Selling a business: the financial steps from prep to close

Selling a business is a sequence of seven stages: get the numbers ready, set a price, market the company to buyers, sign a letter of intent, go through due diligence, sign the purchase agreement and close. On the financial side, the outcome is decided early: a seller with clean monthly books and an earnings figure that holds up keeps more of the price and closes faster.

This guide is for owners and founders of private companies who are thinking about a sale in the next year or two, and for the people running their finances. It follows the deal from the seller's finance seat. The longer planning window before a sale is covered in exit planning, and the line-by-line testing of earnings in the guide to quality of earnings and EBITDA adjustments.

The stages of a sale

Illustrative sequence; stages overlap in practice.

Before going to market: prepare the numbers

The SBA recommends seeking advice from a lawyer and a business valuation expert, along with accountants and bankers. On the financial side, three things decide how the rest of the sale goes:

• Monthly books on an accrual basis, closed on time and reconciled, for at least the last two years. Buyers measure trends, margins and working capital month by month.
• An earnings figure that survives testing. Most buyers price on adjusted EBITDA, so every adjustment (owner pay brought to market rate, personal expenses, genuinely one-time costs) needs a ledger reference and support.
• Monthly working capital history, so the target level the buyer proposes can be checked against real data.

If these do not exist yet, building them is the first job, and it takes months rather than weeks. The exit planning timeline sets out an order for the work.

Setting a price

The SBA advises setting a value through a business valuation before marketing to buyers, and describes three common methods: the income approach, which looks at projected revenue and accounts for risk; the market approach, which compares the business with similar businesses that recently sold; and the assets approach, which subtracts total liabilities from the total value of all assets.

For an operating business, the income and market approaches usually carry the weight, and both start from earnings the buyer believes. Two points help a seller read offers correctly:

• Most offers price the business cash-free and debt-free. The headline figure assumes no debt and a normal level of working capital. Debt is repaid from the price at closing, and cash in the bank usually stays with the seller or is added back.
• Headline price is not proceeds. The terms in the letter of intent decide how much of it arrives at closing, how much later, and how much is at risk.

The letter of intent: terms that decide what the seller keeps

The letter of intent is usually not binding on price, but it sets the frame the rest of the deal is negotiated in. Read each offer on these terms, not only the headline:

• Structure: an asset sale or a sale of shares (or membership interests). It changes tax, which liabilities stay with the seller and which contracts need consent to transfer.
• Cash at closing versus deferred payments: a seller note (the buyer pays part of the price over time) or an earnout (part of the price depends on future results). The SBA describes a gradual sale as suited to buyers who can finance a long-term payment plan; deferred money carries the buyer's credit risk.
• Escrow or holdback: part of the price held back for a period to cover claims under the purchase agreement.
• Working capital target: the level the business must deliver at closing, with the price adjusted up or down for the difference. How it is set is covered in the post on the working capital peg.
• Exclusivity: how long the seller agrees not to talk to other buyers while diligence runs.

A worked example: from headline price to cash at closing

A seller signs a letter of intent at 10.0 million, cash-free and debt-free, with 1.0 million paid through a seller note over three years and 0.5 million held in escrow. The business has 1.2 million of bank debt, and it delivers 1.25 million of working capital against a 1.4 million target.

Illustrative figures, not client data.

The seller receives 68% of the headline price in cash on the closing day. The note and the escrow may still arrive later, but both depend on events after closing. Two offers with the same headline can produce very different cash, which is why the seller's side should model each offer this way before choosing one.

Due diligence and the purchase agreement

After the letter of intent, the buyer rebuilds the seller's numbers from the ledger: revenue by customer, the adjustment schedule, a proof of cash against bank statements, monthly working capital, debt and debt-like items, payroll and taxes. The due diligence checklist lists the requests and what each one tests.

Diligence findings feed straight into the purchase agreement. Buyers commonly re-trade price when the figures they rebuild differ from the figures in the marketing materials, so the best defense is preparation: a data room that answers the usual requests on day one and an adjustment schedule the seller has already tested.

The SBA notes that a sales agreement is needed to sell a business officially, that it should record adjustments and broker fees, and that no assets or liabilities should be left out. For the finance side, the sections that matter most are the definitions: what counts as working capital, what counts as debt, and how the closing statement is prepared and disputed.

Plan the tax side before signing

The structure changes what the seller keeps after tax:

• Asset sale. The IRS treats each asset as sold separately when working out gain or loss, and buyer and seller must both use the residual method to allocate the price. Both parties file Form 8594 when goodwill or going concern value attaches, or could attach, to the assets.
• Stock sale. When a seller sells shares in a corporation, the IRS says the seller usually realizes capital gain or loss.
• Deferred payments. An installment sale is one where at least one payment arrives after the tax year of the sale. For a whole business, the price is split across the assets first, and inventory cannot use the installment method.

These are questions for a tax advisor before the letter of intent, when the structure is still open, not after it is agreed.

Closing and the months after

At closing, the funds flow memo sets out where every dollar goes: debt payoffs, fees, escrow and the seller's proceeds. The closing statement estimates working capital on the closing date; a final true-up usually follows a few months later, once the books for the closing month are done.

After closing, the seller's finance work continues for a while: final tax returns, the working capital true-up, earnout reporting if there is one, and handing over the monthly close, the forecast and the bank relationships to the new owner.

Common mistakes

• Going to market before the numbers are ready. Problems found in diligence are priced in, often with less time to answer them.
• Choosing the highest headline instead of the most cash. Model debt, working capital, deferred payments and escrow for each offer.
• Agreeing a working capital target without history. A seller who does not know the normal level can lose value at closing.
• Leaving tax structure until after the letter of intent. By then the buyer has anchored on a structure that suits them.
• Letting the business drift during the sale. Results in the months before closing are watched closely, and a miss can reopen price.