Selling a Business: A High-Level Overview 

Jacob Orosz Portrait
by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

  1. Build Your Team – The key to maximizing your purchase price is to adequately prepare for the sale. You will need a team of professionals to help you prepare. Your team should consist of an M&A advisor, an M&A attorney, and an accountant. They should have significant M&A experience and should be in place before you begin the process of selling your business.
  2. Prepare for the Sale – The number one mistake most entrepreneurs make when it comes to the sale of their business is failing to prepare. No two exits are alike and there’s no template, so each must be deliberately planned. Pay an M&A advisor to independently evaluate your company, to identify factors with the greatest impact on value, and to help you maximize value and minimize risks. You should also retain a firm to prepare a quality of earnings analysis (QoE) to ensure your financial statements are accurate and workable.
  3. Value Your Business – The first step to valuing your business is to calculate seller’s discretionary earnings (SDE), or earnings before interest, taxes, depreciation, and amortization (EBITDA). Then you can apply a multiple to arrive at your value. Common multiples for most small businesses are 2.0 to 3.0 times and 4.0 to 8.0 times EBITDA for mid-sized businesses. Nearly all valuations are based on cash flow, and increasing it is the easiest way to boost your value. Your best option for obtaining an serious appraisal is an M&A advisor with real-world experience selling businesses. They will supply a verbal opinion of value or a written report for non-legal purposes.
  4. Explore Your Exit Options – You should explore your exit options before you decide to sell your business. The level of preparation required and the purchase price you’ll receive are byproducts of the exit option you choose. Exit options can be summarized as involuntary, inside (family or employees), and outside. If you want to maximize your purchase price, you should pursue outside exits – selling to an outside person or company. Your M&A advisor can also help you determine which subset of buyers is most likely to acquire your business and what specific problems they may pose.
  5. Decide to Sell – The decision to sell your business is a balance between weighing your goals, emotions, industry dynamics, and the value of your business and options for exiting. Take your time with this step – selling a business is a challenging endeavor that requires complete commitment. We suggest first listening to your gut (intuition). Most entrepreneurs know deep down if they have the resolve to continue trading vs. the will to sell.
  6. Prepare the CIM – The first step before going to market is to prepare the confidential information memorandum (CIM), a 20-to-40-page document presented to prescreened buyers who have signed a non-disclosure agreement (NDA). 
  7. Find Buyers – You must determine who is most likely to buy your business, then develop a plan to target that particular audience. For middle-market businesses, buyers can be contacted directly via emails, phone calls, and other messages. A list of 100 to 200 buyers is necessary to produce the 30 to 40 conversations required to generate 5 to 10 letters of intent.
  8. Meet with Buyers – The next step is a virtual meeting with the buyer, in which you share additional information about your business. Avoid negotiating the price or terms of the transaction at this stage. These meetings should only cover questions related to your business. Delegate all negotiations to your M&A advisor.
  9. Negotiate the LOI – A buyer will present you with a letter of intent (LOI) if they’re interested. The LOI is a preliminary agreement that precedes a purchase agreement and allows the parties to begin due diligence. As the seller, you should move slowly when negotiating the LOI because this is the last stage in the transaction when you have significant negotiating leverage. You should also attempt to minimize the exclusivity period and include as many terms, as specifically as possible, in the LOI. Any undefined terms will be slanted in the buyer’s favor later in the purchase agreement because they have all the leverage once the LOI is signed.
  10. Manage the Due Diligence Process – After you accept an LOI on your business, the buyer will begin due diligence. This stage normally lasts 30 to 60 days. In most circumstances, the buyer will walk away from the transaction if they’re unsatisfied for any reason during due diligence. The key to minimizing this risk is to adequately prepare your business for sale. Time kills all deals, and the more problems the buyer discovers, the longer due diligence will take, and the more leverage the buyer has to re-negotiate.
  11. Prepare the Purchase Agreement – The buyer’s attorney will generally prepare the purchase agreement sometime during or after due diligence. The aggressiveness of the buyer’s draft will heavily influence the extent of the negotiations. The purchase agreement is ultimately a tool for allocating risk and will contain a significant number of representations you must sign. You should be prepared to give and take during the negotiations. A common mistake owners make is hiring an inexperienced attorney who lacks significant M&A experience, often because they’re cheaper. An experienced M&A attorney will be far more cost effective in the long run, even if their hourly rate is twice that of an ordinary corporate attorney.
  12. Close the Transaction – These days, most closings are virtual. Documents are sent electronically or by next-day delivery. You will receive any cash at closing, less holdbacks (a portion of the purchase price that is held in escrow to fund indemnification claims by the buyer).


“The end is where we start from.

TS Eliot

A lucrative exit from your business may have been the plan since the day you started trading, one that grew in tandem with your success, or was thrust upon you by an unexpected offer or cataclysmic event. Whatever your reason for selling, you’ve started your exit journey in the best possible place.

This guide aims to be the leading M&A knowledgebase. Beginning with the decision to exit your company, all the way to closing the deal, we believe there is no other guide as comprehensive yet concise, as balanced yet wholly on your side, geared to the best possible outcome for you and your company.

Stay with us for clear and complete overview of selling your business. 

Summary of the Steps

Information Sources

1. Build Your M&A Team

Selling a business today is more complicated than ever. Tools for financing, mitigating risk, and structuring the transaction have added layers of nuance, but they’re crucial to maximizing your purchase price and making a sale. 

The very first step in preparing for sale is to assemble a team of professionals to guide you. Your team will give you the best advice specific to your business and its buyers, help you navigate complex deal structures, and prepare you for all the knowns and unknowns of M&A.

  • M&A Advisor: Think of your M&A advisor as your quarterback. They’ll play a key role in helping you prepare for the sale and packaging of your company, which includes valuation, identifying any issues that need to be addressed before putting your business on the market, and preparing key sales documents. Once the preparation is complete, your M&A advisor will put your business on the market, contact buyers, and manage your negotiations. 
  • Attorney: Your attorney will play the second-most critical role in the transaction – they’ll negotiate the key agreements, primarily the non-disclosure agreement (NDA), the letter of intent (LOI), and the purchase agreement. You should also ask your attorney to perform pre-sale legal due diligence on your business to help identify any legal issues that need to be addressed before you go to market.
  • Accountant: Your accountant will assist you in preparing your company for sale from a financial perspective. They’ll make sure your financials are clean and consistent before your business is on the market. Accountants may also be involved in financial due diligence, and in examining the financial and tax implications of the purchase agreement. 

The role of an accountant is typically less hands-on than your M&A attorney, depending on the transaction. If your accountant does not provide a quality of earnings analysis (QoE), you should retain a firm to perform one. A QoE is critical to minimizing problems related to inaccurate financial statements.

Information Sources

2. Prepare for the Sale of Your Business

The number one mistake most business owners make when it comes to selling their business is failing to prepare. In our estimate, approximately half make no preparation and most take only nominal action, leaving only about 5% of owners optimally prepared for a sale. 

The result is that owners leave significant value on the table when they go to sell their busines, sometimes as much as 50% or more. In other words, a business that sells for $10 million with minimal preparation might have sold for $15 million or more with the right preparation.

The first step in preparing for sale is to build a team of professionals to guide you. Your team will give you the best advice specific to your business and its buyers.

Why do business owners neglect to prepare? It’s simple: they underestimate how difficult the process will be. Besides, most entrepreneurs have a strong bias toward action. Once they decide to sell, they prefer to dive right in and figure out the details later. 

But no two exits are alike, there’s no templated process, and each step must be deliberately planned. Put simply, the preparation stage involves:

  • Creating your plan
  • Prioritizing your plan
  • Executing your plan

As with most skilled endeavors, preparation makes the execution look effortless. It’ll shorten the time frame, command a higher selling price, increase the chances of a successful sale, and put more cash in your pocket.

How Long Does it Take to Sell a Business?

The average time to sell a business has increased in recent years. It now takes about 10 months, compared to six in the early 2000s. 

Most of the factors that increase the value of a business will also impact the time it takes to sell. So, if you want to increase value or shorten the time frame, the steps you must take are often the same.

Why Some Businesses Don’t Sell

A variety of factors can doom the sale of a business. While some can’t be completely overcome, buyers will consider the totality of the circumstances. The more risk they perceive, the less they’ll be willing to pay and the more likely they are to walk away.

Even if a problem can’t be eliminated, it may still be possible to mitigate its effects and reduce the buyer’s perception of risk. The result of properly preparing your business for sale is that you dramatically tilt the odds of a successful transaction in your favor. 

Build What Buyers Want

When preparing your business for sale, it’s important to understand the different buyer types and their criteria. That way, you can position your business as attractively as possible to the buyer who’s most likely to acquire it. Every buyer has a different set of preferences regarding the infrastructure, systems, and other elements they seek in their next acquisition. 

Other than profitability, the most critical factor in building most salable businesses is a well-developed management team. For others, building systems or increasing cash flow may lead to more value. There’s no cookie-cutter formula, but knowing your potential buyer types will help you market to the right audience and maximize your sale price.

Factors That Affect Value

The factors that affect the value of your business can generally be split into two parts – risk and return. 

The less risky your business, the greater its value. Likewise, the more potential your business represents, the higher its potential value. For most businesses, focusing on reducing risk is more prudent than trying to maximize potential. That’s because potential is usually limited by external factors, such as demographics and industry structure, while risk is easier to control. 

The factors that affect the value of your business can be split into two elements – risk and return.

When evaluating your business, buyers will consider a vast array of issues. They’ll then decide on a few factors that represent the greatest risk. Before selling, it’s wise to pay a professional to independently evaluate your business and identify the factors with the greatest impact on value, then develop a strategy to mitigate them.

Prioritize Your Action Steps

Once you’ve discovered the factors that might affect the value of your business, we recommend consulting with an experienced investment banker to help you prioritize them. An advisor can tell you which actions are most likely to generate the highest returns, require the least time and money to implement, and represent the lowest associated risk.

An M&A advisor can also point out which changes will appeal to all buyer types and which may only appeal to a specific group. 

3. Value Your Business


Before you value your business, you must ensure your financials accurately reflect its true earning capacity. You do this by making numerous adjustments to your financial statements to calculate SDE or EBITDA (cash flow). This process is called normalizing, recasting, or adjusting your financial statements. 

After adjustments, the resulting cash flow is called seller’s discretionary earnings (SDE), or earnings before interest, taxes, depreciation, and amortization (EBITDA).

Nearly all valuations are based on cash flow and increasing it is the number-one method of boosting the value of your business. The second method is to increase revenue. So, if you want to increase your value, focus first on increasing your cash flow, and then on increasing your revenue.

Valuation Multiples

Understanding what multiples are and how they’re used is foundational to understanding how to value your business.

Buyers buy businesses so they can receive a return on their investment (ROI). ROI refers to the return on an investment divided by the investment amount. 

For example, a $100,000 return /$1,000,000 investment = 10% ROI. 

In real estate, a capitalization (‘cap’) rate is the ROI from a real estate investment. Typical cap rates for real estate range from 4% to 12%. This would correspond to an 8.3 to 25.0 multiple. 

Understanding multiples is the key to properly valuing your business.

In the business world, ROI is the inverse of a multiple. If the multiple is 4.0, then the ROI is 25%. Common multiples for most small businesses are 2.0 to 3.0 times and for mid-sized businesses it’s 4.0 to 8.0 times EBITDA. This equates to a 12.5% to 50% ROI. Because returns are higher, it’s easier to calculate a multiple than a cap rate.

Multiples are the foundation of nearly every business valuation. But while the math of calculating a multiple is straightforward, don’t let the simplicity fool you. Just as a golf club is easy to swing, swinging effectively is much more difficult.

Information Sources

Valuation Theory

It’s also important to understand these critical valuation concepts:

  • The Future is Always Uncertain: The essence of valuation is predicting how other investors will behave. Anticipating the behavior of an individual is hard enough, let alone the impact of fear, greed, and herd behavior on large numbers. Changes in the macroeconomic environment can also have an enormous impact on the value of a business, and are impossible to foresee.
  • Buyers Have Varying Criteria: The universe of potential buyers for a business is vast and diverse, which means there’s a high chance of differing investor needs and opinions.
  • Valuations Take Time: Properly valuing a business is a lengthy process, especially when it comes to understanding and predicting future cash flows. The more time invested in preparing the appraisal and predicting revenue, the more accurate those predictions can be. 
  • Fair Market Value vs. Strategic Value: Most business appraisals use fair market value (FMV) by default, but this can limit the value of a business. The main alternative is strategic value, but here’s the downside: you can’t measure strategic value until you know who the buyer is. Every buyer can extract a different amount of value from your business based on the synergies they bring.
  • Business Valuation Is a (St)range Concept: This isn’t a hard science. Each buyer will value each business differently, and the same goes for appraisers. The value of a business should never be a hard number, but rather a range of values. 
  • Transaction Structure Affects Value: The terms of the sale – such as the size of the down payment, repayment period, and interest rate – can all affect how much a buyer is willing to pay. 

The Valuation

Here you have several options available to you. The different types of valuation aren’t strictly defined, but most fall into one of three main categories: 

  1. Verbal Opinion of Value: These reports are useful if you’re in the exploratory stages of selling your business and would like a ballpark idea of what your business is worth before committing more time, money, and effort to the process. 
  2. Written Report for Non-Legal Purposes: These reports are most useful for business owners looking to sell. They can be used in the sales process, but they don’t comply with appraisal standards and can’t be used in divorce, bankruptcy, or other legal purposes. 
  3. Self-Contained Appraisal: This type of report is also known as a “formal appraisal” and is required for any legal purpose, including tax matters. While the price can fluctuate widely, these appraisals usually run at least $5,000 to $10,000. They aren’t particularly helpful if your sole objective is to sell your business, and in most cases aren’t essential.

Choosing an Appraiser

When choosing an appraiser, your options include M&A firms, Certified Public Accountants (CPAs), and business appraisers. When your objective is to sell or weigh your exit options, M&A firms are ideal because they have real-world experience selling companies.

When selling your company, you don’t need an appraisal designed for legal purposes or one that can be used in court. Your advisor can produce a shorter report that’s limited to the valuation methods that buyers actually use, which results in a more realistic number.

4. Explore Your Exit Options

Even before you’ve decided to sell your business, it makes sense to fully explore your exit options. The preparation required and the purchase price you receive are ultimately a byproduct of the exit option you choose.

Your exit options can be broadly arranged into three groups:

  • Involuntary: Involuntary exits can result from death, disability, divorce, or other unplanned events. You should anticipate such occurrences, however unlikely they may seem, and take steps to avoid or mitigate any adverse effects. 
  • Inside: Here the buyer comes from within your company, such as your management team or your family. Inside exits require a professional with experience dealing with family businesses, as they often involve emotional elements to address discreetly and without bias. Inside exit options greatly benefit from tax planning because if the money used to buy the company is generated from the business, it may be taxed twice. Also, inside exits tend to realize a much lower valuation than outside exits. 

Management buyouts (MBOs) are common in the middle market. Your current managers or their networks may have insider knowledge that allows them to quickly make decisions, but they may not have the resources necessary to buy your business and invest in its growth. To sell to a management team, be prepared to finance all or part of the sale or arrange for a bank or private equity financing.

  • Outside: Due to the complexities of inside exits, sellers often pursue a buyer from outside the company or family. Outside exits tend to realize the most value. If that’s your goal, hire an M&A advisor, or investment banker who specializes in this area, to conduct a private auction for outside buyers.
Information Sources

Selling a Minority Interest in Your Business

In addition to the three main exit options, you can also sell a portion of your business. This would allow you to focus your talents on a division of your business with the most significant potential, or that you most enjoy, or that offers you the best work-life balance. 

In deciding whether to sell your  company whole or in part, first examine its overall value and then determine the value of each division. Once you’ve performed this analysis, you may decide it’s prudent to break your business in two to extract the most value.

5. The Decision to Sell

The decision to sell your business is a critical one. You’ve invested years or decades building your company, and made countless sacrifices along the way. When contemplating such an important decision, there are four crucial factors to consider:

Your Goals – Personal, Financial, Business

Start the process by writing down your goals. Understanding what you want is the first step toward meeting your objectives. Only after you clarify your long-term goals can you examine how selling your business will move you closer to them.

Internal Factors and Emotions

Look at yourself and your business objectively and determine if a change would make you happier. At the same time, beware of trading one set of problems for another. 

External Factors – Timing and Competition

Timing the sale of your business perfectly is difficult, but you can come close with the right intelligence. The ideal time to sell is when your business and the industry are about to peak. 

Consult with veterans for their opinion on the market cycle of your industry, consider both narrow cycles and macroeconomics, and remember that, as with most important decisions, perfection is always elusive. 

Your Business’s Value and Exit Options

Intelligent financial planning is difficult without an accurate idea of the worth of your most valuable asset – your business. Pay a professional to assess your business and get an idea of the steps you can take to increase its value.

Information Sources

Deciding to Double Down

One of the first things to consider before selling your company is whether a suitable alternative exist. Often, selling isn’t an all-or-nothing affair.

First, consider how committed you are to your business. This means being emotionally honest with yourself. If you decide you’re truly committed and would like to double down, then do it. 

Some entrepreneurs lack the capital to fuel the growth of their business. If that’s, growth equity from a PE firm might be a suitable option. 

Look at yourself and your business and determine if a change would make you happier. Beware of trading one set of problems for another. 

6. Prepare the CIM and Data Room

The first step before going to market is to prepare the confidential information memorandum (CIM), a 20-to-40-page document that includes the key details and the most persuasive story of your company to date, in a coherent, professional package.

The CIM is only shared with buyers who’ve signed a non-disclosure agreement (NDA). It should provide answers to the basic questions every buyer will ask, and contain enough information for them to decide if they’d like to invest time in meeting with you and learning more. 

Keep it Simple & Accessible

Your CIM shouldn’t answer everything, but just enough to move buyers to the next steps. Questions with more nuanced answers should be reserved for a phone call or face-to-face meeting.

Remember, the purpose of the CIM is to sell. Readers of CIMs are sophisticated and averse to hyperbole, so strike a balance between presenting information and pitching your company for sale.

Lastly, you should prepare a virtual data room (VDR), which contains the primary documents buyers will request during the due diligence process.

7. Maintain Business Confidentiality

Maintaining confidentiality is essential when it comes to selling your business. Here are some ways you can do so during the sale:

Draft a Non-Disclosure Agreement

While an NDA isn’t waterproof, it does prevent leaks in most cases. Often, a leak is negligent and the offending party isn’t trying to harm your business. The purpose of an NDA is leak prevention, but it’s not the only tool you can use.

Contact Buyers Based on Increasing Stages of Risk

When selling your business, contact buyers that represent the lowest risk to you and your company first. Typically, this involves initially contacting private equity firms and indirect competitors.

Screen Buyers

You should thoroughly screen all buyers before you provide them with sensitive information on your company. 

Release Information in Phases

As the buyer demonstrates continued interest and capacity, you can release more information. This way, more sensitive information is saved until you know and trust the buyer. You should release highly confidential information, such as customer contracts, only in the later stages of due diligence.

Control Information Release

Controlling how information is released to buyers is foundational to maintaining confidentiality. Here are several strategies for information management:

  • Redact or aggregate information
  • Release information in phases 
  • Develop strategies for different types of information
  • Set up an electronic deal room
  • Email information to create a document trail

Mark or Stamp Documents “Confidential”

Stamp or watermark all documents “Confidential” before releasing them to potential buyers. 

Handle Breaches Immediately

In the event of a breach, immediately contact the offending party.

In nearly every M&A transaction, many critical issues are addressed in a properly drafted NDA, including non-solicitation and other “sales process” issues. It’s tempting to assume that all NDAs are boilerplate, but a mistake in negotiating and signing one can kill critical options later in the process. In extreme cases, leaks can destroy your business. An NDA is one of many tools you can use to prevent this.

8. Finding a Buyer for Your Business

Understanding who your probable buyer is helps you figure out the steps to preparing your business for sale and maximizing its value.

What is the Best Method for Contacting Buyers?

  • Mid-Sized Businesses: The most effective method for selling a mid-sized business — and for contacting companies and private equity firms — is contacting buyers directly. With a targeted campaign, your M&A advisor will reach out to potential corporate buyers, known by some as a private auction. This involves compiling a list of potential buyers and reaching out through emails, letters, and phone calls. 

Corporate buyers can also be targeted through select trade publications. The first step is to prepare the buyers list – a mini database of names, numbers, and background information of companies that might be interested in your company. The bigger the list, the better. A list of 100 to 200 buyers is necessary to produce the 30 to 40 conversations required to generate 5 to 10 letters of intent.

  • Small Businesses: Because the target market for small businesses is primarily individuals, the most efficient and cost-effective method of contacting those buyers is through targeted forms of media. That’s where HNWIs will identify themselves as potential buyers of businesses.

9. Meet with Buyers

Now you’re selling not only your business, but yourself. Buyer meetings are far more than a forum for you to answer questions. You want to assure your buyer that you’re prepared, honest, composed, and serious about selling. 

A healthy relationship with your buyer will not only save time and effort in the long run, it can increase the value of your business as a whole. It’s a key aspect of selling a business that’s often overlooked. Here’s how to do it right:

  • Be respectful of their time and needs when making the arrangements. Send the message that you’re professional and cooperative — but not a pushover.
  • Be prepared. Be sure to have access to a computer and your confidential information memorandum (CIM) when you talk so you can easily answer their questions.
  • Find a quiet place. Most meetings today are virtual, but buyers soon grow testy if you call or video-call while driving or in some other environment not conducive to an important conversation.
  • Schedule enough time so that you can hold the meeting without distractions.
  • Never, ever negotiate directly with the buyer. Always leave the negotiations to your investment banker or intermediary.

A list of 100 to 200 buyers produces 30 to 40 conversations that lead to 5 to 10 letters of intent.

10. Negotiate the Letter of Intent

The LOI is the most significant document in an M&A transaction. Buyers will present you with an LOI and your M&A advisor and attorney will work hand-in-hand to prepare a counter offer. With that in mind, here are the major terms and characteristics of an LOI and the impact they have on negotiations:

  • Preliminary Agreement: The LOI is a preliminary agreement that precedes a purchase agreement and allows the parties to begin due diligence. Any terms of the transaction that aren’t defined in the LOI will be drafted in the buyer’s favor in the purchase agreement.
  • Exclusivity: Most LOIs contain an exclusivity clause. Keep the exclusivity period as short as possible.
  • Limited Information: The terms of the transaction and the content of the purchase agreement may change based on what the buyer discovers during due diligence. 
  • Contingency: The LOI is contingent on the buyer’s successful completion of due diligence. 
  • Momentum: The LOI presents an opportunity for each party because it enables them to resolve problems before becoming too deeply entrenched in a position.
  • Unresolved Issues: The LOI highlights any potential undefined or unresolved issues.
  • Non-Binding with Exceptions: Most of the terms in most LOIs are non-binding. However, the following provisions are typically drafted to be binding – exclusivity, confidentiality, due diligence access, earnest money deposit, and expenses.

Financial Deal Structure

You should evaluate any offer by how the purchase price is paid, to determine how favorable it is compared with other offers on the table. Bear in mind, a $20 million all-cash offer isn’t the same as a $20 million offer with $1 million down and a $19 million earnout. 

The purchase price can be paid as follows:


This can come from cash the buyer has on hand or third-party financing delivered to you in cash at closing. Cash down varies from 30% to 100% of the purchase price.


If the seller is publicly traded, they may be willing to pay you in stock in lieu of cash. If so, carefully consider the health of the acquirer and the liquidity of the stock.

Contingent Payments:

  • Seller Financing: The terms of the seller note and the creditworthiness of the buyer should be considered, as well as the seniority of your note relative to any other lenders. Typical seller notes vary from 10% to 50% of the purchase price.
  • Earnouts: Earnouts are a complex matter and should be carefully considered before you commit to one. If an earnout is involved, it’s usually in the range of 10% to 25% of the purchase price.
  • Holdback/Escrow: Most transactions include a holdback, in which a percentage of the purchase price is held in escrow to fund any indemnification claims the buyer makes after closing. Such claims may arise if you make a representation in the purchase agreement that proves to be untrue. Most escrows are in the range of 10% to 15% of the purchase price.
  • Royalties and Licensing Fees: Licensing fees are less commonly used and are designed to compensate you for new product launches.

Employment or Consulting Agreements

These are normally guaranteed payments, but are taxed at ordinary income tax rates to you. It’s common for buyers to want to retain the seller for a period of time during the transition period.

Information Sources

Legal Deal Structure

You should next evaluate the legal structure of the transaction. The transaction can be structured as an asset sale, a stock sale, or a merger. Most small and mid-sized transactions will be structured as asset sales. If that’s the case, how the purchase price will be allocated is critical and has a tremendous impact on your taxes. 

The allocation of the purchase price should be carefully analyzed by your accountant to determine if it’s reasonable and to evaluate the extent to which your tax burden can be mitigated. 

Tips for Negotiating the Letter of Intent

Here are the most important tips to bear in mind when negotiating the LOI:

Remember the Balance of Power: The balance of power changes dramatically the moment you grant the buyer exclusivity. Before this shift, take your time to ensure the LOI is as specific as possible. 

Move Slowly Before Signing: Regardless of what the buyer says and how urgent they appear to be, take your time when negotiating the LOI.

Move Fast After Signing: Take your time negotiating the LOI but get hopping the moment it’s signed.

Prevent Re-trading: Re-trading is when the buyer attempts to re-negotiate the price or terms of the transaction after the LOI has been signed. To prevent re-trading, do the following:

  • Take your time negotiating the LOI – it should be as specific as possible
  • Include milestones and deadlines in the LOI
  • Commit to the shortest possible exclusivity period
  • Move as fast as possible once you’ve accepted the LOI
  • Prepare for due diligence to speed up the process

Focus on Running Your Business: Once you’ve signed the LOI, continue to focus on running your business as if you weren’t going to sell. Your top priorities should be maintaining profitability and keeping your sales pipeline full.

Read the Buyer: There’s no standard LOI. If you suspect the buyer will be picky about certain issues, such as reps and warranties or access to employees during due diligence, be sure to address those matters in the LOI. It’s better for the deal to blow up now than when you’re off the market for three months and tens of thousands of dollars deep in due diligence.

Prepare for Due Diligence: Preparing for due diligence can speed up the process dramatically. The moment you’ve accepted the LOI, you should be ready to hand over the main documents most buyers will request. They should be highly organized and uploaded to a virtual data room or other location easily accessed by third parties. 

Maintain Confidentiality: Confidentiality agreements aren’t bulletproof. Avoid sharing very sensitive information during due diligence even with signed NDAs in place, especially if the buyer is a direct competitor. If you must disclose sensitive information, wait until the end of due diligence.

When it comes to presenting your financials to the buyer, honesty is the best policy. Better for a deal to end now that thousands of dollars down the line.

Disclose Beforehand: Disclose all problems about your business before the buyer makes an offer. If you disclose new, negative information after you accept the LOI, the terms of your deal will change.

Be Thorough: The LOI should encapsulate all the major terms of the transaction and not leave any significant provisions to be negotiated later in the process. 

Define Working Capital: If you want to avoid the working capital adjustment time bomb, the language in the LOI regarding how working capital is to be calculated should be as specific as possible.

11. Manage the Due Diligence Process

After you accept an LOI on your business, the buyer will begin due diligence. Due diligence normally lasts 30 to 60 days but can be extended if both parties agree. In most circumstances, the buyer can walk away from the transaction if they’re unsatisfied for any reason during due diligence.

There are three primary types of due diligence:

  • Financial Due Diligence
  • Legal Due Diligence
  • Operations Due Diligence
Information Sources

We strongly recommend you invest the time to prepare your business for due diligence. Most business owners skip this step altogether. By preparing fully, you’ll significantly improve the chances of a successful sale. Additionally, demonstrating to the buyer that you’ve prepared for due diligence increases their confidence in your business and reduces their perception of risk. 

Due diligence can be heaven or hell. If you your financials are in order, and all’s well from an operational and legal standpoint, chances are due diligence will be uneventful, and your deal will take flight. If you’re unprepared and the buyer finds things amiss during due diligence, you’ll find yourself on the horns of a dilemma. Being prepared can go a long way in achieving the outcome you want.

Showing the buyer that you’ve prepared for due diligence increases their confidence and lowers their perception of risk.

12. Prepare the Purchase Agreement

The buyer’s attorney will generally prepare the purchase agreement, usually sometime during or after the due diligence period. The aggressiveness of the buyer’s draft will strongly influence the extent of the negotiations. 

Since there are many interconnected components that constitute the overall transaction structure, you can’t negotiate parts of the purchase agreement in isolation. All components should be taken into consideration collectively during negotiations. 

For example, if the buyer proposes a lower purchase price, you may concede but may request more cash down at closing or a smaller earnout. Or, if you insist on providing minimal representations to a buyer, they may concede but may tighten up other elements of the deal structure, such as escrows, knowledge qualifiers, or thresholds.

The trade-offs and tensions of a purchase agreement can be summarized as follows:

Seller’s Objectives:

  • Maximize the purchase price
  • Receive maximum cash down at closing
  • Pay minimum taxes
  • Reduce earnouts, escrows, and other contingent payments
  • Reduce the scope and breadth of reps and warranties
  • Reduce the strength of indemnification via baskets, caps, and survival periods

Buyer’s Objectives:

  • Minimize the purchase price
  • Put minimum cash down at closing
  • Maximize the tax-deductibility of assets acquired by increasing the tax basis in these assets
  • Increase earnouts and escrows
  • Increase the scope and breadth of reps and warranties
  • Increase the strength of indemnification via baskets, caps, and survival periods
Information Sources

The purchase agreement is a tool for allocating risk. As the seller, the more assurances and protections you’re willing to provide in the purchase agreement, the lower the risk for the buyer and the higher the price they can potentially afford. 

Risk and return are directly related. The higher the risk, the lower the return – and vice versa.

The most fiercely debated elements of the transaction are as follows:

  • Price and Terms:
    • Purchase price
    • Terms of the seller note
    • Post-closing purchase price adjustments, such as working capital adjustment
    • Size and length of escrow
    • Contingent payments, such as earnouts and escrows
    • Specific terms of employment and consulting agreements
  • Deal Structure:
    • Allocation of the purchase price, which affects the tax implications of the transaction
  • Protective Mechanisms:
    • Survival period, knowledge, and materiality qualifiers of reps and warranties
    • Caps, baskets, and survival period of indemnification
  • Miscellaneous:
    • Conditions to closing, such as material adverse change (MAC) clause

The purchase agreement often takes one to two months to negotiate. In most cases, it is signed on the day of closing.

13. Close the Transaction

On closing day, you and the buyer may physically meet around a table, where the buyer delivers the final payment and you sign and deliver the closing documents. Alternatively, they may sign the documents electronically or via FedEx. These days, most closings are virtual and documents are sent electronically or by next-day delivery. 

“It’s always best to start at the beginning.” – Glinda the Good Witch, The Wizard of Oz


With this comprehensive guide, you’ve begun to see the exit process in clear, real-world terms: the formulation of a professional exit team, how multiples apply to the value of your business, and how to structure a watertight deal. 

Finally, the importance of preparation can’t be overstated. That’s the theme that ties everything together. You’re going to face challenges almost every step of the way – challenges that can be met and mitigated or overcome with preparation. This not only maximizes your price but ensures the process unfolds smoothly and quickly.

Whether you’ve already put your pending sale in motion or you’re getting ready for an exit a couple of years down the road, your preparations can now begin. It’s never too early to be ready.