The final stage of a business’s life cycle is when an owner decides to close, sell or bring in a successor to take over the company.
Owners may decide to move on for a variety of reasons. You might want to try something new, your business may be in decline or you could be dealing with personal or health issues. Or, your business might be doing great, and you think you could get a great price and then retire.
For small business owners, a successor is often a family member, friend or current employee who wants to take over and run the business. However, you could also try to sell your business to someone who you don’t already know.
You may also want to sell the entire business to the person, or retain partial ownership and receive income from the business’s profits even though you’re no longer involved with the day-to-day operations. Some business owners agree to stay on and help train the new owner during the transition.
The sale process can vary depending on the type of business and where it’s located, but it often involves several steps:
- Determine the business’s worth. Evaluate the value of the business based on its assets and sales. A small business may be worth several times its yearly sales, but the value can vary depending on the specifics of the situation. You can hire a professional or company to help determine the business’s value if you’re unsure of what to do. Look for someone who has experience evaluating similar businesses and can use that experience to guide the valuation. If you are determining the value on your own, review some of the steps in the process that you will need to complete.
- Prepare your financial documents. Potential buyers will want to review your business’s records, financial statements and tax returns to get a better understanding of the business’s financial situation and sales history. Make sure all your documents are ready and accurate.
- Find prospective buyers. You may be able to list your business for sale online or in local publications. You could also work with a business broker, a professional who can match sellers with potential buyers in exchange for a cut of the sale price.
- Get financing in order. Many business buyers will need to take out a loan to buy your business. You may also have to lend the buyer money by allowing the buyer to pay you part of the selling price, plus interest, over time. Seller-financing can be important because it shows the buyer, and the other lenders, that you believe in the business’s future.
- Negotiate the terms of the sale. As with many transactions, expect the buyer to negotiate the sale price and terms of the agreement. You may want to hire professionals who have managed small business sales before, including an accountant and attorney, to review everything before the final sale.
- Close the deal. Once you come to an agreement, it’s time to make the sale official by signing the legal contracts that turn over control and ownership to the buyer. These contracts can be difficult to write and understand, and your attorney should likely be involved in this final step.
If you’re unable to find a seller or can’t get a high enough price for your business, you may want to pass the business on to a family member, friend or employee for free. You could still retain partial ownership and have an income from the business.
Or, if the business is already declining and you think it won’t survive for much longer, you may want to close the business completely rather than selling or passing it on.
Closing a business can be a straightforward process if it doesn’t have a lot of debt. You can sell the business assets and end contracts, and may need to file paperwork with your state government to disband your business entity (if you created one). If you don’t officially disband the entity, you may need to continue to pay state filing fees or taxes.
If you can’t afford the business’s debt, you may want to try and work with the creditors to pay over time or settle for a lower amount. Bankruptcy may also be an option depending on the amount of debt and the business’s and your personal financial situation.