Costs Of Selling Your Business: What You Need To Know

Among the many strategic decisions you’ll make, don’t overlook the costs of selling your business. Whatever your reasons and timing for the sale may be, always factor in the expenses you’ll incur. Be ready to add this cost to the company’s final price.

Founders selling their company need assistance from a team of expert professionals who can ensure you get the best price. You’ll also need advisors to guide you through the legal, accounting, financial, and other regulatory aspects. Hiring people with the best skills will streamline the process.

For starters, you’ll conduct a detailed valuation of the company, which requires the assistance of an expert M&A advisor. Use their expertise to assess the financial and non-financial aspects that add value to the company. You’ll also factor in the sweat equity you invested in building the business.

Preparing the company for sale, dealing with due diligence, and marketing involve expenditures. You should also anticipate some closing costs. Read ahead for detailed information about the costs of selling your business. Knowing what to expect can help avoid unpleasant surprises.

Pre-Listing Procedures Expense

Before exiting the company, you’ll ensure its stability and that it can continue to operate without the founder’s supervision. Buyers and investors are likely to assess the company’s team and its ability to run operations after the founder’s exit.

The team should be well-trained and competent to handle management and administrative tasks. If needed, you’ll promote them to executive positions and offer competitive compensation packages. Depending on the company’s needs, you’ll hire external executives as board members.

Next, you’ll examine the premises, manufacturing units, and other processes to identify areas of improvement. Invest in new technology, automation, AI capabilities, software, and machinery to enhance production capacity and operating efficiency.

This is a good time to upgrade any processes you’ve been putting off until now. For instance, human resources and payroll systems, point-of-sale POS systems, inventory management tools, and more. Also, beef up IT cybersecurity protocols like firewalls and breach protection.

You’ll conduct all the necessary repairs and maintenance tasks to have the facility running in top shape. If needed, invest in R&D to expand the product portfolio. You’ll also enter into strategic contracts that lower logistics costs for selling products and sourcing inventory.

Many companies have proprietary secrets, Intellectual Property, Intangible Assets, and patents that form their core assets. As part of the sale prepping, you’ll make sure that the ownership titles are secure. Confirm that the employees who created the IP have signed over their rights without any liens.

These steps, along with other operational improvements, will maximize the company’s valuation. Also, prepare three years’ worth of financial statements that investors and buyers will ask to see. All these activities could cost thousands of dollars, but you’ll recover them with a higher valuation.

Costs for Listing and Marketing the Company

Having prepped and readied your company for sale, you’ll scout around for appropriate marketing channels to present it. You’ll compile sales materials and other resources to advertise the business and attract potential acquirers.

Creating listings on relevant public platforms and online websites within your business vertical may involve substantial investment. However, investing this money is crucial to get the company in front of buyers and advertise its best features.

You’ll collaborate with the M&A advisor or finance broker to craft a compelling advertising strategy. Publishing the campaign on business-for-sale marketplaces and ensuring visibility can also involve expenses. Founders self-listing their companies can expect to pay a fee ranging from $500 to $1,000.

This fee applies to a six-month engagement; you’ll renew if the company isn’t sold during that period. Add this fee to the end costs of selling your business.

Crafting the Selling Memorandum

Having listed the business, you can expect multiple inquiries from interested buyers who’ll need detailed information about the company. But before you share business secrets, details about the IP, and other confidential data, you’ll institute some measure of security.

To secure the company, you’ll craft the selling memorandum with the assistance of the business broker. This document is, in essence, a brochure that sellers send to prospective buyers containing data about the business. Along with highlights, it may also present an overview of its financials.

Founders can prevent information about the sale from reaching the market by getting the buyers to sign an NDA. Once this NDA is signed, you can share the selling memorandum. You’ll assign the task of crafting a compelling memorandum to a professional.

This professional is proficient in presenting the company’s most value-enhancing aspects. That’s how they promote the best features and invite the highest buds. The broker’s job description also includes ensuring the NDA is signed and executed to ensure complete confidentiality before divulging details.

Founders with prior experience valuing and selling the company can craft the memorandum themselves. The process may include creating memos and printing out the relevant documents.

For added security, consider adding the documents to a virtual data room and restricting access only to specific entities.

However, you’ll pay a fee if you intend to have professionals handle the task. This amount can range from $500 to $3,000, but the final change depends on the complexity of the memorandum.

The number of pages that need to be prepared can also determine the costs of selling your business.

Business Valuation Costs

Business owners can deploy different strategies to evaluate their company to raise funding or enter into M&A. An effective strategy is to run a comparative analysis of similar businesses that have been sold within the industry.

You can generate a price range and use that figure as a benchmark for valuing the company. This strategy works well for companies that have yet to start generating revenues or don’t have robust financial statements.

Arriving at a pricing multiple is easily done and costs around $20 to $100. Several online tools are available that you can use to calculate this figure.

However, if the company is well established with complex operations and extensive financials, it’s advisable to bring in professionals. Retain the services of expert agents who can handle the valuation and arrive at accurate figures. Typically, the costs include the brokerage fee.

Depending on the company’s size and scope, owners may have to hire a business appraiser. This professional studies the operational and financial metrics in detail before arriving at a number you’ll quote prospective buyers. The business appraiser’s fee varies according to the project but usually starts at $5,000.

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Legal and Due Diligence Expenses

When estimating the costs of selling your business, you’ll include the costs incurred for conducting due diligence. While buyers do their own research into the business, as the seller, you’ll also do an independent analysis.

Due diligence will help you uncover any hidden details that can bring down the price of the company. At this time, you can resolve potential issues that can prove to be dealbreakers. The team you hire for the due diligence will include legal professionals, M&A advisors, brokers, and accountants.

You’ll retain additional experts depending on the type of business and industry where you work. For instance, you operate within the IT sphere and gather customer information for running operations. You’ll need cyber experts to assess the systems and ensure the PII hasn’t been compromised.

The entire team coordinates its efforts to examine the legal connotations of the business operations to ensure regulatory compliance. They’ll also review contracts to identify possible liabilities so you can resolve them.

Once the sale is finalized, legal experts will draft the sales documents and relevant agreements. Attorneys will examine the contracts to ensure that the ownership transfer progresses without any issues.

The costs of selling your business should account for the fees you’ll pay to the team. For instance, attorneys may charge you on an hourly basis or by project. You can safely anticipate that these fees can range from $2,500 to $5,000 but can also vary.

You might have to pay a higher amount if the deal is more complex and requires additional work. A good rule of thumb is to assume 1% to 2% of the transaction’s value in legal fees.

Closing Costs

Expect to incur several other transactional and miscellaneous expenses during the sale process. For instance, any unpaid business and property taxes and filing fees to the relevant state government for transferring the ownership. Depending on the payment terms and conditions, you’ll pay escrow fees.

Sellers should also factor in unexpected minor costs such as preparing documents, courier charges for dispatching documents and traveling.

In case of an M&A deal across state lines or a cross-border transaction, you or team members may have to travel to complete due diligence, and accommodation and other incidental expenses may be added.

Then again, you may have to hire a CPA to compile accurate financial statements dating back at least three years. You’ll pay anywhere from $1,000 to $5,000 for income statements, profit and loss statements, and balance sheets. They’ll also review your taxes and ensure payments are compliant.

Although the small expenses may seem minor at the onset, they can quickly add up to huge bills. It is always advisable to plan for them when estimating the costs of selling your business.

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Business Broker or M&A Advisor Fee

The size, scope, and location of your company will determine the type of professionals you’ll retain for the sale. Business brokers work on a regional or local scale and are concerned with executing the sale quickly. Typical transaction values are less than $2M.

However, if you’re engaging in a cross-border sale or a national-level company, you’ll need expert M&A advisors. Many advisors charge you an upfront cost for covering all the costs associated with the transaction. These costs may include business valuation, market analysis, and marketing materials.

When engaging the services of professionals, it’s advisable to check their costs beforehand. Their fee ranges from 1% to 5% of the transaction’s value. Several factors can determine the final charges, such as complexity, level of negotiations, relationship with clients, and specific verticals.

Essentially, you’re paying for their exceptional skill sets, industry-specific knowledge, database, and extensive experience handling such transactions. They’ll ensure that you get the best price possible for the company and that the transaction progresses smoothly.

Navigating any possible challenges is quickly done thanks to their connections in the market.

Additional Costs

Before we start to tally the final costs of selling your business, account for these additional fees. Do keep in mind that the complexity and scope of the transaction always determine the charges.

• While we’ve talked about attorney fees in the ongoing sections, these expenses can be higher. For instance, you intend to separate real estate and other fixed assets from the company. In that case, the attorney must draw up the necessary ownership papers. But, if you intend to sell them with the business, you’ll need an estimate of their pricing and separate documents.
• The assignment fee is applicable if you’ve leased property from a third party. When selling the company, you must request the landlord to assign the lease to the company buyer. You’ll also pay a transfer fee to the government and attorneys to renegotiate the lease. And prepare the lease agreement in favor of the company buyer.
• If you pay off open mortgages, credit lines, and commercial real property loans as part of the company sale, the prepayment or termination penalty applies.

 

Accurately estimating the costs of selling your business is not possible because every company is unique. Several variables come into play, so it is always advisable to factor in additional costs when calculating the company’s price.

Adding these charges to your asking price will ensure they don’t reduce your profits when you receive the final check. Always rely on the assistance of an expert M&A advisor to guide you through the deal.

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