How To Sell Your Business: Simple Guide to Exiting (Without the Stress)
In this guide, we’ll explain exactly how to go about selling your business from start to finish. Whether you’re just starting to consider a sale, trying to choose between different buyers, or wondering whether to work with an investment banker – we’ve got you covered.
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You’ve put extensive amounts of time, effort, money, and sacrifice into starting and growing your business.
Now you’re thinking about selling it— and finally being compensated for all of it!
This should result in the biggest payday of your life. In fact, most small business owners look to selling as a glorious stage in their entrepreneurial career and a fairly simple feat. All the hard work has already been done— you created a successful business.
Selling it should be easy, right?
Selling is stressful. It’s complicated. It’s definitely not easy.
On both the emotional and logistical level, the process of selling a business is complex.
If you know that it’s time to sell, then you want to maximize the sale price and ensure that you sell your business for the price it’s worth— with the appropriate compensation for everything you put into it.
But how can you do that?
Here’s the answer: you need to be a smart seller. This involves understanding all the steps involved in the process of selling your business, your options, and determining which path is the best for your particular situation.
The following pages will show you everything you need to know in order to become a smart seller. They’ll equip you with the knowledge needed to capitalize on that upcoming payday, in the easiest way possible.
1. Clean up your books
Prospective buyers are going to seek as much objective transparency as possible when contemplating whether or not to make you an offer.
The primary source of this objective transparency will be your books.
The average buyer will typically want three years’ worth of the following documents:
- profit and loss statements
- balance sheets
- bank statements
- tax returns
- supplier and vendor contracts
- customer data
A diligent buyer could ask for up to five years’ worth of this information, according to Barbara Findlay Schenck, author of “Selling Your Business For Dummies”.
Keep in mind that your financials are likely have a ton of eyes— from lawyers, accountants, business valuation specialists, prospective buyers, business brokers, etc. In this sense, it is recommended to turn to an accountant for help. They can help you avoid potential problems by drafting clean, verifiable financial statements and through the assurance that all income is accounted for. If any income cannot be accounted for, this will throw up huge red flags to potential buyers, which could ultimately limit your selling options.
An accountant can also act as a financial advisor to clarify what you own, what you owe, taxes, the structure of your deal, and what will be included in the sale. They can also help you identify adjustments to your earnings which could help increase the valuation of your business. These are all things you need to discuss with your accountant early on.
They can work with you to generate a picture of your income over time and assign objective value to your business, through past earnings, cash flow, balance sheets, equity statements, and the company’s performance related to its larger market conditions.
It’s difficult to understate the value of a reliable accounting and bookkeeping solution. Accounting is the language of business, and to you want to make sure your numbers correctly characterize the operations of your business.
You may not need to be fully GAAP-compliant or audit-ready to sell your business, but you’ll want to understand the roadmap to that point from where you are today. If the sale of your business will involve leverage, any lender will want to understand how your financials compare to GAAP and will have regular reporting requirements.
Making sure your accounting systems and controls are in order is a great first step to maximizing your valuation. FreshBooks and QuickBooks are particularly user-friendly, which can help you get started if you’re not all that familiar with basic accounting and bookkeeping principles.
2. Determine the value of your business
This one isn’t so objective— most business owners struggle to figure out the value of their company.
If the same applies to you, this is normal.
There is one thing to keep in mind here: your company’s value will depend on its specific industry and the size of your firm. However, we can get a general idea of its worth, plus or minus the specific details.
On average, small businesses are worth anywhere between two to six times their cash flow. In general, as the cash flow increases, so does the multiple. The range is broad here as a result of so many factors coming into play. These include the company’s overall financial health, industry trends, market demand, location, and other variables.
Some opt to have a third-party valuation to provide a realistic estimate. This will come at a cost though, which is usually a set fee ranging from $3,000 – $7,500 for businesses selling around $2 million or less. In this case, a qualified professional will review both your business and its environment. The review will look at sales, receivables, inventories, outstanding debt, liens, assets, business threats, and opportunities with objective value. In addition, a third-party valuation can help a buyer defend the price of a business when in negotiations with a potential buyer.
Now, certain situations can add or lower value. These could include having a big deal booked for the immediate future, an annual sales growth trend (typically of 25% or more), or proven repeat business. Likewise, a high degree of customer concentration, low gross or operating margins, and participation in a cyclical industry could all negatively impact valuation.
Another valuable aspect could be a convincing plan to continue growing the business in the future. This is often referred to as the “sizzle” of the deal for the buyer because it creates the case for continued growth. This should be shared with discretion, though, as you don’t want to give away valuable ideas or strategic secrets for free.
Lastly, search for similar businesses that sold in the recent past. Expect sellers to use these as guidelines when determining the value of your own business. If you think your business is more valuable, be prepared to explain why.
3. Prepare your exit strategy
An exit strategy should be prepared during every stage your business demonstrates financial strength or long-term viability. What I mean here, is that the best way to prepare an exit strategy is to already have one.
Too many times, unexpected factors— such as an aging owner, burnout, a lack of interest by children in taking over the family business, or a competitive threat— lead a small business owner to sell. “Before any unforeseen situation forces you to sell, make sure you have an exit strategy in place,” says Ed Knox, founder of Yarmouth Venture Group, an advisory firm to investors seeking to invest in small businesses.
At the bare minimum, every exit strategy needs to have three key components:
4. Keep running the business as normal (and improving it!)
Remember when we talked about the different factors that determine your company’s value— specifically a sales growth trend? This can add significant value to your business. That’s why, when you’re getting ready to sell, you need to make an effort to boost sales.Everyone cleans their car before they put it up for sale. Don’t overlook the simplicity here: The nicer your asset looks, the more a buyer is willing to pay for it. The same is true for your business.
If you can show that sales have been improving, this will tell potential buyers that the business has room to grow as it is— and can make even more profit than it already does.
With that in mind, it’s 100% worth it to spend a little extra effort in marketing, advertising, or even referral programs for existing clients. This can help increase your sales figures, and ultimately strengthen your position when serious negotiations begin.
Additionally, your deal structure might include an earnout, where only a percentage of the final sale is paid upon the completion of the deal. The rest will be paid from the future profit of the business. In this case, the continued success of the company is crucial to you receiving the full amount on the price tag. You therefore need to set the business up for continued success.
At the same time, continuing to run your business when you’re preparing to sell isn’t all about sales. There’s a management— and therefore human aspect— too.
If your company is dependent on you or select staff, a buyer could see this as a red flag. If this foundational staff leaves, the business might come crumbling down. That’s why, as the leader of your organization, you need to ensure that the company can operate just as smoothly without you. This will likely require additional training, putting systems and processes in place that aren’t reliant on a single person, and perhaps even a new organizational structure.
5. Get professional help
When selling your business, you typically have three options: a direct sale, enlisting the help of a business broker, or turning to an investment banker.
Direct Business Sale
Compared with the latter two options, a direct sale will be cheaper up-front since there are no associated fees. Yet that doesn’t necessarily mean it will bring you the highest sale.
Preparation for a direct sale will include researching similarly sized businesses in your industry that have been sold recently. Transactions of comparable companies are a good way to get a sense of what your business might sell for. However, be very skeptical of any multiples you hear from fellow business owners. The concept of a multiple seems simple but in practice is very nuanced, so it’s better to think in terms of absolute dollars than multiples at this stage in the process.
It’s also an option to reach out to closely associated— yet different— businesses in your industry and let them know you are considering strategic alternatives for your business. For example, a coffee mug manufacturer could contact businesses in other aspects of the coffee industry to let them know a profitable business is for sale.
If successful, this direct sale method will bypass a business broker or investment banker— and their associated fees— altogether.
Using a Business Broker
However, most companies with less than $5 million in annual revenue turn to a business broker when selling their business. A business broker usually charges between 5%-10% of the sale price, but sometimes as much as 15%. A broker will usually perform a business valuation, prepare a prospectus, and then tap into a large network to find potential buyers. It will be beneficial to find a business broker who has previously completed deals with other businesses in your same industry.
Therefore, while lawyers can help structure a deal, it is the business broker who finds a buyer. And a good business broker is one who finds the buyer that is willing to pay you the most money for your business.
Working With an Investment Banking Firm
Another option is an investment banker. Investment bankers – and investment banking firms – function like business brokers on steroids. While business brokers generally serve smaller, less sophisticated businesses, often times with a local market, investment bankers help businesses with a regional or national market.
When an investment banker is hired, the buyer is usually another company or a private equity firm. Some are even licensed by the Securities and Exchange Commission (SEC) to deal with publicly traded companies. When considering either a business broker or a banker, you’ll want to make sure they are a FINRA-registered Broker-Dealer.
In any case, an investment banker will perform a valuation, prepare all the documentation needed for a sale, perform prospective buyer screening, organize visits to your facility, and advise during negotiation of the legal documents. Investment bankers usually have senior level business and investment banking experience. They are very helpful in connecting strategic business decisions with the impact those decisions will have on the value of your company.
Investment bankers will also help you throughout the entire sale process, to educate and inform you on the various options and potential implications of each decision you have to make. They will also be able to reassure you that certain transaction developments or buyer requests are normal in a sale process.
The most popular payment structure for an investment banker includes a retainer between $50,000 – $100,000 with a 1% – 5% cut of the total sale once successful. Many investment banking firms adhere to the Lehman Scale, which assigns commissions based on deal size. Usually, the retainer will be credited against the final fee when the sale is complete. You can also expect to see valuation-based fee thresholds that are negotiated in your engagement letter with the investment banker.
Ultimately, a direct sale will be cheaper since there are no up-front fees. But the expertise of a business broker or investment banker— who better understands your industry and its market— is likely to help you sell your business in the higher end of its value-range.
6. Find the right buyer
There are several types of buyers that you need to be aware of.
Financial buyers are basically investors who are primarily interested in the cash flow of a company. They buy a business for the return they can achieve and for the future exit opportunities that may arise, such as an IPO or a future sale. Most financial buyers will scrutinize the financial statements of a company, as they value a history of consistent earnings, and especially, earnings growth.
Strategic buyers are different. They buy businesses because of long-term goals they have with a separate, pre-existing business. They might want to acquire your company because of plans for a vertical expansion (meaning customers and/or suppliers), a horizontal expansion (breaking into new markets), the elimination of competition, or strengthening one of its own weaknesses (technology, advertising, manufacturing, research and development, etc.).
There are also individual buyers. These will typically want to replace you as the owner and operator of the business. Of course they want to make money, but they also have a high-value on self-employment.
Another option, which can surprisingly be unknown to a large portion of small business owners, is selling to a private equity firm (PE). PE firms raise capital from investors like university endowments, pension funds, insurance companies and high net worth families – investors who have a longer investment time horizon. This capital is put into private equity funds managed by investment professionals, and these funds have certain legal mandates. Funds come in all sizes and with all sorts of strategies.
For example, some funds can only invest in oil or gas companies, or technology firms, or sometimes they are industry agnostic. Others are focused only on companies in the middle- or lower-middle market. Either way, PEs bring a lot of benefits to the table.
One advantage of selling to a PE fund is that you don’t have to worry about their funding. Because funds invest capital that is already committed, they will have significant amounts of liquidity. In addition, they usually have an extensive staff of talented and experienced professionals.
They don’t want to put money into a business that won’t perform well— so they have the staff to make sure that doesn’t happen. They also won’t waste your time. After one or two meetings, you’ll know if they’re a serious buyer or not.
At the same time, PEs can not only help out owners who are looking to exit, but partially exit. In the latter case, a PE is likely to purchase a majority equity stake in your company, giving them a controlling interest, while you maintain a minority stake in your business.
Keep in mind though, this particular case will result in a significant change from what you’re used to: you will now have to answer to someone.
7. Fielding offers from buyers
Some think selling a business is as easy as reviewing offers from buyers and negotiating the best one. It’s not.
All too often, deals fall through due to a lack of financing. A large portion of small business transactions are funded in part through either outside equity or third-party loans. Sellers frequently spend time and resources on potential buyers who are, in the end, unable to secure financing. As a by-product of wasting your time, this will also limit the amount of interaction a seller has with legitimate buyers.
In addition, you need to be able to spot real buyers from suspicious buyers. Selling a business involves sharing lots of sensitive, internal information. This type of data is extremely valuable to your competitors. If you share too much information early on, you risk giving up too much information to a competitor without any actual sale taking place.
Whenever you’re at a stage where you need to share sensitive information, you need to know who the prospective buyer is.
In any case, you can mitigate risks through Non-Disclosure Agreements (NDAs). These will legally protect against the transmission of sensitive information. However, you should consider hiring an attorney to serve as an arbitrator. You also need to understand that going after an entity for violating an NDA is costly and time-consuming in and of itself.
Lastly, from the start of your interaction with a prospective buyer, you should be analyzing their fit within the company culture. If there is friction here, it could lead to the buyer bailing during the later stages of sealing a deal.
8. Hand off contracts and vendor relationships
Another part of the sale will include existing contracts and vendor relationships.
Usually, these will be defined in the Purchase Agreement – either a Stock Purchase Agreement (SPA) or an Asset Purchase Agreement (APA). A Purchase Agreement is a thorough document, usually 25-50 pages. In the case of an asset purchase, the agreement can cover all assets including both physical and intellectual property, as well as liabilities.
As mentioned earlier, sellers should be aware of the tax and liability implications of a sale structured as an asset purchase versus a stock purchase.
Purchase Agreeements include noncompete agreements, asset listings, employee agreements, and even guidelines for the use of website domain names. According to attorney Harry Styron, a legal consultant for small business transactions, basic APAs have fees that typically run in the $750 – $1,500 range.
Normally, with an APA, contracts will require the consent of all parties involved. It is less common that this consent will be needed in an equity sale (e.g. an SPA) or merger agreement.
If you have any existing vendor relationships, or B2B relationships in general, be prepared to give them a heads up of the ownership change and introduce the buyer when the deal is done.
Additionally, buyers can frequently require a seller to remain in an advisory capacity for a set period of time. Buyers want to have a term of overlap where the seller continues to help the business, answer questions, provide guidance, and ensure a smooth transition.
Often times, this period can have a duration of one year, but obviously, as a seller you want this period to be as short as possible.
9. Close the deal
As you can see, selling a small business is extremely intensive and will require significant amounts of time, collaboration, and other resources. If you finally made it to the point where you’re about to close a deal— congratulations!
Once all the details are agreed upon, the parties will sign contracts to transfer ownership. You’ll get paid, and the buyer will legally possess ownership of the business.
There’s just one last thing to keep in mind: It is typically better to get paid up front.
There are many reasons for this, importantly:
- First, it allows you to walk away from the business according to your exit plan.
- Second, selling your business will have some expenses associated with it. You’ll have to pay fees from lawyers, accountants, and likely a business valuation specialist, business broker, or investment banker. Ensuring you get paid right away will enable you to pay all outstanding fees right away.
- Lastly, getting paid up front is perhaps the only way to know your buyer has all the funds needed to complete their side of the bargain.
Sometimes, buyers will negotiate for periodic installments. These can be associated with the future and ongoing success of the business. Regardless of how promising that future looks to you, the business will ultimately be under new management, and you don’t want to take any risks in this process.
Every sale is different, but it is recommended to try to get your sale amount up-front before accepting a deferred consideration or an earnout option as mentioned earlier. When considering options from multiple buyers, it’s important to consider the structure offered and not just the headline number. A higher offer with more of the consideration contingent on performance or paid in installments may be less attractive than a lower, all-cash offer.
Finally, once all of that is complete, there’s one last super important step: celebrate! Buy that special bottle of champagne and do whatever it is you dreamt of in your moment.
Mistakes to Avoid When Selling Your Business
There are several common mistakes that you need to be aware of:
1. Holding out too long for a higher sale
Selling a small business typically takes 1-4 years. Therefore, a long-term plan with a proper exit strategy, updated financial records, and the help of a business broker or similar expert can ensure that you make the right decision— whether that means accepting an offer or turning it down. Knowing what you can expect as a fair offer will help you accept the right offer.
2. Choosing the wrong representative to sell your business
Turning to a business broker, investment banker, valuation specialist, or similar expert is a great idea. But you need to make sure they’ve conducted business transactions in your industry in the past. Don’t just hire the first broker you meet— taking the time to interview several reps, conducting reference checks with past clients, and looking at realistic outcomes can save you significant amounts of time in the long run.
3. Letting a business broker do all the work
Sure, you pay a business broker to assist you with the sale of your business. But that doesn’t mean you can just kick your feet up and wait for them to call you with offers. You need to continue improving your business to make it more attractive. You also need to help market and advertise the sale of your business. No one is more passionate, motivated, or knowledgeable about your business than you are. But all people are passionate about making money— something they can do if they buy your business. You need to spread that message to the right crowds as well. Just be sure to do it in a confidential manner— you don’t want the general public to know your business is up for sale, as it can negatively affect sales.
Your business is profitable and has a consistent history of growth to boot. But that doesn’t mean you should be so confident that you neglect the key steps to sell your business. You also shouldn’t think that you’ll get top dollar easily. You put lots of blood, sweat, and tears into starting and growing your business. But a buyer is going to give you an offer based on objective, quantifiable criteria. This is when hiring an expert, such as a business broker, comes in handy.
5. Thinking you can sell your business by yourself
Remember— you’re an expert when it comes to operating and growing your business. You’re not an expert when it comes to selling businesses. I get it: the brokerage fee would be nice to keep. But you know what would also be nice? Getting the higher end of your company’s value deposited into your bank account! With the exception of rare cases, this will usually require professional help.
6. Failure to pre-qualify buyers
Sellers have a tendency to either not qualify buyers at all, or wait until later in the process out of a fear of scaring the buyer away. This is a common misconception, however. Passing a pre-qualification early on can get the buyer even more psychologically invested in the sale. Additionally, working with several potential buyers who cannot secure the necessary funds— but don’t reveal this until several months into working out a deal— will waste your time, resources, money, and energy.
7. Pricing problems
The price of your business is the single most important factor in determining how long it stays on the market. Inexperienced sellers (the majority of small business owners) will typically set a price on the high side. Sellers who receive an objective, third-party valuation or who are more in touch with their market by conducting thorough research on similar sales in recent past—if that’s available— are more likely to experience a smooth sale.
8. Allowing word to get out that your business is for sale
You need to keep the fact that your business is up for sale under wraps, with only those who need to know, actually knowing. If this doesn’t happen, there could be negative consequences on your relationship with your staff, and your sales. If you opt for a direct sale, you need to be careful about the audience of your marketing efforts.
9. Ignoring transition issues
Many buyers will want the seller to maintain a supervisory role to ensure a smooth change of ownership. As a seller, you need to clearly hash out these details before closing a deal.
10. Not increasing your company’s value
Certain factors, to include a recent sales growth trend, can add significant value to your business in the eyes of a buyer. This can make your business stick out when compared to similarly sized businesses in the same industry. Added efforts in marketing and advertising to kick up sales can help you get more for your business, and can help it sell quicker.
11. Being unprepared to defend your valuation
Whether or not you performed your valuation yourself, you need to be prepared to defend it with objective figures. You worked hard to create a business of value, and the valuation needs to demonstrate that value objectively. You need to be able to defend it in a clear and impartial manner which will be difficult to refute.
12. Not understanding the motivation of prospective buyers
It’s easy to group buyers under one blanket. After all, they all share one common similarity: they’re interested in buying your business. But importantly, they might want to buy your business for very different reasons. There are different types of buyers out there, and you need to understand them so you can better understand the prospective buyers you talk to. For example, financial buyers will see your company as an investment. They invest in your company by buying it, and they expect to see a positive return through annual profit margins, and successful exits such as a future IPO. On the other hand, strategic buyers might buy your business because they it as competition to their existing business. Understanding the motivation of each and every buyer will help you negotiate better and land a deal smoothly.
Frequently Asked Questions When Selling a Business
How much is my business worth?
Lots of factors come into play here, including your industry, current market atmospherics, the size of your business, recent trends in growth, etc. Usually, your business is worth a multiple of its earnings, often times anywhere from 2-6 times its annual profit. But in the end, your business is only worth as much as a buyer is willing to pay.
How do I find out how much my business is worth?
The best option here is to turn to a business broker or valuation specialist. For a fee, they’ll examine the internal operations of your company— profits, recent growth trends, assets, etc.— as well as external components to see where your business fits in its particular market. All of this will be used to give you a reliable range of how much you can likely get.
How long does it take to sell a small business?
Generally, a small business will take anywhere from 1-4 years to sell. The larger the business— and the higher its value— the longer it will take to sell.
How can I sell my business quickly?
The most important factor in the speed of a sale is an accurate price tag from the start. This is why turning to a valuation specialist or business broker is so valuable.
What kind of business is the best to sell?
Businesses in every industry can be sold. The biggest difference across industries is the valuation of businesses in a particular industry. Currently, some of the most valuable industries include technology, property management, home services, logistics and transportation, and service companies.
What should I look for in a business broker?
Finding a business broker who has previously completed deals in your industry is strongly recommended. You want someone who knows and understands your industry better than you.
When is the best time to sell my business?
Timing is a crucial factor in determining how much you’ll get for your business. The best time to sell is always when the business is doing well, and you’re not forced to sell. In general, a recent increase in sales and profit— signaling continued growth into the future— will result in a buyer paying more.
Can you sell a minority shareholding (less than 50%)?
It is possible to sell a minority shareholding. However, if your company is private and relatively small, there is little-to-no market for such shares.
Can my accountant sell my business for me?
Your accountant should not be selected to sell your business. If you want to hire help, you should turn to a business broker. The primary reason is this: selling your business is primarily done through marketing. Your accountant is not a marketing specialist. Instead, look for a business broker who is an expert in your particular industry. They will market the sale of your business to an existing network of potential buyers.
Do I need a solicitor and accountant to sell my business?
With the exception of rare cases, yes. A solicitor— whose background is preferably in corporate law— will create the definitive sale and purchase contract. An accountant will be needed to prepare all of the financial information that prospective buyers will need to know. The accountant will also be needed for tax preparation.
How can I protect sensitive information about my business sale?
The best bet here is to not release sensitive information until you absolutely have to. Make sure the buyers you talk to are serious. In addition, make sure the parties you share sensitive info with sign NDAs.
What is an NDA?
A Non-Disclosure Agreement (NDA) is a legally binding document that protects sensitive information. All parties who sign an NDA agree to not share certain information, depending on the specific criteria of the document. It should be noted however, that enforcing an NDA can be very difficult, costly, and time consuming.
Who can sell my business for me?
Your best bet is to leverage a business broker or an investment banker, depending on the profit your business generates. Companies with less than $5 million in annual revenue will turn to a broker-dealer. A higher revenue will probably require an investment banker. Both tiers of specialists will tap into a large network of potential buyers, market your sale, and advise you along the way.
Someone wants to buy my business. What should I do?
The first thing you need to do is verify whether or not this buyer is serious. If they are, you will likely need professional help from a business broker or investment banker to complete a fair deal.
What is an IM?
An Information Memorandum (IM) includes some basic information about a business such as its history, its current position, the reason it’s up for sale, and some financial figures. It should not include confidential information such as existing customers. An IM should only be given to parties who have signed an NDA.
Who is likely to buy my business?
It’s hard to say, as every industry is different. Even in the same industry, buyers will also be different. Different buyers will have different reasons for wanting to buy your business. Your best bet is enlisting the help of specialists to find a buyer for you— they’ll know the right place to look and how to attractively market your business.
What is a teaser document?
This document will feature a brief paragraph to elicit enquiries from interested parties. The name of your company should remain confidential by not being included in the document.
What is deferred consideration?
Sometimes, the agreed upon purchase price is not paid up front. With deferred consideration, a percentage of the price can be paid at a later date and can even be dependent upon the company achieving specific results or profit in the future. This can be used to motivate sellers into sticking around in an advisory capacity (after the deal is done) to ensure continued success for the new owner.
Should I tell my employees that I’m selling my business?
Each business has specific needs. Usually, employees are not told of the sale of a business until both the seller and buyer decide the time is right.
Can I keep my cash on hand and accounts receivable?
Frequently, yes. The majority of business sales are asset sales where the seller does keep all receivables, including cash, at closing. However, this is negotiable, and the seller and buyer need to agree on such terms prior to completing a deal.
What taxes will I have to pay when selling my business?
Selling a business can be a very complicated tax event. It is crucial that you talk to an accountant at the very start of the process, when you are first considering selling your business, in order to set up the ideal tax structure. The applicable taxes will depend on a variety of variables, including the structure of your sale. That’s why you need an accountant’s expertise from the get-go. Taxes can include capital gains, ordinary income, dividends to shareholders, and recapture of depreciation.
What types of business buyers exist?
Generally, there are three types: 1) An individual buyer has the aim of replacing you as owner. Their primary motivation is self-employment. 2) A financial buyer will see your business as an investment. Their motivation is to make financial gains from that investment. 3) A strategic buyer see’s your company as an asset. They want to buy your business to either add it to their own business or reduce competition.