Buying or Selling a Business: A Step-by-Step Guide
Buying or selling a business is one of the largest financial decisions most owners ever make. Whether you are planning your exit or looking to grow through acquisition, a disciplined process protects the value you are buying or selling.
Key takeaways
- Selling a business typically takes six to twelve months or longer, and preparation starts well before that.
- A credible valuation and clean financial records are the foundation of a good deal.
- Buyers should complete thorough financial, legal and operational due diligence before closing.
- Deal structure (asset vs. stock sale, seller financing, earnouts) can matter as much as the price.
For sellers: preparing to sell
Start early
Ideally one to three years before you plan to sell, tidy up your financial records, reduce your personal involvement in daily operations and address any legal or tax issues.
Get a professional valuation
Know what your business is worth and what drives that value before you set a price.
Assemble your team
A business broker or M&A advisor, a CPA and a transactional attorney.
Prepare your memorandum
Prepare a confidential information memorandum that presents the business to qualified buyers.
Screen buyers, negotiate an LOI
Screen buyers and negotiate a letter of intent (LOI) that sets out price, structure and key terms.
Support due diligence and close
Support due diligence, then negotiate the purchase agreement and close.
For buyers: acquiring a business
Define what you are looking for
Industry, size, location and what you can afford.
Line up financing
SBA 7(a) loans are commonly used for acquisitions and typically require an equity injection from the buyer.
Evaluate opportunities
Confirm the asking price with your own analysis or an independent valuation.
Letter of intent
Submit a letter of intent.
Conduct due diligence
Conduct thorough due diligence before committing.
Plan the transition
Including how customers, employees and suppliers will be told.
Due diligence: what buyers should examine
Financial
Three to five years of financial statements and tax returns, a quality of earnings (QoE) analysis, working capital needs, debt and liabilities.
Legal
Contracts, leases, licenses, litigation, intellectual property, regulatory compliance.
Operational
Customers and concentration risk, suppliers, staff and key employees, systems.
Tax
Outstanding liabilities and how the deal structure affects taxes for both sides.
A quality of earnings analysis tests whether the earnings a seller presents are real and sustainable. It is one of the most valuable steps a buyer can take.
Deal structures
Asset sale vs. stock sale
In an asset sale, the buyer buys selected assets and usually avoids most of the seller’s liabilities. In a stock sale, the buyer acquires the company itself, including its history. Tax consequences differ for both sides.
Seller financing
The seller lends part of the purchase price, which shows confidence in the business and helps bridge financing gaps.
Earnouts
Part of the price depends on the business hitting future targets, which helps when buyer and seller disagree on value.
Working capital adjustments, escrows and holdbacks
They protect the buyer against surprises after closing.
Common mistakes to avoid
- Setting a price based on what the owner needs rather than what the business is worth
- Messy or incomplete financial records
- Skipping or rushing due diligence
- Ignoring tax consequences until late in the deal
- Losing focus on running the business during the sale process
Buying or selling a business?
Foxboro Consulting Group provides business valuations, M&A financial due diligence, and fairness and solvency opinions for buyers, sellers and their advisors.
