When thinking about the process of selling their business, business owners often focus on the negotiation and deal finalization processes. While these are important stages, understanding the full life cycle and the typical timeline of a business sale can help sellers make smart decisions, particularly when time is a factor.
What is a Business Sale’s Life Cycle and Timeline?
The timeline of a business sale is the duration of the sale, from initial contact to closing the deal. The life cycle is the core stages sellers go through during the selling process. While the stages may vary, they are generally defined by five main stages: searching, prospecting, due diligence, negotiation, and closing.
Why Do These Concepts Matter?
Understanding their practical applications can make buyers and sellers productive and prudent business partners. For sellers, it can help keep timeline expectations realistic. Additionally, a practical understanding of the estimated duration of a sale can empower sellers to plan around the sale and not feel rushed. Most importantly, if both parties have an understanding and agreement of how long a transaction may take, they can hold themselves and one another accountable during the life cycle’s stages.
Stage 1: Listing
The listing phase is when a seller decides to put their business for sale. This can be done independently with advertising, through a broker, or through an online marketplace. The duration of this stage can vary vastly, primarily depending on what method a seller uses for listing their business. Some methods allow for this stage to be completed in a few minutes while others require a few weeks. Generally, it will be completed faster if a seller is using online methods since information receipt and output is instantaneous.
Another key factor in how quickly a seller can complete this stage is how much preparation they have undertaken prior to listing. A seller who understands the intricacies of their business will have an easier time determining the most basic part of a listing: the price. While some sellers attempt to sense what a fair price for their business is, this can create problems in the subsequent stages, as a price that is too high will deter buyers from seriously considering your business. Furthermore, if the price is not based on the business’s assets, it can create tension and conflict during negotiations. To prevent these scenarios, sellers are recommended to obtain a valuation for their business. The valuation provides an objective and thorough evaluation of the business, and results in an objective and demonstrable pricing baseline.
Preparation also includes having the necessary information about the business onhand. A motivated seller who has their business’s financials, general information, and an understanding of what key details and elements they wish to emphasize will generally complete this stage much faster than a seller who is unsure of their decision to sell, who has not started procuring the financials, and who is not certain of what their business’s core competencies are.
If a seller finds themselves in the latter category, it is best to take a step back and re-evaluate their business, action plan, approach to selling, and goals in selling their business. Doing so can provide clarity as to whether they are ready to sell, and can offer insights into what needs to be prioritized or modified in how the sales process is being approached.
Stage 2: Prospecting
The prospecting phase is when a seller finds interested buyers to engage with. If a seller is pursuing an independent sale, they will need to source the buyers themselves. For a seller who is using a broker or an online marketplace, they generally will not have to do as much active effort in prospecting. Brokers will perform this task on the seller’s behalf, and the structure of an online marketplace encourages buyers to reach out to sellers.
There are a few key factors that must be emphasized before understanding the timeline for a business sale at this stage. Sellers use different approaches when considering potential buyers. Some sellers are primarily interested in just selling their business, and not concerned about the longevity or success of it post-sale. Other sellers are concerned about their business’s state post-sale, and so will be more particular about who they sell to.
Additionally, elements outside of a seller’s control, like market conditions, can affect how effective prospecting can be. For example, attempting to sell a restaurant business at the height of the COVID-19 pandemic would likely not have yielded a successful prospecting stage. More difficult market conditions will require more effort and detail put into a listing to attract the sustained interest of prospective buyers.
Under ideal conditions and depending on what a seller values in a buyer, prospecting can take between a few weeks and a couple of months. However, during difficult market conditions, prospecting can take longer, at which point sellers may need to decide whether to wait for better conditions, work on improving their listing and prospecting efforts, or adjust their criteria for buyers.
Stage 3: Due Diligence
After a seller has found a promising potential buyer, they can begin to engage in conversation to further discuss the details and specifics of the sale while also getting a feel for one another. After a potential buyer sends a letter of intent, and the seller sends and receives their signed NDA, both parties have entered into the due diligence stage. This stage is a relatively short process for sellers as compared to buyers, who will have to perform thorough investigation into all aspects of the business. Sellers typically research the buyer, their history, whether they have the means to finance the sale, and whether they have a reliable track record. Some sellers will decline to continue discussing a sale with a potential buyer if they feel that the buyer is not serious or professional, with the same being true of buyers.
Additionally, how effectively sellers and buyers can gauge one another depends on how both parties approach communication. If they are motivated, keep their channels of communication open, and are prepared with the necessary documents, getting through this stage can happen quickly. However, if one party is not putting in the same level of effort or preparedness, this stage can take longer. Due to this, the due diligence stage can end up becoming a lengthy process. Generally, this stage takes around a few weeks, but if either party is dragging their feet, it can take a few months. For sellers who find themselves spending a long time in this phase with one buyer, they should keep their conversations with other buyers open and see which is the most motivated and professional. Additionally, market conditions can shift quickly, so sellers should stay up-to-date and see if any aspect of their listing needs modification to adapt.
Stage 4: Negotiation
Once a seller has found a suitable buyer and both are serious and motivated for the sale, both parties move into the negotiation phase of the life cycle. Initially, this phase is heavily buyer-driven, with the buyer investigating the company more thoroughly. The buyer may request action items like inventory checks, financial record audits, and any client lists so they can certify that claims made by the seller are accurate and truthful prior to signing a sales agreement. The findings can either bolster the original price if positive, or diminish it, so sellers should make sure that they are very thorough during the listing stage to be certain that the price they ask for is reasonable and the claims made are accurate.
As mentioned in that stage, this is where a valuation can become an invaluable asset and tool for a seller during negotiations. If a buyer offers a lower price than what the seller deems acceptable, a recently-conducted valuation can be used to justify the price baseline of the business. Aside from price alone, negotiations can also include determining whether the buyer will obtain the company’s equipment and machinery, software and hardware, intellectual property, patents, real estate and more. Both parties must be thorough in their asset negotiations to ensure that the necessary investigations for those assets are performed in a timely manner.
The duration of this stage is also dependent on the parties involved. If the teams the buyer hires to investigate the business, like accountants or inspection agents, work slowly, delays can range from a few days to weeks. Other factors involved are the general speed that both parties respond to requests with and the duration it takes for any tangential paperwork to be processed. Also, the amount of investigation and work tends to scale up as the size of the company’s operations increase. Generally, negotiations for smaller businesses can last for a few weeks to a month, while a larger business can require a few months before both parties are satisfied and ready to close.
Stage 5: Closing
The last stage of the business sale life cycle is closing. At this stage, both parties should feel satisfied, secure, and confident in their respective decisions. When this stage is reached, generally all that is left to be done is the paperwork, transferring assets and funds, and having the buyer assume ownership of the assets. After the seller receives the money, which would have been in escrow until now, they must settle any associated fees with any professionals contracted, like lawyers and accountants. Closing generally takes a few weeks to a few months for small and medium-sized businesses, and once all fees have been paid and all paperwork signed and filed, the seller has successfully exited the final stage of the business sale life cycle.
So, How Long Will Your Business Take to Sell?
There is no definitive, universal answer to this question, as there are a multitude of factors to be considered, some of which are outside of the buyer’s or seller’s control. However, for smaller businesses, the typical minimum duration for the entire life cycle to be completed is around 6 months. However, the information outlined in this article includes steps a seller can take to help promote an expeditious sale. So, if time is an urgent factor in selling your business, be certain that your expectations are aligned with reality and that you are setting yourself and your company up for an efficient sale.