Either way, remember that valuation is just a guideline. Your buyer is, in the end, the one who determines the value of your business when they decide what they’re actually willing to pay. The buyer is also looking to make a profit, which means that the amount they’re willing to pay will typically be somewhat less than the estimated value. Go into negotiations with an understanding of how much you’re willing to compromise on price.
3. Qualify potential buyers
This next step might not seem important if you’ve already got a buyer lined up, but interest isn’t enough to run a successful business. Moreover, you owe it to the business you’ve built, your own reputation as a business owner, and any employees you have to make sure that the person buying your business is qualified to run it going forward.
👉 There are a few questions you should ask right when an offer is made:
Vetting your buyer with these questions can help you ensure that your business is in good hands going forward.
4. Draft and sign a Letter of Intent
A Letter of Intent (LOI) is a document that establishes a buyer’s intent to purchase a business, along with the terms and conditions of the sale.
👉 There are several key things to include in an LOI:
- Your full name and the full name of your buyer.
- The nature of the purchase.
- The period of exclusivity that exists for negotiations (how much time the buyer has to complete the purchase before you seek other buyers).
- Assignment of responsibility for various costs involved in the sale (establishing who pays what).
- A withdrawal clause allowing the buyer to back out of the transaction at any time if they’re not provided with the expected gains.
- Closing conditions for the transaction.
An LOI may also be preceded by a confidentiality agreement to keep the details of the sale private. Check out the BDC guide to LOIs for more information. You can also find Letter of Intent templates online, though I strongly recommend working with a lawyer to draft this document.
5. Negotiate and finalize the sale
Now that you have a basic structure laid out for the sale, it’s time to negotiate the details in a Definitive Agreement. This is a larger legal document that finalizes the details of the purchase and transfer of ownership, including:
- Names, addresses, and contact information of both the seller and the buyer.
- A solicitation clause that specifies whether these negotiations are exclusive.
- The agreed-upon purchase price.
- Payment and financing structure, outlining whether the purchase will be made all at once or in installments + when payments are due.
- A complete list of the assets being purchased, including valuations and warranties.
- An Intangible Assets list for any intellectual property involved in the sale.
- Termination clauses outlining whether each party can terminate the sale and, if they can, under what circumstances the sale can be terminated. Termination fees will also be listed here.
- Closing conditions and costs, including cost distribution. Note that costs are typically split evenly between the buyer and the seller.
- Earnouts clauses that define whether the seller can expect any future payouts from the success of the business.
- Confidentiality agreements to protect the details of the sale.
- Indemnification clauses that shift post-sale costs or losses from the buyer to the seller.
Definitive Agreements are also often supported by a variety of other documents, such as non-compete agreements and lease or rental agreements for any property being transferred.
Due to the complicated nature of Definitive Agreements and supporting documents, you’ll need to work closely with both your own attorney and the buyer’s attorney at this stage. This will ensure that all of the terms are fair and also compliant with local laws and regulations.
Your step-by-step business sale plan
Skipping the broker when you sell your small business can help you make the highest possible profit from your business sale, especially if you already have a buyer lined up. However, even with a buyer, you’ll need to do a lot of work 🧑💼 to make the sale run smoothly. Here’s a template plan that you can use when closing the deal:
- Hire a CPA to work through your financial documents with you and make sure that everything is organized and buyer-ready. This includes all of your documents for three to five years, including bank statements, invoices, and receipts.
- Valuate your business with an online business valuation calculator and/or hire an expert to do a separate valuation.
- Qualify your buyer by asking questions about their financial means, experience, and what they intend to do with your business.
- Draft and sign a Letter of Intent to establish a period of exclusive negotiations. This will also establish some basic rules around termination and cost splitting. You can find templates for these documents online, but we strongly recommend working with a lawyer for this step.
- Negotiate your Definitive Agreement and gather all related legal documents with the help of your attorney and your buyer’s attorney. You may also want to work with a CPA here to ensure that all financial documents are in order and help you deal with taxes resulting from the sale.
Most of all, be sure to take your time and do the paperwork properly, with the help of a lawyer and CPA where applicable.