Business Sales & Exit Planning

For most closely held companies, a multiple of normalized earnings — seller’s discretionary earnings for smaller businesses, EBITDA as size increases. The multiple varies enormously by industry, size, growth and risk, and the honest range for a small business is wide enough that a formal valuation is worth the cost before you go to market.

What moves the multiple within your industry: revenue that recurs, customer diversification, the degree to which the business runs without you, the quality of the financial records, and the strength of the management team. Profitability sets the base; those factors set the multiplier.

Get the valuation early, not when a buyer appears. Its most valuable use is not pricing the deal — it is telling you what to fix while there is still time, and reconciling the number in your head with the number in the market.

Usually yes, and the choice tracks size. Business brokers serve smaller transactions, typically on a percentage commission. Investment bankers run competitive processes for larger ones, with a retainer plus a success fee.

What you are buying is buyer reach and a process. The single largest determinant of price is competition among buyers, and an owner selling on their own generally has one buyer — the one who approached them. A good intermediary also absorbs the process load so you can keep running the business, which protects the price in its own right.

Read the engagement agreement closely before signing, particularly the tail period, which can obligate you to pay a fee on a sale that closes long after the engagement ends and to a buyer you found yourself. That is a negotiable term.

You will want stock or membership interests; the buyer will want assets. An equity sale is generally one transaction taxed as capital gain and a genuine exit from the liabilities. An asset sale is taxed asset by asset, with portions treated as ordinary income, and leaves you as the owner of an empty entity with residual obligations.

Buyers push for assets because they get a tax basis step-up and can decline unwanted liabilities. In smaller transactions they usually win, because they have the alternative and you have one business to sell.

Where it matters, the difference can be quantified and traded. Model the after-tax proceeds under both structures with your accountant, then negotiate the price difference explicitly rather than conceding the structure and discovering the cost afterward.

Frequently, particularly with an individual buyer or a management team. Seller notes commonly cover ten to thirty percent of the price, and SBA-financed deals often require some seller participation, sometimes on standby.

Treat it as a loan, because it is one. You want a real interest rate, a security interest in the business assets, personal guarantees, financial reporting covenants, and defined remedies on default. Sellers who paper this loosely because they like the buyer regret it at a rate that is difficult to overstate.

Understand the risk honestly: if the buyer fails, your remedy may be taking back a business that is now worth less than when you sold it, from someone who has run it for two years. Price the note accordingly, and prefer more cash at closing over a higher headline price paid over time.

Commonly three to twelve months for a transition, longer where the relationships or technical knowledge run through you. It is negotiable in duration, in hours, and in compensation — and it should be a written agreement rather than an understanding.

Two points sellers regret conceding. Define the role and the time commitment concretely; “reasonable assistance as requested” can become a full-time job you are no longer being paid for as an owner. And separate the transition compensation from the purchase price, so that working longer is not a discount on what you sold.

If part of your price is contingent on an earnout, your role during the measurement period is not incidental — it is the mechanism by which you can protect the number. Negotiate authority, not just involvement.

Subject to whatever you sign, and buyers will require a non-competition and non-solicitation agreement — they are paying for goodwill and will not pay for it if you can rebuild the same business next door. Missouri enforces restrictive covenants in the sale-of-business context considerably more readily than in an ordinary employment relationship.

Negotiate scope, geography and duration deliberately. Broad industry-wide language is common in first drafts and frequently narrowed, particularly where you have a plausible plan to work in an adjacent field.

Think it through before you sign rather than after. Owners who assume they will retire and then find they want to work again are the ones who discover the covenant they never read is the binding constraint on the rest of their career.

Most deals assume the business is delivered with a normal level of working capital — receivables and inventory net of payables. If actual working capital at closing is below the agreed target, the price is reduced by the shortfall.

Sellers get caught by it because they run the business down before closing: collecting receivables aggressively, delaying payables, and letting inventory thin. Every dollar of that comes straight out of the purchase price through the adjustment.

Negotiate the target carefully, especially in a seasonal business where a twelve-month average may not fit the closing date. And negotiate the mechanics — who prepares the closing statement, the accounting principles used, the objection period, and who breaks a tie.

Typically five to fifteen percent of the price, in escrow for twelve to twenty-four months, as the buyer’s source of recovery if the representations turn out to be wrong. You will also give indemnification obligations with a survival period, a cap, and a basket below which nothing is owed.

Fundamental representations — title, ownership, taxes, authority — usually survive longer and outside the cap, and fraud always does. Those carve-outs are standard and not worth spending your negotiating capital on.

Where you can move the needle: the size of the escrow, the length of the survival period, a tiered release, and representation and warranty insurance in place of a large holdback. Insurance has moved down-market and is worth pricing on more deals than sellers assume.

Carefully, and with the understanding that leaks damage value. Employees who learn the business is for sale start looking; customers who learn it start hedging; competitors who learn it start calling both.

The tools are a mutual non-disclosure agreement signed before anything meaningful is shared, blind marketing materials that do not identify the company, staged disclosure with the sensitive information released late, and a very small internal circle. Where the buyer is a competitor, clean-team protocols limit who on their side sees what.

Plan the announcement before you need it. Employees should hear it from you, in a single conversation, with the answers to the questions they will actually ask — whether they have a job, who their manager will be, and what changes. Key employees frequently receive retention arrangements funded as part of the deal.

Take the meeting, and take nothing else. Unsolicited offers are common and are frequently an attempt to buy a business before it goes to market and before the seller knows what it is worth.

Before sharing anything: sign a mutual NDA, get a valuation so you know the number, and consider whether a short competitive process would produce a better one. A serious buyer will not be offended by any of that. A buyer who pressures you to move fast and stay exclusive is telling you something.

Be especially careful with the letter of intent. The exclusivity provision is binding and it removes your alternatives. If you sign one before you know your value or your options, you have negotiated the entire deal already.

Some are not, at least not yet — heavy owner dependence, one customer, no records, no management. That is a finding, not a verdict, and it is far better to learn it three years early than during a diligence process.

The fixes are the same list either way: reduce owner dependence, diversify customers, clean up the financials and the legal foundations, build a team. Two or three years of deliberate work regularly changes both whether a business sells and what it sells for.

And if the honest answer is that the business will not transfer, plan for that instead — an orderly wind-down, a sale of the assets and customer list to a competitor, or a transition to a key employee. All three are better than an owner working until they cannot and leaving a family with something no one will buy.

Two to three years before you intend to sell. That is the horizon on which the changes that actually move price — reducing owner dependence, diversifying customers, cleaning up the records, developing management — can realistically be made.

If a buyer is already at the door, the work is different but still worth doing quickly: fix the legal defects that will surface in diligence, get a valuation, and get the tax structure modeled before you sign a letter of intent.

And regardless of your timeline, have the continuity documents in place now. Every plan on this page assumes you are alive and well on the day of the sale, and the plan for the other case is a separate conversation worth having once.