For many entrepreneurs, starting and growing a business is a rewarding but difficult endeavour. All businesses require capital, and some require a lot of it. Because sole ownership may not be the best structure for transitioning leadership, many business owners sell ownership in their company in the form of shares of stock.

Key points

Selling stock shares in a sale of ownership can be done for a variety of reasons, including debt repayment, expansion funding, and risk diversification.

Owners can sell all or part of their ownership stake in their company, depending on the circumstances.

Selling to private investors or employees are two options for selling a business.

There are numerous steps to selling a business, including determining its value, determining what your shareholders want, developing a marketing strategy, and preparing your business for sale.

Reasons to Sell Your Company's Stock

There are numerous compelling reasons to sell all or a portion of a business. Selling stock in a company can generate large sums of money, which can be used to pay off debts, make investments, or make charitable contributions.

That money can also be reinvested in the company to help it grow. Similarly, selling a portion of a company can lower the owner's risk and allow them to diversify their personal assets.

Other reasons for selling stock may exist for business owners. Selling shares over time can be a good way to plan for eventual succession and transfer ownership in a way that minimizes tax shock for the eventual new owners.

Finally, selling stock in a company can be the result of burnout or an unwillingness to expand the company further.

Full vs. Partial Sale

First, decide whether you want a full or partial sale. A full sale is relatively simple. Unless you have an employment or consulting contract that extends the relationship, it effectively ends your involvement with the company.

Because business sales can be structured to provide annuity payments, a complete sale makes sense if the owner wishes to retire financially.

Partial sales are not the same. They can raise capital, reward employees, or initiate ownership transitions. Before considering a partial sale, think about the implications of how much you want to sell. If you sell too much and become a minority investor, you may lose control—or even influence—over decisions.

Different Selling Options

Making It Public

Going public is not an option for the vast majority of business owners. A public listing is the most expensive option, as well as the most demanding in terms of legal, auditing, and disclosure requirements. Nonetheless, it is the best option for raising large amounts of capital and/or increasing the value of a business.

Selling to High-Level Private Investors

Companies do not have to go public in order to attract institutional investment dollars. Selling shares privately is much easier, faster, and less expensive. While there are restrictions on how far a company can go without filing with the Securities and Exchange Commission (SEC), private sales provide the same benefits as public offerings while avoiding some of the drawbacks.

Private sales frequently include venture capital funding. In venture funding, a company or its owner sells shares to venture capital investors in exchange for the capital needed to grow or expand the company. Significant share sales to large private investors frequently necessitate that the company gives the investors a seat on the board of directors.

Selling to Individual Investors

Selling shares in your private company to small private investors is both more difficult and easier than selling to large, sophisticated investors in some ways. On the plus side, handpicking the investors is easier, and there are frequently pre-existing relationships.

These investors are also less likely to compel some of the more consequential concessions that larger investors may demand, such as board representation or a CEO replacement. Smaller investors, on the other hand, typically have less money, and the legal process can be more complicated.

Selling to Employees

Another option is to sell stock in your company to your employees. Establishing an employee stock ownership plan (ESOP) increases employee loyalty and retention while decreasing a company's cash compensation needs, such as awards or bonuses, which would otherwise be paid in cash. These contributions are usually tax deductible; however, selling stock to employees is not a viable method of raising capital.

Steps to Take When Selling a Business

If you're thinking about leaving, here are some steps to take.

Make a Decision About Your Future

Begin by answering a single question: How do you intend to spend your time, money, and energy after you sell your home/business? Many people avoid soul-searching because it is difficult for them. Unfortunately, owners who enter into negotiations with a potential buyer without a long-term vision rarely succeed. Put your future life vision in writing so you can refer to it and update it as needed.

Understand Your Shareholders' Preferences

The following question is, "What do your stakeholders expect from your company?" Employees, other owners, investors, and family members are all examples of stakeholders. The goals of these key individuals will shape the future of the company, and a wise buyer will want to understand and agree with their goals before closing a deal.

Determine the Worth of Your Company

The next step is to determine the worth of the company. An accountant, an independent analyst, and/or a consultant may be required for this process. The entrepreneur has developed their company from an idea to a company with employees, assets, intellectual property, and a reputation.

It's priceless—for the entrepreneur. Potential buyers will assign a price to the business and walk away if the owner's price is too high.

If you're thinking about selling to a third party, hire a business broker to help you find a buyer, manage paperwork, navigate tax and other laws, and close the deal more quickly than an entrepreneur selling a business for the first time.

At a glance

Identifying your company's market value is a critical step in selling your company. >Calculating the value of all assets or comparing your revenue and profits to other similar companies that have recently been sold can help you determine market value.

A broker will focus on the sale, allowing the entrepreneur to focus on running the business and maintaining its value.

Solicit multiple bids once you've determined the fair value of the business. If the bids differ significantly from the owner's perception of fair value, the assumptions may need to be revisited.

It's also worth noting that while private companies almost always sell at a discount to public companies, a controlling stake is frequently worth a significant premium to noncontrolling minority investors.

Develop a Marketing Strategy

It is also critical to properly market a for-sale business. There are websites that specialize in assisting owners in selling their businesses, but owners must be prepared to create their own sales materials.

A well-formatted one-page summary is required at a minimum, as is a more detailed package for serious bidders. These materials must include information such as the company's sales, profits, and cash flows, as well as a detailed description of the company and its assets.

It's also worth noting that while private companies almost always sell at a loss to public companies, a controlling stake is frequently worth a significant premium to noncontrolling minority investors.

Get Your Company in Order

Finally, before attempting to sell the business, get it in order. A business, like a house, requires a facelift before it can be sold. Before opening the books for inspection, look for issues that will turn off potential buyers and fix them.

What to take note of

Remember that selling your business is a lengthy process. It is not a single event, but rather a series of steps and areas of focus.

Make sure that all cosmetic details and repairs are taken care of, that you have a detailed inventory and equipment list, and that you have multiple years of financial data and tax returns on hand.

Other Factors to Consider

There are several other important details to consider when considering selling a portion or all of your business. Keep in mind that it takes time. An initial public offering (IPO) or venture round of financing can take months to plan, and obtaining a good price for a private company can take a year or more. Patience is essential; the more you rush to sell, the lower the prices will be.

According to Chris Snider, CEO, and president of Exit Planning Institute, a national organization that trains financial advisors on the fundamentals of selling a business, selling should be treated as a retirement plan and should begin as early as possible. "Exit planning is a process, not an event," explains Snider. "It is a method of operating a business that maximizes its value and provides a means of achieving an owner's personal and financial objectives."

Finally, don't overlook the psychological implications. Are you prepared to leave? Are you ready for new partners to question your decisions? Having investors in your company makes you legally responsible to others and necessitates more transparency than a sole proprietor may be used to.

Frequently asked questions and answers

What Exactly Is Equity Financing?

Equity financing is a method of raising capital for a business that entails selling a portion of your company to an investor in exchange for funds. When a business owner raises funds for their company's needs through equity financing, they give up some control to other investors.

Is It a Good Idea to Sell My Business?

Knowing if selling your business is a good idea is dependent on a variety of factors, the majority of which will differ for each business owner. If you no longer want to manage your business, if the demands are too strenuous, if you are nearing retirement, or if you need money, these are all good reasons to sell it. Of course, most of these reasons are qualified and will be affected by other factors.

How Much Should I Ask for When Selling My Business?

Typically, a business is sold for two to three times its discretionary earnings range. For example, if a company has $300,000 in cash flow, it will sell between $600,000 and $900,000.

In conclusion,

Selling even a small portion of your company is a major undertaking. At the very least, ensure that you are thoroughly prepared and that you have clear expectations for the process.

Selling stock in a private company can be a great way to raise capital, incentivize employees, or bring in new talent and ideas, but it takes patience, preparation, and a willingness to negotiate.

The best way to maximize the value of your company when selling it is to plan ahead of time. Examine your company's worth and address any issues that may cause it to sell for less than it is worth. Then take your earnings and embark on your next adventure.