A Concise Guide

To
Selling Your Business

Protect Your Employees

Preserve Your Legacy

Peace Of Mind

Fair Price

RetireFromMyBiz.Com®
 A Concise Guide
To
Selling Your Business

RetireFromMyBiz.Com®
Copyright © 2019 RetireFromMyBiz.Com®.
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 Contents

Why Are You Selling? 1

The Four P’s - Your Concerns and Desires 1

Your Business Sales Team 2

Key Documents 5

The Offering Memorandum 7

Confidentiality 12
Valuation – What’s My Business Worth? 13

Deal Structure 17

Stock Sale vs. Asset Sale 19

Financial Buyer vs. Trade Buyer 20

Due Diligence 23

The Closing 25

Successful Transition 27
RetireFromMyBiz.Com Simple Process 28
 A Concise Guide To Selling Your Business

Why are you selling?

There are many reasons to sell your business such as,
retirement, health issues, partner disagreements, lifestyle
changes, financial needs, burned out, the business has
plateaued or you are seeking other opportunities. Whatever
the reason, a potential buyer will be looking for a
reasonable answer to this question and having one will not
only remove any sort of uncertainty regarding the sale, but
also make your business more attractive. So, give this some
thought because, more than likely, this will be the first
question asked by a prospective buyer. If there are certain
aspects of the business that have been a bit challenging
over recent years, don’t be afraid to relate this to the buyer.
What you see as a challenge, someone else may see as an
opportunity!

The Four P’s – Your Concerns and Desires

When selling your business, the four main considerations
are Protecting your employees, Preserving your legacy,
having the Peace of mind that your business is in safe
hands and receiving a fair Price. Since every seller is
unique and has their own set of concerns and desires, it is
important to spend some time thinking about what you
hope to achieve from the sale.

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Understanding what is most important to you will play

a big part in determining what type of buyer you are
seeking. For example, if your only motivation is
maximizing the sale price, you will probably look for a
trade buyer (competitor) because they will be able to reduce
costs by absorbing your operation into their own, laying off
redundant employees, therefore enabling them to pay more
for your business. If your primary concern is protecting
your employees and preserving your legacy, you will
probably look for a financial buyer who will be relying on
your existing staff and looking to add additional resources
for the purpose of growing the operation.
Determining your financial and non-financial
objectives will help determine the right exit strategy for you
to pursue. If you can clearly articulate why you are selling
and your primary concerns and desires regarding the sale,
you have made the first important step on your way to a
successful sale because your values and the buyer’s values
must be in alignment.

Your Business Sales Team

When you decide to sell your business, the first thing you
need to do is assemble a team of competent advisers. You
do not want to handle this on your own. At a minimum,
you need an accountant and an attorney and you want to
involve them early in the process. You may also want to
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add your banker, business broker / M&A Advisor and an

appraiser to the roster.
Accountant
Your accountant is most likely the first member of the
team you will be consulting regarding the sale of your
business. He or she will have all your financial information
at their disposal and will be able to help you present it in an
organized fashion to prospective buyers. Accountants also
talk to many other business owners who may well be
potential buyers. When it comes to structuring the deal,
your accountant will advise you on the tax implications of
your sale and the pros and cons of various deal structures.

Attorney

Your attorney will also be an important part of the sale

process. In addition to preparing the required legal
documents such as confidentiality agreements, seller
disclosure statements and the purchase and sale agreement,
your attorney can also assist with negotiations and tax
matters. Like accountants, attorneys usually have an
extensive network and may be able to introduce potential
buyers.

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Business Broker / M&A Advisor

While some business owners elect to use the services of an

accountant and attorney alone, others may find the services
of a business broker or M&A advisor useful as well. These
intermediaries can be helpful in placing a proper value on
your business, maintaining confidentiality, providing
requested information to prospective buyers, assisting in
negotiations, preparing an Information Memorandum and
of course introducing your business to potential buyers.
For this service you can expect to pay a fee of up to 10% of
your sale price and you can expect the term of the
agreement to last 12- 24 months.

Banker
If you are looking to have a buyer seek SBA financing, you
may want to check with your banker to make sure your
business qualifies. In addition, like accountants and
attorneys, bankers also have extensive networks and may
be a good source for potential buyers.

Appraiser
If your business is complex you may want to hire a
professional appraiser to give you an independent
valuation. If there is property involved in the sale, you will
also need an appraisal of the property to provide to the
buyer.

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Key Documents
When preparing for a sale, you will want to gather all
important documents and have them readily available. It
shows you are organized and will help avoid delays down
the road. Below is a list of documents you will want to
have on hand.

Business Formation Documents

 Articles of Incorporation
 Stock Certificates
 Franchise agreement (if applicable)

Organizational Documents

 Organizational chart
 Employee list with hire dates, salaries, pension records
and benefits
 Employment agreements
 Business procedures manual
 Employment policy manual
 Copies of patents, trademark and copyright registrations

Financial Documents

 Federal tax returns for the past three years

 Income statements for the past three years + YTD for
current year

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 Balance sheets for the past three years + YTD for

current year
 Statement of seller’s discretionary earnings (SDE) for
last three years
 Accounts receivable aging list
 Accounts payable list
 Inventory list including value
 Fixtures, furnishings, and equipment list with fair
market values
 Asset depreciation schedule from most recent tax return
 List of existing liens
 Copies of outstanding loan agreements
 Personal Guarantees

Operational Documents

 Current building lease

 Copies of equipment and facility maintenance
agreements
 Copies employee, customer, supplier, and distributor
agreements
 Current business licenses, certifications, and
registrations
 Product or service price list
 Current client list
 Current list of major suppliers and distributors
 Business plan

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 Marketing plan
 Photos of building, work areas, and equipment

The Offering Memorandum

Your “offering memorandum” or “confidential
information memorandum” (CIM) will be the primary
marketing tool used to attract the interest of potential
buyers. A thorough and informative CIM will pay large
dividends and save you a lot of time explaining and re-
explaining your business to various buyers.
While you should not include sensitive commercial
information, you should include enough information for
buyers to decide if they want to investigate further. Since
most buyers are primarily interested in the profitability of
your business, be sure to include the necessary financial
information for them to perform a quick analysis. Your
memorandum should include the last three years income
statements, the last three years recast seller’s discretionary
earnings (SDE) and current balance sheet. Not including
this information makes a buyer suspicious and wastes time
with phone calls and emails.
Whether you are selling your business yourself or
using the services of an intermediary, a well written CIM is
a must.

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Barbara Findlay Schenck, in her book “Guide To

Selling Your Small Business”, suggests including the
following information in your offering memorandum.

OFFERING MEMORANDUM CONTENTS

Table of Contents

Summary
Business Description

 Summary of business history.

 Business structure (sole proprietorship, partnership,
corporation) and ownership.
 Short description of products, staffing, markets and
operations.
 Financial information including annual sales and
earnings; description of products/services; description
of key strengths; reason for sale.

Location

 Geographic location, building description, lease

information.

Business Strengths

 List of business strengths and competitive advantages.

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 List of business challenges accompanied by statements

of how the issue could be overcome or provide a
growth opportunity.

Competitive Overview

 Description of number of competitors without listing

names.
 Description of competitive position and advantages of
your business.

Products / Services

 Brief description of business offerings including

product list.
 Description of distinguishing product / service features.
 Product sales trends.

Operations

 Information on operating hours and seasonality.

 List of operating equipment.
 Inventory information and list.
 Production processes.
 Staffing overview.
Marketing

 Industry information and growth trends.

 Geographic information and growth trends.
 Customer profile including information on client lists.

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 Description of competition and competitive rank.

 Description of marketing approach, marketing plan and
untapped marketing opportunities.

Key Management And Employees

 Key employee job titles, job descriptions, length of

employment, compensation, benefits and credentials
(but not names) including information on contracts.

Future Plans / Growth Projections

 List growth opportunities, along with the investment in

time, financial resources and staff required.

Potential Buyer Concerns

 Issues, if any, that buyers might see as purchase barriers.

 Statements describing business, marketing, or transition
plans that ease or overcome each potential concern.

Financial Information

 Statement of accounting method: Accrual or cash basis.

 Revenues, net income, and seller’s discretionary
earnings for past three years presented not as financial
statements, but as one line summaries.

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Offering Price And Terms

 Asking price (example: ABC Company, a California

Subchapter S Corporation with all shares held by the
owner. Asking price is $XXX,XXX).
 Contents of sale (example: Sale includes assets.
Furnishings, fixtures, and equipment have a fair market
value of $XXX,XXX, detailed in the Appendix.
Inventory to be included at cost).
 Terms, including whether seller-financing is available
(example: Seller requires $XXX,XXX at closing and the
balance financed by SBA note or seller financing to
qualified buyer at X percent over X years).
 Buyer qualifications, if any.
 Seller’s timeframe including sale timeline and seller’s
willingness to remain during a transition period.
 Statement of seller’s willingness to sign a non-compete
agreement.

Appendix

 Statement of seller’s discretionary earnings.

 Financial statements as recommended by broker and
accountant.
 Asset list showing values.
 Seller’s disclosure statement, prepared with assistance
from broker or attorney, providing an accurate
assessment of business condition, a list of licenses and
regulations that apply, and
 Descriptions of any legal issues.

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 Market area information if business relies on local

clientele.
 Photos of business location, building and equipment.
 Copies of marketing materials.

Confidentiality
It’s very important that you maintain confidentiality
throughout the sales process. Once employees get wind of
a potential sale, they may start to feel uneasy and this
uncertainty can lead to departures. If your competitors
learn that your business is for sale, they may use the
opportunity to poach customers as well as employees. You
want to maintain business as usually while you are
searching for a potential buyer. So only inform key trusted
employees, such as your bookkeeper, that you will rely on
during the process.
Before releasing important information such as
financials, customer lists or intellectual property to
prospective buyers, be certain to have a signed NDA (non-
disclosure agreement) between both parties. Both parties
are bound by this agreement not to disclose sensitive
information learned during the investigation.

Confidentiality is in the interest of both the seller and

the buyer. Once the new buyer takes over, he or she will

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want to have the opportunity to introduce themselves to

important customers and suppliers that have not been
affected by any sort of business disruptions caused by
rumors and uncertainty.

Valuation – What’s My Business Worth?

Valuing a business is not as cut and dry as one may believe
and there are several ways to arrive at a valuation. No
doubt, a business is worth more in the eyes of the founder
than it is in the eyes of the buyer. This is understandable
given the years of blood, sweat and tears the founder has
poured into the business. Just the same, it’s important to
be objective and have a rational economic justification for
your offering price.
The statistics you will hear for the number of listed
businesses that actually sell can be discouraging. More than
likely, this is partially due to unrealistic expectations of
value. So, investigate your industry to see how similar
businesses are being valued and consult with a professional.
On the one hand, you do not want to give away the farm.
On the other hand, you do not want the process to drag on
for years because your asking price is out of line with the
market. So, if you are serious about selling your business,
do a little bit of research and list it for a fair market price.

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The three primary ways to value your business are an

asset based approach, market based approach and an income based
approach. We’ll take a brief look at each of the three
methods.
Asset Based Approach
If a business is heavy on assets but light on cash flow, this
may be the technique of choice. An investor is generally
looking to purchase assets and the ability of those assets to
generate a return. If there isn’t any cash flow to speak of,
the value of the business is essentially the value of all the
assets less all of the liabilities. This is your book value.
This approach is not all that useful for most profitable
businesses.

Market Based Approach

Like valuing real estate, a market based approach looks to
see what similar business have sold for and attempts to
divine a valuation based on recent sales. Unfortunately,
this data is not readily available and is often unreliable.
Unless you are a franchise, there are too many variables and
differences between businesses for this method to be
useful.
Income Based Approach

There are two main income based approaches; discounted

cash flow and multiple of earnings. The discounted cash

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flow method attempts to forecast future earnings and

discount those earnings in to present dollars. The
calculations can be a bit complex so we will stick to using a
multiple of historical earnings.
So what earnings numbers do we use? We will use
adjusted EBITDA, otherwise known as seller’s
discretionary earnings (SDE). We use adjusted numbers
because, unlike a public company, a private company
usually does everything it can to prove that it is not making
money in order to reduce the tax liability. So we have to
factor in the expenses that the new owner will not incur
like the seller’s family vacation to Hawaii and the golf club
membership.
If you look at your company’s tax return for any given
year, start with your ordinary business income (which is
before tax), then add back interest, depreciation,
amortization and any personal expenses that you can easily
document. Don’t get carried away and add back legitimate
business expenses that the buyer will also incur. You will
also want to add back your salary. This is your seller’s
discretionary earnings (SDE); the true benefit that the new
owner will receive.

Just a quick note, if the new owners will be hiring

someone to fill your position, your salary will be an expense
to them and they will not be able to add this back for
valuation purposes. If the new owners will also be

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operating the business and paying your salary to

themselves, then it will be added back and factored into the
valuation. We will discuss this further when we look at
financial buyers vs. trade buyers.
Now that we have our SDE, we will look at the last
three years and calculate an average. Often times an owner
will have a fantastic (outlier) year and put the business up
for sale valuing it based on that single year. If you do this,
you will most likely become a part of the statistic of
businesses that never sell. We will use the average SDE
and a market multiple to get a ball park valuation for your
business. For example, if your three year average SDE is
$100,000 and you use a multiple of 2.5 times SDE, the
enterprise value of your business is $250,000.
So, what is the proper multiple to use in your
calculation? This varies based on many factors, but the
most important is revenue. Larger companies with stable
or accelerating growth receive a larger multiple. Other
factors are industry growth, customer concentration, owner
dependency, reputation, synergies, clean financials,
intellectual property, regulatory risk and outstanding legal
issues to name a few. Generally speaking, you can expect
private companies to sell at a multiple of 1-5 times SDE.
In a report published by Transworld Business Advisors for
Q4 2018, the average SDE multiple for “closed” deals was
2.24 x.

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Once you have calculated the enterprise value of your

company, the only thing left to do is adjust for any
property that may be included in the deal and any debt the
buyer may be assuming and you will have a good estimate
of what you can reasonably expect to receive for your
business.

Deal Structure
The purchase price is only one component of the deal.
The structure of the deal is equally important and there are
many things to consider such as the tax implication of
various deal structures, the type of entity involved (C
corporation, S corporation, LLC), whether it is an asset sale
or stock sale, liabilities assumed by the buyer, current assets
retained by the seller and more. You really need to consult
the professionals on your team and figure out what is best
for your situation.
With that said, every sale will involve some
combination of debt, equity, seller financing and possibly
an earn-out. There are many creative ways to structure a
deal and it pays to be open minded. Although every seller
would like to simply show up to the closing and receive a
big fat check for the entire purchase prices, the truth is this
rarely happens. The majority of all transactions involve
some amount of seller financing. Even if your buyer goes

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through the rigorous process of obtaining an SBA loan, the

SBA will require you, as the seller, to take back a note for a
portion of the purchase price and that note will not be paid
off until the SBA loan has been repaid.
Now this is not all bad news. A creative deal structure
can create a win-win situation for both parties and allow
you, as the seller, to achieve your desire goal. For example,
seller financing offers a few potential benefits. First, it will
give you a bigger audience of prospective buyers and
possibly a higher sale price. If a seller is willing to offer
financing, it tells the buyer that you have confidence that
the business is strong and it will continue to provide a
return sufficient to cover the repayment of the seller note.
Second, if you do not have an immediate need for cash, the
return you will earn on the note you have provided to the
buyer will be significantly higher than the return you would
receive by simply depositing those funds in the bank.
Finally, spreading the payment over a number of years vs.
taking payment in one lump some may provide some tax
benefits by placing you in a lower tax bracket. This is not
at all meant to be tax advice, but something you should be
aware of and discuss with your team.
When considering a seller note, it is important that
you feel confident the new team running your business has
the experience and know how to do it successfully. If
things do not go as planned, you will not get paid and you

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will be back running your business because it will have

been pledged as security for the loan.
An earn-out is another useful tool that can be used to
bridge the gap between differences of opinion on the value
of your business. If you feel your business is worth
$2,000,000 and the buyer feels your business is only worth
$1,700,000, is the deal dead? Not necessarily, if you are
creative and open minded. Let’s say the buyer agrees to
give you $1,700,000 plus 10% of all revenues in excess of
$3,500,000 for the next 5 years. If the business continues
to grow, you will not only have successfully sold your
business, you will end up receiving more than your original
asking price!
The point here is that there are many ways to structure
a deal and achieve your goals. If a dream buyer walks into
your office and offers all cash, well hey, that’s fantastic!
But know that it is not all that common and it may pay to
be a little flexible.

Stock Sale vs. Asset Sale

There are two ways to transfer ownership of a company.
One is the purchase of shares in the target company and
the other is the purchase of company assets. The decision
to structure a deal as an asset sale vs. a stock sale is usually

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subject to negotiation and based on a variety of legal,

accounting and tax reasons. In most cases, a seller will
prefer a stock sale and a buyer will prefer an asset sale. In
the case of a stock sale the buyer will usually negotiate a
slightly lower purchase price given the added benefit to the
seller.
In a stock sale, the buyer becomes the owner of the
company’s shares which includes all the assets and liabilities
of the company. While much simpler than an asset sale,
the buyer does inherit all future liabilities that may be a
result of past actions of the company. For the seller, a
stock sale is usually advantageous because any gains will be
taxed as capital gains rather than ordinary income.
In an asset sale, the buyer purchases only the assets it
wishes to acquire and does not assume any future liability
for a company’s past actions. In addition, the buyer
purchases the assets at fair market value and gets to re-
depreciate the assets, which is a major tax benefit. An asset
sale requires a much more detailed agreement and can be
time consuming.

Financial Buyer vs. Trade Buyer

Finding a buyer for a private company can be a difficult
and lengthy process. To find a buyer that is a good fit for
your business requires you to sit down and ask yourself
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what is most important about the sale. Are you only

interested in maximizing the sale price? Or is your primary
concern for your employees and your legacy? Occasionally,
you will hear stories like Bob Moore of Red Mill Natural
Foods who gave away his multi-million dollar business to
his employees, but for most sellers, protecting the
employees, preserving the legacy, peace of mind and price
are all important in varying degrees.
Likewise, you will need to understand the buyer’s
motivation. Your business will have different values to a
financial buyer, who is looking to enter your industry vs. a
trade buyer who is already in your line of business and
looking to expand their operations. The financial buyer
will be evaluating your business strictly on the economic
benefit of owning your company as a stand-alone entity,
while a trade buyer will be focusing on the synergies
between the combined entities. So, let’s take a brief look at
the pros and cons of each type of buyer.

Financial Buyer – (Private Equity Fund)

Pros:

 Current management will be retained and maintain

significant involvement in the operation of the business.
 Likely to allow the current owner to stay on with upside
potential via earn-out.

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 May offer management upside potential via equity

position in company.
 Will offer support, strategy and resources such as
broader sales and marketing capabilities, expanded
network of relationships and focus on analytics and key
metrics.
 Potential for other synergistic acquisitions.
 Ability to complete acquisition quickly.

Cons:

 If not already in your line of business, slightly lower

valuation at closing.
 More onerous financial and operational reporting
requirements on management. (actually a good thing)
 Will expect continued involvement of current owner for
short period of time during hand over period.
Trade Buyer – (Competitor)

Pros:

 Will allow current owner to walk away immediately

following the sale.
 Higher valuation at closing due to synergies and cost
savings.
 Knowledgeable about the business and industry.

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Cons:

 Current management may lose autonomy or their jobs

due to redundancies across multiple businesses.
 Possible negative impact on morale.
 Possible negative impact on customer and supplier
loyalty.
 Acquisition may take longer to complete.
 Risk of providing sensitive information to a competitor
in the event the deal does not get completed.
Initially, a seller whose primary motivation is receiving
top dollar may only seek a trade buyer hoping for a higher
valuation. However, the pool of potential suiters becomes
very small and it can take a lot longer to sell your business.
It would be wise not to limit yourself to one or the other.
As we saw earlier, the right combination of price and deal
structure can help you achieve your desired goal with either
type of buyer.

Due Diligence
Once a letter of intent is executed, the seller provides an
exclusivity period during which the seller agrees not to
meet with other buyers and the buyer begins a serious
investigation of the business by reviewing documents and
interviewing people who know the company. The buyer

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will conduct commercial due diligence, financial due

diligence, legal due diligence and possibly environmental
due diligence. To move the process along as quickly as
possible, be certain to have all your key documents readily
available. It may also be a good idea to store the
documents at your accountant’s office and perform as
much due diligence off-site as possible. Remember
confidentiality is paramount. Here is a brief summary of
the various forms of due diligence.
Commercial Due Diligence
During this phase, the buyer will look to better understand
the sustainability of the company’s revenue, the prospects
for growing the business and your position within the
industry. They will be investigating market trends, drivers,
strengths, weaknesses, opportunities, threats, competition
and market share to learn more about your business and
the broader industry.

Financial Due Diligence

This phase primarily involves fact checking the financial
condition of the company and insuring that the financial
data you have provided is accurate. Much time will be
spent gathering data to understand your accounting policies
and compliance with GAAP (Generally Accepted
Accounting Principles). Expect your controller and
accountant to be involved, as the areas of interest will

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involve financial reporting, revenue, expenses, cash flow

and taxes.
Legal Due Diligence
During this phase, the buyer will investigate any potential
legal issues that may result in future liabilities, including
pending litigation, pension liabilities, tax audits, zoning
issues, intellectual property, liens and contracts with
suppliers, customers and service providers.

Environmental Due Diligence

This phase involves the examination of any potential risks
associated environmental contamination such a soil or
ground water contamination. The buyer will assess the
environmental condition of the land, physical assets and
operations being purchased.

The Closing
The closing is the day all necessary documents are signed
by all parties, the buyer delivers to the seller the agreed
upon payment, the keys are exchanged and the buyer
becomes the new owner of the business. The closing may
take place on one day when all parties are present or over a
number of days once an escrow agent has received all
necessary documents from both parties. After preparing

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and reviewing the purchase and sale agreement, here is

what you can expect on closing day.

 Agree to post-closing final adjustments to purchase

price to account for prorated expenses and closing
valuation of inventory and accounts receivable,
usually finalized within 15 days of closing.
 Review and sign the purchase and sale agreement.
 Review and sign loan documents.
 Review and sign lease-transfer documents, vehicle
ownership-transfer documents, franchise
documents, succession documents and other
documents involved in transferring your business or
its assets.
 Review and sign seller’s consulting, employment,
and/or non-competition agreements.
 Review and sign the bill of sale.
 Review and sign articles of amendment to change
the name of your business, thereby freeing the name
for use by the buyer. This step allows the buyer to
amend the working name he or she has been using
during the purchase process to the name being
purchased as part of the sale.
 Review and sign forms to transfer patents,
trademarks, copyrights and other intellectual
property assets.

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 Review and agree to the closing or settlement sheet

listing all financial aspects of the sale including how
expenses and credits are assigned to each party.
 Review and agree to the Asset Acquisition
Statement, IRS Form 8594, which you and the buyer
must attach, showing the identical allocation, to your
federal income tax return.
 Receive the buyer’s payment for the purchase price
in full or for a sizable down payment, depending on
the payment terms you negotiated.1

Now that the deal is done, it is time to introduce the

new owner to the staff, customers and suppliers and work
with the new owner to ensure a smooth transition.

Successful Transition
Whether you, as the former owner, plan to stay with the
company, transition out of the company or immediately
depart from the company, the new owner will look to you
for support to ensure a smooth transition. After the bank
accounts, credit cards, passwords, keys, and alarm codes
have been sorted out, the new owner will be spending time
learning about your processes and your people. Expect this

1
Barbara Findlay Schenck, Guide to Selling Your Small Business, 2015
(BizBuySell) p.134

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to take a few months and plan on making yourself available

to answer any questions that may arise. After the transition
period, you have successfully passed the baton and this is
your opportunity to relax, sit on the sidelines and cheer on
the new team!

RetireFromMyBiz.Com Simple Process

If you are thinking about selling your business, we would
like to invite you to schedule a call. We are always on the
lookout for businesses to acquire and it would be a pleasure
to speak with you. You can contact us by visiting our
website at www.RetireFromMyBiz.Com
Although the thought of selling your business can be
overwhelming, we’ve broken down the process and we will
work with you and your team efficiently and confidentially
to complete the sale in a timely manner. Below is our
simple ten step process.

1. Schedule Introductory Call

2. Sign NDA (Non-Disclosure Agreement)
3. Basic Information Request
4. Provide Financial Statements / Tax Records For
Analysis
5. Follow Up Call / Meeting - Receive Opinion Of Value

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6. Written Offer / Indication Of Interest

7. Negotiate Terms
8. Letter Of Intent
9. Due Diligence
10. Closing

Every acquisition starts with a phone call.

We hope to hear from you soon!

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