Business Review (CBR), Owner’s Memorandum (OM), or Confidential Information Memorandum (CIM). This is where brokers are often able to demonstrate their value. It involves doing a full write up of your business including background, description of product/service offering, information on operations, information on financials, and what the growth opportunities would be for a new owner.
Once this document is complete, it needs to be advertised. This is what BizBuySell can do for you (the largest business market place), as well as other business listing sites. You can also list your business on Facebook (there are many Groups for this), as well as Craigslist (use the Business section).
Some of the best buyers are people you may already know such as a competitor, supplier, neighbor, peer, or employee. Make sure you exhaust this route before going out to the general public.
#4: Agree on Terms
Once you find a potential buyer, it is time to negotiate. Other than the price, you should also discuss what kind of support you are willing to offer as a seller after a sale. You should also discuss seller financing terms you are willing to offer as a seller (e,g., loan amount, interest rate, term, balloon payment, etc.).
This should all be written into an Asset Purchase Agreement (APA), a legal form that can be found online. It is ALWAYS a good idea to have the completed form reviewed by a business attorney. Selling a business doesn’t have to require a business broker, but it does always require some cost. Don’t skimp on legal protections.
#5: Go Under Contract and Close
Once an Asset Purchase Agreement is agreed upon and signed, there may be a diligence period, as well as a time period following in which a buyer creates a new LLC, obtains funding, gets a lease assigned or re-written, lines up insurance. etc. A seller will play a big role in explaining to a buyer everything that is needed to be ready at closing.
When the deal is ready to close, have a business attorney create all the closing paperwork. Again, don’t skip this step!
Once complete, and both parties sign… congrats! You have officially sold your business by owner.
If this has been helpful, I created a one-page FREE checklist that covers the above steps in more depth. Feel free to download it here and let me know with questions!
