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How do I sell my business?

Exit Planning

What is Exit Planning?

According to Wikipedia, Exit Planning is the process of preparation for the exit of an entrepreneur from his company while maximizing enterprise value , and thus his shareholder value, during the mergers and acquisitions transaction.

Other non-financial objectives may be pursued including the transition of the company to the next generation, sale to employees or management, or other altruistic, non-financial objectives.

In simple terms, exit planning is a three phase process undertaken by a business owner as he considers transferring ownership to another business or individual(s).

A variety of terms are used by professionals and entrepreneurs alike to describe exit planning.  They may include:  transition planning, exit strategy, and succession planning.  None of these terms define or encompass the full exit planning process.  Instead, each term is a phase or component of the exit planning process.

Let’s break down its three parts.

Brokers vs. Bankers

Before we define the Steps in the Sale of a Business, it’s important to understand the options an entrepreneur has with respect to representation in the selling process. The size of the business dictates whether it’s appropriate to hire a Business Broker, or alternatively, an Investment Banker, also referred to as a Merger & Acquisition Intermediary.

Business Brokers

Business Brokers typically represent smaller businesses known as Main Street Businesses. Such businesses typically have less than $2 Million revenue per year. Business Brokers often specialize in industries such as restaurants, specific franchises, service industries, etc.  The best way to find a good business broker is to reach out to other entrepreneurs in the same industry who have successfully sold their businesses and ask for a referral.

Investment Bankers

Investment Bankers, or M&A Intermediaries, typically represent middle market businesses and tend to have a very large footprint and a deep network of resources. A good Investment Banking firm has the ability to pull in specialists in any industry from multiple geographical locations to market and close a transaction.

Do It Yourself is also an option for the entrepreneur who wants to sell his business. Although an option, representing yourself in the sale of your business is widely regarded by many as foolish and is not recommended. Not recommended for good reasons. According to Smith Bucklin and Associates through a Study commissioned by the M&A Source and the IBBA:

  • 60% of sellers received an increased price of over 40% by using an intermediary;
  • 10% received 90% more money for their business;
  • 20% received 60% more money for their business;
  • 30% received 40% more money for their business;
  • 90% of sellers using an intermediary felt that their involvement resulted in a more confidential sales process; and
  • 90% of sellers using an intermediary felt that their involvement resulted in significantly reduced stress.

How Much are Business Brokers’ and Investment Bankers’ Fees?

Entrepreneurs ask this question often because the model for paying a business broker or investment banker is not commonly understood.  The model is referred to as the Double Lehman Formula or the Double Lehman Scale and looks something like this:

  • A Commission or Success Fee is paid at closing.
  • 10% of the first $1,000,000 selling price; plus
  • 8% of the next $1,000,000 selling price; plus
  • 6% of the next $1,000,000 selling price; plus
  • 4% of the next $1,000,000 selling price; plus
  • 2% of the selling price exceeding $4,000,000.

Main Street businesses often sell for less than $1,000,000.  For this reason, many business brokers charge their clients a flat 10% commission to represent them in the sale of their business.

When the entrepreneur is selling a business through an investment banker or an M&A intermediary, a retainer fee and out-of-pocket expenses are normally paid to the representative by the entrepreneur from the initial engagement until the sale closing.  The retainer is normally deducted from the final success fee at the closing.

Steps to Sell a Business

Once an entrepreneur has completed the exit planning process, hired an experienced Business Broker or Investment Banker, they are ready to take the steps to sell a business.  The most important thing an entrepreneur can do during the selling process is to understand the importance of confidentiality and to respect the leading role of their Business Broker or Investment Banker.  To use a football analogy, these professionals should be the offensive front line for the entrepreneur so that the he may continue to operate his business and maintain the confidentiality related to the sale of their business.  If the entrepreneur allows their representative to do their job, the business will continue running profitably and they will experience less stress while the business is on the market for sale.

We’ve found many entrepreneurs do not take the exit planning journey before they sell their business.  Instead, their journey to sell their business starts with an unsolicited offer to acquire their business.  

What Do I Need to Sell My Business?

This question about what is needed to complete the sale of a business is also a common one from entrepreneurs.  If properly represented by advisors who place the entrepreneur’s best interests first, the process of gathering all of the resources necessary to complete the sale should be no problem at all.

We’ve identified the resources needed to sell a business in this Infographic.

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