Selling Your Business to an Outsider

Name: Law Office of Zachary D Kamykowski, PLLC
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May 9, 2024 • Business Succession • Estate Planning • | Law Office of Zachary D Kamykowski, PLLC

You have spent years building your business, but eventually, you must sell the company and exit. While many business owners choose to keep the company in the family, that is not always realistic. Family members may not have the interest or skills needed to run the business. In such cases, selling the business to an […]

The average time to sell a business is around six to twelve months, but the exit planning process typically takes longer. Optimizing a business for sale may involve modifying operations to make it more appealing to buyers and investors.

The Importance of Pre-Diligence

Author John Warrillow stresses the importance of pre-diligence, or creating a competitive landscape for a business before the sales process even begins. This entails assembling all of the essential metrics about a company—such as revenue and churn rate figures—that a buyer would care about. Pre-diligence can help to value a business more accurately and arrive at a fair purchase offer.^[1]

With adequate lead time, business owners can modify operations to make their company more appealing to potential buyers. Exit planning can take two or three years. The actual time to sell a business after listing is six to twelve months, depending on price, complexity, and structure.^[2]

An Owner’s Checklist

In addition to preparing a pre-diligence package about a company’s financials, owners should have the following items on their pre-sale to-do list:

Business valuation. A business's median sale price is usually slightly below its median asking price. Although a business is ultimately worth what a buyer is willing to pay, a professional third-party valuation can provide a realistic value estimate and a starting point for negotiations.
Clean records. Expect all things related to a business’s finances, from real estate and equipment to income and tax returns, to be scrutinized. Ensure all records are accurate, organized, and easy to review to maximize transparency. Due to financial red flags, the price that a potential buyer is willing to pay can drop, and a sale can fall through.
Taxes. Focusing on an acceptable sale price during the pre-sale period is logical. It is also essential to consider how much sale proceeds the owner will retain. At the federal level, owners may have to pay long-term capital gains taxes. Some states also have a state income tax that could apply to a business sale. The business’s structure, the type of sale (assets versus stock), and the terms of the sale (e.g., cash, equity rollover) can additionally affect tax liability. The proceeds from the sale of a successful business may be substantial, so it is also crucial for the seller to consider whether their estate could be subject to federal or state estate taxes.
Business broker. Great entrepreneurs are not always great salespeople. Business brokers are experts at identifying potential buyers, listing the business in the right places, and obtaining the best price. Some may also be qualified to perform a business valuation or assist buyers with financing. Brokers usually charge 5 to 10 percent of the sale price, but a good broker may cover their fee by facilitating a faster sale and a higher negotiated sale price.
Legal considerations. Selling a business comes with a host of legal considerations. Among the documents typically needed to close a sale are a letter of intent, sales agreement, noncompete agreement, asset listing, employee agreement, intellectual property agreement, assignments of lease, and security agreement. The seller’s attorney will prepare the necessary contracts and work with the buyer’s attorney, accountant, and other advisers on due diligence matters. There may also be other legal obligations for the seller, such as notifying creditors, obtaining director and shareholder approval for the sale, and filing tax documents.

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