Are You Ready to Sell Your Business?

An owner is ready to sell a business when they can answer yes to two questions: do I genuinely want to sell, and are my expectations realistic? Once both answers are yes, the next step is gathering the financial and legal documents a buyer will ask for. Exploring a sale does not require a commitment. It does require an honest look at motivation, expectations, and records.

Question one: do you really want to sell?

The first thing most owners want to know is what their business is worth. That question matters, but it comes second. Before price, an owner needs to be clear on why they are selling and whether they are prepared to accept what the market will pay.

Owners with a solid reason to sell, such as retirement, a new venture, health, or burnout, tend to follow through. Owners whose only reason is curiosity about the number often pull the business off the market when the offers arrive.

Question two: are your expectations reasonable?

A business is worth what a qualified buyer will pay for it. The opinions of your accountant, banker, attorney, or friends do not set the price, and neither does the amount you need to fund retirement. The market sets it. Sellers who accept that going in are far more likely to close.

Gather your information before going to market

Before a business is listed, the owner should assemble the records a buyer will want to see. A starting checklist:

• Profit and loss statements for at least the last three years, plus year to date
• Federal income tax returns for the business for the same period
• A list of furniture, fixtures, and equipment
• The lease and any amendments or related documents
• A list of loans against the business, with balances and payment schedules
• Copies of any equipment leases
• The franchise agreement, if the business is a franchise
• An estimate of inventory on hand, if applicable
• Names and contact details for your outside advisors

Many owners have to search for some of these items. Once gathered, they should be reviewed, updated, and organized as if they were going to be handed to a buyer. For the more detailed set of documents buyers request later in the process, see Preparing for Due Diligence Before You Go to Market.

Make the financial statements presentable

Financial statements should be current and as accurate as possible. If you are partway through the year, have last year's statements and tax return complete along with year-to-date figures. Outside help from a CPA is often worth the cost if the books need work.

Owners are sometimes discouraged by their bottom line. Small businesses are usually priced on cash flow, which adds back the owner's salary and benefits, depreciation, interest, and other non-cash or discretionary items to net profit. Once those are added back, the picture often looks considerably better. See SDE and EBITDA Are Not the Same Number.

Buyers want to know two things from the numbers: whether the business can cover its debt payments after the purchase, and whether it will still provide the owner a living. A business that cannot support a reasonable income for its operator is difficult to sell, though an industry buyer who values the location or customer base may still be interested.

Talk to a tax advisor early

The more important question may be how much of the sale price you keep. Taxes on a sale depend heavily on how the business is organized (sole proprietorship, partnership, LLC, C corporation, or S corporation) and on how the deal is structured. Tax rules also change over time. Before setting a price or accepting an offer, review the tax implications with a qualified CPA or tax attorney so there are no surprises in the middle of a transaction. See Asset Sale or Stock Sale: What the Structure Changes.

If you are weighing a sale in Southern California, a confidential valuation from BusinessQuest Brokers shows where your business stands before you commit to anything. Request a valuation.

Frequently asked questions

What documents do I need to sell my business?

At minimum, three years of profit and loss statements and tax returns, year-to-date financials, your lease, an equipment list, a list of business debts, and any franchise or equipment lease agreements.

Why is my business valued on cash flow instead of net profit?

Buyers want to know how much money the business produces for its owner. Cash flow adds back owner compensation, depreciation, interest, and discretionary expenses to show that figure more accurately than net profit alone.

When should I talk to a tax advisor about selling?

Before you list the business. Entity type and deal structure both affect how much of the sale price you keep, and those decisions are easier to plan than to fix mid-transaction.