35 Steps in Selling a Business – Stage 1 of 4: Planning

Planning: The First 9 Steps In Selling a Business


Whether you are trying to sell your business by yourself, or you hire a professional to guide you through the process, there are four major stages of selling a business:  Planning, Searching, Deal Making, and Closing.  I will provide some explanation for each of the detailed steps in these four stages in a series of four discussions.  Here are the steps in the 1st stage – Planning:

Seller InterviewThis is one of only three steps in all four stages of this selling process that is not required by the business owner who is selling his own company.  However, the business broker [aka M&A Advisor or Business Intermediary] needs to meet the business owner to determine if he wants to take on this assignment.  The typical business broker is going to be compensated only if the business is actually sold and closed, so he must make sure the business owner is serious about selling his/her business, is somewhat familiar with the selling process, and has reasonable expectations about timing, price, and terms.

Information Collection: After the seller interview, the business broker needs to gather preliminary information about the business in order to determine his business valuation opinion.  At this stage, the business broker needs the balance sheet and income statements [P&L] for the prior 3 years and the most recent YTD numbers. With this information, the business broker can prepare a document comparing the P&L’s for the most recent periods, prompting questions about significant YTD variations and trends that are then addressed in the “re-casted” financials [see below].  In addition, an extremely significant decision must be reached about which assets and liabilities will revert back to the seller and which will remain with the business.  While this can be a contentious issue to both parties, a seasoned business broker can explain what is normal and customary in business transition transactions.

Recast Financials: This is the process of highlighting revenues and expenses that will not necessarily be a part of the on-going business under new management.  Some of these items might be: (i) revenue from investments owned by the company that will not be included in the sale of the business, (ii) personal expenses of the owner that are currently being paid by the business, (iii) reconstruction expenses after a fire that were not covered by insurance, etc. The purpose of recasting is to show the potential buyer the cash that should be available for: (i) his own compensation, (ii) debt service on the acquisition financing, and (iii) growth of the business.

Valuation Opinion: Formal business appraisals, which costs thousands of dollars, are based upon many different methods of valuation, including: discounted cash flow, capitalization of earnings, multiple of discretionary earnings, multiple of EBITDA, asset accumulation, capitalized excess earnings, comparative transactions, and guidelines of publicly traded companies.  Most business brokers [M&A Advisors and business intermediaries] typically use one of two methods for their business valuation opinions – either a multiple of discretionary earnings or a multiple of EBITDA.  These methods are used because they best reflect the value of businesses by actual buyers active in the market.

Preliminary Marketing Plan: In order to sell a business, the opportunity [in the form of a mail-able or email-able “teaser”] must be disseminated to a large number of buyers who are most likely to be interested.  Business brokers could send letters and emails, and make phone calls to every potential buyer, but limited resources of time and money prevent that from happening.  But posting on the right websites for the targeted buyers allows business brokers to reach the greatest number of potential buyers.  Based upon the particular business being sold, an experienced business broker will know the size of the pool of potential buyers (financial, strategic, and life-style) and how long it will take to reach out to all of them – with what methods of engagement to employ.

Letter of Engagement: Once the seller feels comfortable with the ability and plan of the business broker, an Engagement Letter must be signed by both parties.  Since the broker receives almost all his compensation at closing, he must be confident that he can interest enough buyers to obtain a number of market-price offers, and he must have confidence that the seller is serious about selling his business at a market price.  At that point, the engagement letter, which describes the responsibilities of both parties, with time frames for length of time, exclusivity, etc., is signed.  As a point of interest, if a broker is willing to sign an agreement without exclusivity, that is usually a sign of an inexperienced or desperate broker and seller who is not confident in the broker’s ability.  The seller will probably be working other channels to sell his business – and the broker will likely end up for working for free.

Prepare Marketing Collateral:  In the recent past, the traditional method of advertising buyer opportunities was to place ads in the newspaper and send spiral bound “books” to potential buyers.  But, today’s technology allows business brokers to vary their approach in every engagement with customized visual communication tools and to reach almost every potential buyer via the internet.  Therefore the traditional printed collateral material has been replaced by the more technologically savvy business brokers, with electronic outreach via email attachments or links to specific opportunities directed to targeted groups of buyers.  And, the placement of opportunities on different websites and social media provide endless opportunities to reach a worldwide audience of buyers.  However, specific collateral material actually physically mailed to strategic buyers often pays great dividends, because it’s so rare in today’s technology-driven world.

Prepare Offering Memorandum: The OM is a compilation of all the information about the seller’s company that potential buyers would want to see in order to make an informed decision.  This includes financial statements for three to four prior years, photographs, history of the business, description of current management and current clients [without revealing the names], competitors, projections for the future, etc.  The seller will not reveal the truly confidential information [income tax return, employee and customer lists, contracts, etc.] until he/she has received and agreed to a valid offer to purchase the business. 

It takes a lot of time for the seller to gather the information and for the business broker to prepare this 50 to 150 page document, but it’s important for two main reasons: (1) if buyers don’t receive enough information to make a reasonably informed decision, they will make no decision – which means they will pass on the opportunity; and (2) It is far better for the buyer to have most of the information he’s looking for at the beginning of the process, so the seller is not interrupted with questions every time a new buyer expresses interest, and asks some questions.   As an additional point:  It is very important for the seller to respond to buyer questions quickly.  If the buyer has to wait an unreasonable amount of time for a response to his questions, the momentum of the deal will be stopped – and the buyer will move on to other deals.

Prepare Executive Summary: This is the generic one or two-page “teaser” that is provided to prospective buyers.  It contains enough information to pique the curiosity of the buyers, but not enough that someone would be able to identify the seller’s company. This document is used to capture the attention of potential buyers and to provide an opportunity to start a dialog with the buyer – including obtaining financial and operational information about the buyer, to determine if he has the financial strength and background to acquire and operate the business.  In addition, with this preliminary document in the buyer’s possession, it sets the stage for obtaining a non-disclosure agreement from the buyer before he’s entitled to receive the more comprehensive Offering Memorandum.


To see each of the other three stages, click:
Searching – the next 8 Steps
Deal Making – the next 10 Steps
Closing – the last 8 steps

If you’re interested in receiving a one-page PDF summary of all 35 steps in the 4 stages of selling a business, email Tom MacPherson and paste “Sequence of Steps in Selling a Business” in the Subject line.
The Summit Acquisitions Group — Business Brokers and M&A Advisors — specializes in the sale, appraisal, and financing of privately owned companies ranging in valuation from $750,000 to $25,000,000. Contact their offices in Atlanta, GA or Charlotte, NC for a free consultation.