Selling a Professional Service Business

selling a professional service business

Selling a professional service business is much more complicated than selling a regular business, in no small part because it often indicates you are ready to retire or move into another venture.

Before you sell, you need to be sure that action will support your next move – and a business broker can help make sure you’ve made the right decision.

Ready to start?

Selling a Professional Service Business

sold my business now what

Promise of Confidentiality

As a business broker specializing in the sale of professional service companies, one of the questions most often asked by potential clients is how my firm can maintain confidentiality while selling a business and what security procedures we have in place to protect our clients.

Highest Selling Value

With an incredible number of professional service companies exiting business ownership for retirement, it’s imperative that sellers make their businesses stand out from others on the market. In this article, we’ll discuss how to get the best price for your professional service company.

Am I Ready to Sell?

What is your motivation for selling? Selling a professional service business requires significant time, effort, and emotional commitment. Ask yourself, “Am I positive I want to sell, or am I just thinking about the idea?” Does your spouse support selling now?

Do I Need to Pay Tax on the Sale?

A Structured Sale enables the seller to defer up to 100% of sale year taxes. Taxes can be deferred for a few months up to several years. A Structured Sale can give the Seller or the owner of the professional service business a lot of flexibility in managing tax payment options

Questions?

If you have questions or would like more information about a specific professional business services sector, call us today at (916) 570-2674 or click the link below to get started.

Are you Selling a Professional Service Business?

Selling a professional service company can be a long and complicated process. Even with a good exit strategy in place, you will face many hurdles, lots of paperwork, and potential setbacks.

Here are 12 steps to help you learn more about how to sell a professional service firm and how to make your professional service business more appealing than others on the market.

 

Preparing to Sell a Professional Service Business

 

1. Think Like a Buyer

When preparing a professional service business for sale, you need to start by thinking like a buyer.

You know your company is great, but how would an outsider see it? Imagine you’re buying a company and trying to do your due diligence. What would you look for? What might be a red flag?

If you can get in this mindset, you can rectify factors that may turn off strategic buyers and prevent any setbacks.

2. Paperwork

One of the first things a strategic buyer will want to see is your documents. It can take a while to get these in order, so it’s best to start gathering and organizing long before you put your business on the market.

Some of the paperwork you will need includes:

  • Tax returns and financial statements from at least the past three years
  • Different markets you serve in your business and the portions of your income that come from each market
  • A list of your ten highest volume customers and the amount you make from each
  • A list of aging accounts receivable and payable
  • A list of all the equipment in your facility, with year, make, model and serial number, and other details on each
  • An inventory list
  • Detailed information about employees (you won’t distribute this information during the initial stages of selling)

 

This list is by no means exhaustive. You’ll need to prepare much more before putting your business on the market. Once you find potential buyers, they may have requests for other types of documentation as well.

3. Are your employees dependent on you?

Many business owners in the professional services business have trouble delegating tasks and wind up doing much of the work themselves. While no one knows your company the way you do, it’s important to make sure your staff can carry on with the majority of your business’s functions when you’re not there.

Here are some key tips on selling your business in the professional services industry.

If you are the only one who knows how to do a large part of the business, you may turn off buyers. Most professional services business buyers want a turnkey business, not an investment where they will have to spend hours training employees or taking over the bulk of the work. As an added benefit, by training your employees, you are ensuring that the business can function as you transition out.

4. Processes

Many business owners in the professional services industry have a system of running their business that is entirely in their heads. You know the ins and outs of your business and you are the one who keeps everything running. While this may work as long as you are with the company, a potential buyer will want to know what processes are in place.

Therefore, you need to create an operations manual for each of your processes. Work with your employees to develop this manual by getting everyone to detail exactly what they do. Potential buyers will be impressed with a company that’s ready to go as soon as the change of ownership happens, and your purchase price potential will be greater. As a bonus, if your employees are trained to do what you do, your business will carry on just fine, even if you have to be out for an extended period or if an employee leaves your company.

5. Get Everything Ready

If you have neglected cleaning and organizing your facility, it’s time to get it in order. Go over everything, from machinery to inventory to paperwork. Get rid of anything you do not need and clean up everything else. Paperwork should be organized, and the office should be clean. Depending on what niche you focus on, it may not be possible to get everything perfectly orderly, but make your best attempt (or hire someone to).

6. Check the Law

If your California business in the professional services industry isn’t following local and federal laws, most buyers will turn away immediately. Read up on the laws and go through every step of your process to ensure you are in compliance. Also, make sure that all relevant employees understand the law.

7. Accurate Records

Go through your records and make sure that everything is up to date and completely accurate. A buyer will certainly do their due diligence, and if it looks like you’re not completely truthful, they’ll head elsewhere.

Go through your records of profits and losses and make sure they line up with what’s stated on your tax return. If your records and tax returns do not match, do not try to fix this issue yourself. You will need a CPA to reconcile the two, and you will also need a reasonable explanation for why there was an incongruence in the first place.

8. Financial Obligations

A buyer does not want to have a company that has a multitude of unresolved financial transactions. Make sure everything is current when it comes to money because no buyer wants to take on a business with a lot of pre-existing obligations.

Simply put, if you have any accounts you have not paid, take care of them as quickly as possible. If clients owe you, work to get their accounts current. If you owe anything in taxes, make sure to pay. Also, check to see if your business has any liens in place. Your finances should be clear and ready to go when you hand over your business.

9. CPA

Once you’ve gathered and organized all of your financial documents, it’s necessary to review everything with your CPA. Your CPA can look over everything, make sure you’re current and tax-compliant, and advise you on any errors.

A CPA can also help you create records that show the true potential of your business. In most cases, the tax records of your business are set up to prevent paying a lot back in taxes. However, once it is time to put your business up for sale, you will want records to show your business’s potential for profits. It is important to let a CPA restructure these records instead of doing it yourself.

Additionally, you need to consider the taxes you will pay after the sale. A CPA can help you go over the terms and help you figure out how much profit you will have left after paying taxes. It is especially important to see how much you will actually get if you are retiring, as you’ll want to ensure you have enough to maintain your current quality of life.

10. Hire a Service Business Intermediary

The steps to creating an exit strategy and selling your business in the professional services industry are arduous and complicated. It can take you many hours to get everything in order. If you are still working full-time running your business, you simply may not have the time to do both.

If this situation applies to you, you may want to hire a California-certified service business intermediary. A broker knows exactly what to get your professional service business ready for sale. They can guide you through each step of the process, help you avoid any errors, make your business more attractive to buyers, and ultimately help you get a better price.

Types of Professional Services Companies

There are many California professional service businesses for sale.

The Business Services sector is incredibly varied, and a cornucopia of different businesses fall under the umbrella of Business Services.  Are you unsure whether or not your business is considered a service business? Read on, as we provide a comprehensive list of Business Services businesses. 

Employment Services

Employment services make up most service businesses, driving nearly 40% of the revenue in the category. Employment services break down into three main categories: 

  • Placement agencies
  • Temporary help services
  • Professional Employer Organizations (PEOs)


At a placement agency, the agency works to place employees from their pool of qualified talent in permanent positions with a customer company or client. Temporary help services serve a similar function, but the workers they place are hired temporarily, typically replacing a long-term employee on leave or during periods of high demand. 


PEOs are contracted by a customer company to provide employees to serve specific functions, and it’s most often related to human resources. 


Preparing a staffing agency for sale is typically one of the more manageable tasks if you are selling a service business. The evergreen demand for these services, coupled with top agencies’ desire to grow through acquisitions, make it easy to sell compared to some other business services. 

Building Services

Another major category within business services is building services, including landscaping, carpet and upholstery cleaning, janitorial services, and more. These service businesses can be incredibly lucrative, as recurring maintenance or ongoing service is standard among building service companies.   However, they can be challenging to sell in California as the business owner may need a specific license to own and operate the business and some of these licenses take time and experience to qualify.

Waste Management Services 

Waste management services include all businesses related to collecting, treating, recycling, or disposing of garbage. It’s common for a waste management company to provide every phase of service. More specialized companies deal with a particular facet of waste management, such as environmental remediation. 


A dumpster rental business for sale or a recycling business for sale in California is typically a good investment, as lucrative service contracts are standard in this sector. 

Security Services

Commercial security companies provide various security-related services, including the installation and service of alarm and monitoring systems. Many companies also provide security personnel and vehicles for on-site security needs. 

Travel Arrangement Services 

Travel arrangement services are a small and specialized area of business services, and their services are usually only retained by large corporations whose employees do lots of traveling. Businesses with travel budgets above $1 million will work with a travel arrangement provider who will broker the best deals for travel services and accommodations with airlines, hotels, and rental car agencies. 

Professional Services 

Another large sector of business services is professional services, which cover a broad range of different businesses. Finding a professional service business for sale is common, as there is such a range of other services that fall under this category. 


Professional services include things like accounting, law offices, IT services, consulting services, and much more. Here are the common types of professional services businesses you’re likely to see in the market: 

  • Engineering firms for sale
  • Architecture firm for sale
  • IT consulting business for sale
  • Land surveying business for sale
  • Civil engineering firms for sale
  • Structural engineering business for sale
  • Consulting engineering business for sale
  • Design business for sale 
  • Law firms for sale
  • Financial service business for sale

Again – knowing where your business falls in among these categories can help you coordinate your buying and selling checklist, along with knowing the businesses in the services sector market size. 

What is the Role of a Certified Business Intermediary in Selling My Business in The Professional Services Industry?

Most business owners are experts in running their business, but that doesn’t make them experts when selling it. Selling a business is a nuanced and challenging process that can involve careful consideration of laws and regulations. The larger or more complex a company is, the more involved the sale process will be. 


This is where a business intermediary comes in. Business Brokers work with California companies for sale and provide fully managed service from when you decide to sell your company until the deal is complete. A broker most commonly works with main street business deals ( $500K to $3M), but they work with large businesses for sale, too. 


A business intermediary is also an
 expert source for complex businesses with valuations that are tricky to determine. A business broker will carefully consider the competitive advantages and intellectual property of your company and ensure that your business’s valuation accounts for the things that make your business special. 

Buyer Analysis – Qualifying Potential Buyers

The selling of any business is unique, and potential buyers can include everyone from your competition to current employees, Private Equity Groups, strategic, synergistic, or corporate investors. Business brokers can work with any combination of potential buyers to deliver a sale that’s beneficial to all parties. 


One of the many
 challenges facing business owners when selling their business is understanding and qualifying their prospects. Often, owners end up divulging proprietary information to competitors as a show of good faith, only for the deal to fall through. When negotiating with former or current employees, owners often let their familiarity and fondness for that person cloud their negotiating strategy. 


Each potential buyer brings negotiation challenges to the table, which means challenges when managing California businesses for sale. Business Intermediaries help to shield ownership from potential negotiating problems, and they serve as a trusted advisors as they navigate selling your business for the best price possible. 

Exit Plan

One of the first steps a business broker will take is to develop the business exit strategy for the professional service company. This plan acts as a framework for navigating the process whenever there are California main street companies for sale. 


First, you will sit down with your business intermediary to formulate a strategy for putting your business on the market. This strategy will detail where to plan on promoting the sale, the potential buyers you are targeting, and what you will do to market the business. 


As the exit plan is being put in place, this is also when you’ll work to arrive at a firm valuation for your business. A qualified business broker will be able to accurately approximate business value while also setting proper expectations as you move through the sale process. 


Once the business is on the market, your business broker will market the business for sale and begin keeping a shortlist of interested buyers. Once there is a pool of interested parties to pull from, ownership and the intermediary will rank potential buyers and start the process of engaging with the potential suitors that can provide the best value for your business. 

Deal Origination

Once you’ve amassed a pool of potential buyers, the deal origination process begins. 


Deal origination, or deal sourcing, is the process of marketing the sale of a professional service business to potential buyers. Qualified brokers with main street businesses for sale leverage their network of contacts and use various tools to promote a sale and begin the process of striking a deal. 

In many cases, a  broker’s best source of new leads is the cold outreach efforts they engage in within their network. Business intermediaries maintain a carefully curated contact list of former and current clients, and they will send regular messages to keep them up to date with the various mid-market businesses for sale they are brokering.


These intermediaries also conduct business from their websites, and a quality website can serve as a dot connector between buyers and sellers. Those in the market to buy or sell a business have no doubt engaged in some due diligence to learn more about the area’s brokers as they search for a suitor that offers a strong fit to their needs. 


Brokers also use M&A deal platforms to promote sales. These platforms are essentially databases that provide a detailed list of available deals and the relevant information necessary to follow up with the appropriate parties.


With your business broker actively engaged in marketing your business for sale, it’s a matter of time before qualified offers begin coming in. All the while, your broker will continue to build and leverage relationships as you search for the most lucrative opportunity. 


Once the offers are in, you’ll work with your Broker to perform a careful
 market analysis to determine which offer provides the best opportunity for your business. With the most lucrative opportunity identified, it’s time to begin the process of negotiating the deal. 

Negotiating the Deal

As the buyer and seller enter the negotiation process, the first step is to draft a Letter Of Intent (LOI) that outlines the points of the deal that must be negotiated, protects both the buyer and seller and clarifies the nature of the agreement (i.e., merger, partnership, sale). 


Since an LOI precedes the actual negotiation process, a Letter Of Intent is almost always written as a non-binding agreement. But, it does set certain expectations and provides necessary protections for both parties. For example, an LOI typically includes a Non-Disclosure Agreement that protects both parties’ privacy as they begin the negotiations. 


Once a Letter Of Intent is in place to establish what must be negotiated, the buyer and seller begin ironing out any sticking points present, and the buyer starts the process of due diligence. 

Buyer Due Diligence 

When it comes to a financial agreement or any agreement between two parties, it’s critical that due diligence is being performed to ensure that the representations being made are acceptable for all parties. 


For the buyer, conducting due diligence amounts to doing thorough research into every aspect of the company they are negotiating to acquire. When it comes to mergers and acquisitions, a broker working on behalf of the buyer will conduct hard and soft forms of due diligence. 


Hard due diligence requires the study of costs, structure, assets, liabilities, and benefits associated with a business. This form of due diligence relates to the hard numbers and legal implications of the sale. 


Beyond the numbers behind a company, there is another less-tangible driver of the business’s success, and that’s the human capital that propels the business forward. Auditing this aspect of the business is known as soft due diligence. 


Soft due diligence is the study of a business’s corporate culture, employee relationships, and leadership. In many companies, the employees are what drive the continued success of the business. In other cases, a fractured culture and questionable leadership can be a significant red flag for an otherwise promising-looking deal. 


Buyers should practice both forms of due diligence to ensure that all parties are fully aware of the acquisition’s terms and characteristics. 

Due Diligence Checklist For Selling a Professional Service Business

While the onus is on the buyer to perform due diligence on the company they’re negotiating with, it’s in the seller’s best interest to make this process as straightforward as possible. This helps avoid the appearance of impropriety and sets the stage for an open and mutually beneficial negotiation process. 


As the business owner, you should expect prospective buyers to have questions they’ll need to be answered before they agree. This checklist covers the most critical documents and essential questions a seller will have when evaluating
 California businesses for sale. 

  1. Income statements
  2. Records of Accounts Receivable and Accounts Payable
  3. Balance sheets and Tax Returns from the last 3-5 years (including activity statements)
  4. Profit and loss records 
  5. Reconciled cash deposit and payment accounts
  6. Utility accounts
  7. Banks loans and lines or Letters Of Credit
  8. Minutes of management meetings
  9. Audit paper files 
  10. The seller’s claims about the business (i.e., why they’re selling, the business’s reputation)
  11. Privacy details of employees, partners, and customers
  12. Stock information
  13. Details about facilities, equipment, vehicles, and fixtures that are to be included in the sale
  14. Intellectual assets including intellectual property, trademarks, and patents
  15. Existing contracts with customers and employees
  16. Partnership agreements
  17. Lease agreements
  18. Automated financial system details
  19. Details of credit and historical searches relating to the business
  20. An independent valuation of the business

Warning Signs for the Buyer

Many red flags can arise during the negotiation process on both sides of the table. These are the most common issues for buyers that can signal your negotiating partner isn’t operating in good faith. 


The seller won’t disclose information related to their reasons for the sale, financial statements, contracts, and more

  • Seller doesn’t provide ample time to conduct due diligence
  • They won’t introduce you to key business partners like supplies or landlords
  • The business is embroiled in legal proceedings
  • The seller is looking to close the deal quickly
  • The seller has a questionable track record or credit history


Business intermediaries advocating for the seller must eliminate these warning signs to facilitate a deal. It’s common for one or more of these signs to be present during negotiations. They typically indicate that the seller is having a hard time parting with something they’ve worked so hard to build, which is a normal response to a business’s sale. 


It’s up to the broker to acknowledge any pain points and work through them to keep negotiations moving in the right direction. 

Negotiating the Deal – Buy-Sell Agreement

Buy-sell agreements are useful documentation that can help guide a business through its sale if there are two or more partners with ownership in the business.  A buy-sell agreement can help resolve any potential disputes before they arise especially if one owner wants to sell and the other does not want to sell.  

Negotiating the Definitive Purchase Agreement


Offering middle-market businesses for sale involves several steps. The
 M&A Advisor works closely with you and your legal advisor, especially while negotiating and finalizing the Definitive Purchase Agreement. This Definitive Purchase Agreement helps both parties reach their goals for the transaction and allows no room for error as it completely represents the legal wishes of each party. 


A good M&A Definitive Agreement is the lynchpin of a good transaction. Both seller and buyer exchange a large amount of information from different sources.  This is often over many months of conversations.  These exchanges are then condensed, with their individual interests, as best as possible into the Purchase Agreement. 

Items a typical Definitive Purchase Agreement may include:

  1. Treatment of Shares, Options, and any other Securities; if appropriate to the transaction
  2. Representations and Warranties
  3. Covenants
  4. Solicitation (“No Shop” clause)
  5. Financing
  6. Termination Fee (or “Break-Up Fee”)
  7. Indemnification
  8. Material Adverse Change (MAC) and Material Adverse Effect (MAE) Clauses
  9. Closing Conditions

The Definitive Purchase Agreement can have potential pitfalls, so your qualified business intermediary needs to keep the communication open with the Buyer and their Deal Team as well as the Seller and their deal team.

The M&A Definitive Purchase Agreement also needs to include details about tax obligations and consequences, especially if shareholders are involved.

Avoiding Pitfalls if you have a Buy-Sell Agreement

What if the seller is two or more individuals?

Many businesses have multiple owners or shareholders. Getting an agreement from a majority of the shareholders about selling the business and being willing to accept an offer can be challenging. One of the shareholders may not have any interest in selling the business at all or may want something specific most buyers will not be willing to agree. If this is the case, hopefully, there is a Buy-Sell Agreement in place as this will outline what each shareholder needs to do.  A few years previously I had a transaction with 9 shareholders.  One shareholder with a minority interest initially refused to sell.  Eventually, they changed their mind but it was stressful while this played out.

If no Buy-Sell Agreement is in place and there is tension between the owners and shareholders, the pressure to decide the future direction of the business may be challenging.  This article provides additional information for an owner or shareholder on how to avoid buy-sell agreement pitfalls. To help their clients, the business broker should understand the importance of assumption of liability, so their buyers and sellers know who is responsible for any lingering claims. 

The agreement also needs to have information about indemnity clauses regarding operations. For Business Services Companies, concerns about environmental liability, breaches of warranties, and other issues need to be factored into the indemnity clauses of a Definitive Purchase Agreement. 

Buy-sell agreements can be confusing, so it is helpful to learn how to understand buy-sell agreements and how a buy-sell agreement can save a business.

The Legal Intricacies of Buying and Selling a Business in California

With California’s main street businesses for sale, there are many legal intricacies that are far beyond the understanding of the buyer and seller negotiating the transaction. While a broker or business intermediary is critical to the successful sale of a professional service business, it’s almost always in the best interests of all parties to retain attorneys as well. 


When selling a services business in California, the legal implications of a sale extend far beyond the basics of who is selling what to who. An attorney who specializes in the sale of businesses will be able to draft all necessary forms, including term sheets, Letters Of Intent, or Purchase Agreements. 


An attorney will also help navigate other industry or location-specific requirements, such as licensing, escrow, and tax implications. Having an attorney also ensures thorough due diligence and lessens the likelihood of future litigation or
 state audit arising from misunderstandings with the sale.

Final Negotiations

With all due diligence completed, and both parties eager to reach an agreement, all parties must engage in final negotiations. At this time, any additional sticking points will be addressed in the Definitive Purchase Agreement and negotiated until both parties can reach an acceptable solution. 


Once all parties agree on any remaining concerns or stipulations, a formal contract is finalized, and the closing process begins. 

Closing

With the terms successfully negotiated, it’s now time to facilitate the transaction by signing off on any required contracts and begin the process of transferring ownership of the business to the buyer. 


It’s common for the seller to stay on with the business in some capacity to ensure that the transition is smooth. It’s common for a former owner to continue to be involved with the company for several more years, usually in a higher-level advisory capacity. This arrangement helps to ensure that business can continue unimpeded through the ownership transition. 

Mistakes to Avoid When Selling a Professional Service Business in California

When it comes to California businesses for sale, there are a few common mistakes that can dramatically impact your business’s sale. 

  • Too dependent on a small customer base
  • No strategy for sustained growth
  • Cash flow issues
  • Commoditization in your industry
  • No recurring revenue
  • The business owner is the sole reason for the success


Thankfully, these are all issues you can overcome to successfully sell your professional service business for the right price. But, it’s virtually impossible to take control and remedy these issues without a competent business intermediary in your corner. 


As a seller, working with a broker can help you avoid many of the pitfalls associated with a sale. They can also help remedy any issues that will prevent your business from achieving its full value in a deal. 


When you sit down with a broker, you’ll be able to lay everything on the table and create a tailored plan that will help you address any issues that could prevent a sale or depress the value of your professional service business. 

Ready to start?

Get in touch today for a free consult; let’s talk about your desires to sell, and how we can best help make it an easy, profitable process for you.

Alternatively, call me today at (916) 570-2674 or click this link for me to contact you.

Certified Machinery and Equipment Appraiser

Andrew Rogerson; Sacramento, CA

is a business expert of 35+ years, a 5-time successful business owner, Certified Mergers & Acquisition Professional (CM&AP), Mergers & Acquisition Master Intermediary (M&AMI), Certified Business Broker (CBB), author of 4 books, and he gives speaking presentations on request.

Andrew helps business owners with a business in California, plan and execute buying or selling a business, and consults with business owners on how to make their ventures stronger so they increase in value.

    YOUR SACRAMENTO CALIFORNIA BUSINESS INTERMEDIARY

    ADDRESS

    5150 Fair Oaks Blvd, #101-198
    Carmichael, CA, 95608-5788

    PHONE

    Phone: (916) 570-2674
    Fax: (916) 473-8655

    EMAIL

    info@rogersonbusinessservices.com

    Buying or selling a business is a complex process – and you shouldn’t go through it alone. You need an experienced business broker to guide you through the process.

    We make buying and selling businesses simple and straightforward. We’re qualified to handle the most complicated aspects on behalf of our clients, ensuring you walk away satisfied.