Exit PlanningBy Owen P.September 19, 2026

How to Sell a Small Business: The Process, the Paperwork and the Tax Rules

The sequence from clean books to closing, the SBA financing rules a buyer faces, and how the IRS taxes the sale of a business.

How to sell a small business is mostly a question of sequence: get the books to a state a stranger can audit, price the business on a defensible earnings figure, find a buyer, agree terms in a letter of intent, survive diligence, sign a purchase agreement and file the paperwork the sale creates. The rule that decides how much of the price you keep sits at the end of that list. The IRS treats a business sale as the sale of each asset separately, not of one thing, and the allocation the two sides write down on Form 8594 binds them both.

The short version: a year of clean, reconciled books changes the price more than any negotiating tactic, and the two documents that decide what you keep are the purchase agreement and the asset allocation, not the headline number.

How to sell a small business, stage by stage

Stage	What you produce	Who leads it
Preparation	Reconciled books, tax returns that tie to them, a defensible add-back schedule, a business that runs without you in it daily	You, with your accountant
Pricing	An earnings figure and a supportable range	You, with a valuer or broker
Going to market	A confidential information memorandum and a buyer list	You or a broker
Letter of intent	Agreed price, structure and the ground rules for diligence	Both sides, with counsel
Due diligence	Everything the buyer and its lender ask for, including a Quality of Earnings report on larger SBA-financed deals	The buyer, at your expense in time
Purchase agreement	The document that governs the sale, and the asset allocation behind it	Attorneys on both sides
Closing and transition	Funds flow, an agreed handover, final returns and forms	Everyone

Time is the part nobody can give you honestly. There is no published all-market figure for how long a small business takes to sell. The two current sector numbers come from BizBuySell’s Insight Report for the second quarter of 2026: service businesses reached a median 155 days on market, an improvement of 9 percent, and manufacturing transactions took 247 days to close, up 17 percent year over year. Both count businesses that sold, so they exclude every listing that never found a buyer.

Preparing: the work that actually moves the price

Three things are worth more than anything else you can do in the year before a sale.

Books a stranger can follow. The buyer’s analyst will reconcile your accountant-prepared statements, your tax returns, your internal statements and your IRS transcript data to each other. If those four disagree, every unexplained difference reads as risk and gets priced as risk. If your business reports on the cash basis and the buyer works in accrual, that gap is a known reconciling item rather than a problem, and cash versus accrual accounting explains what changes between them.

An add-back schedule you can defend line by line. IBBA defines seller’s discretionary earnings as earnings before income taxes, non-operating and nonrecurring items, depreciation and amortization, interest, and “one owner’s entire compensation, including benefits and any non-business or personal expenses paid by the business.” Every one of those adjustments needs a document behind it. How to value a small business sets out how the earnings figure turns into a price, and which multiple applies at which size.

A business that is not you. Customer concentration, contract continuity and owner dependence are named risks in a lender’s diligence, not soft factors. A buyer paying for cash flow that walks out with the founder is buying something they will discount heavily.

The exit planning process checklist covers this preparation phase in the order it usually has to happen.

Pricing: what the market data does and does not tell you

BizBuySell’s Q2 2026 report covers 2,117 sales voluntarily reported by brokers, with a median sale price of $349,250, a median cash flow of $155,921, and medians of 0.7 times revenue and 2.7 times cash flow. Advisors surveyed for the IBBA and M&A Source Market Pulse in the same quarter reported medians ranging from 2.0 times SDE below $500,000 to 5.8 times EBITDA between $5 million and $50 million.

Those are medians across every industry at once. They are useful for one purpose: checking that the number in your head is in the same neighborhood as the market. They are not a valuation, and NACVA’s Professional Standards say as much about the rules of thumb built on them. “Rules of thumb are acceptable as reasonableness checks, but should not be used as a stand-alone method.”

Finding a buyer: broker or direct

Both routes are open, and the trade-off is money against time and reach.

On fees, there is nothing honest to quote. Business broker commissions are negotiated privately, the International Business Brokers Association publishes no fee schedule on its public pages, and its own glossary does not define any of the tiered formulas the internet attributes to the trade. Ask any broker for their fee schedule, their minimum fee and the term of the listing agreement in writing before you sign.

On credentials, IBBA issues the Certified Business Intermediary designation, which requires membership in good standing, completion of its education requirement, attendance at an IBBA conference, evidence of acting as lead seller broker on three business transactions, passing the CBI examination, and continuing education to maintain it.

On registration, federal law changed in favor of the intermediary. Under 15 U.S.C. section 78o(b)(13), “an M&A broker shall be exempt from registration under this section,” where the broker acts solely in connection with the transfer of ownership of an eligible privately held company and the acquirer will control and actively manage the business after closing. The exemption is lost if the broker takes custody of funds or securities, finances the deal, represents both parties without clear written consent, forms a buyer group, deals with a passive buyer, or binds a party to the transaction. The company must also have EBITDA below $25,000,000 or gross revenues below $250,000,000, and both figures are adjusted every five years against the Employment Cost Index for wages and salaries of private industry workers. This is a federal registration point only and says nothing about state business broker or real estate licensing, which varies by state.

Selling direct to a competitor, a supplier, an employee or a family member skips the fee and narrows the field to one. It also means you are running the confidentiality, the diligence schedule and the negotiation yourself, alongside running the business. Our guide to business exit strategies and options compares the routes, and exit planning for family-owned businesses covers the case where the buyer is a relative.

The letter of intent

The letter of intent is where price, structure and the ground rules for the next phase get written down before anyone spends real money on lawyers. Terms, duration, exclusivity and which provisions bind are negotiated document by document, and no trade body publishes a standard form or a customary exclusivity period. This is the point to have your own attorney read the draft, because the LOI sets the frame that the purchase agreement is then argued inside.

Due diligence and the Quality of Earnings

IBBA defines due diligence as “a process where a buyer inspects a potential transaction. Often includes a detailed review of accounting history and practices, operating practices, customer and supplier references, management references and market reviews.”

On SBA-financed deals above a threshold, one part of that review is now mandatory. SOP 50 10 8.1, effective October 1, 2026, states: “For Business Expansion and Initial Acquisition transactions where the Purchase Price as defined in Paragraph A.1 is equal to or greater than $3 million, the Lender must also obtain a Quality of Earnings (QoE) in addition to the required Business Valuation. The $3 million threshold is determined before the application of buyer equity, seller debt, or other financing sources. Owner Buyout and ESOP & Cooperative transactions are not subject to the QoE requirement.”

The report must be performed by “an independent, experienced financial professional,” may not be prepared by or for the borrower or seller, and must include a Cash Proof, which the SOP defines as an analysis that “reconstructs cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for each period under review,” run over a trailing twelve months and the last two fiscal years.

It must also “identify and document all add-backs and adjustments to the seller’s reported earnings, including non-recurring revenue or expenses, above- or below-market owner compensation, related-party transactions, deferred maintenance, and accounting methodology differences between cash-basis and accrual-basis reporting,” and assess “customer concentration risk, contract continuity, and the likelihood that existing revenue and margins will be maintained post-sale.” The lender then uses the earnings figure from that report, not yours, in its debt service coverage calculation.

Note the date. The Quality of Earnings requirement is new in SOP 50 10 8.1, so a deal closing around October 1, 2026 needs to establish which version of the procedure governs it.

How the buyer will finance it

Where the purchase is financed by a bank loan guaranteed by the SBA, the agency’s rules shape your deal even though you are not the borrower.

Rule, SBA 7(a) change of ownership	What it says
Maximum loan	Standard 7(a) loans have a maximum of $5,000,000
Equity injection	At least 10 percent of total project costs. Under SOP 50 10 8.1, an Initial Acquisition injection cannot be reduced or eliminated; for business expansion, owner buyouts, ESOPs and cooperatives, a lender may reduce or eliminate it where liquidity is sufficient
Seller debt as equity	Counts only if on full standby, with no payments of principal or interest for the term of the 7(a) loan, and it may provide no more than half of the required injection
Refinancing seller debt	Under SOP 50 10 8.1, seller debt is eligible to be refinanced after it has been in place and current for 36 months, up from 24 under the previous SOP
Debt service coverage	EBITDA divided by combined post-transaction debt service, with minimums of 1.25 to 1 for Initial Acquisition and Owner Buyout, and 1.15 to 1 for Business Expansion
Valuation ceiling	Loan proceeds for the change of ownership may not exceed the business valuation. Where the price is higher, “the difference must be made up by equity”

Sources: SBA SOP 50 10 8 (effective June 1, 2025) and SOP 50 10 8.1 (effective October 1, 2026).

Two consequences for a seller. First, a price the lender’s valuation will not support does not automatically kill the deal, but it does move the gap onto the buyer’s cash, which is a real constraint on what a buyer can agree to. Second, if part of your consideration is a seller note, standby terms decide whether it helps the buyer qualify, and a standby note is not paid while the SBA loan runs.

Full cash at close is not what the survey data shows. Advisors responding to the Market Pulse survey for Q2 2026 reported cash at close running from 83 to 92 percent of consideration depending on deal size, with the remainder in seller financing, earn-outs and retained equity. IBBA defines an earn-out as “a contractual provision stating that the seller of a business is to obtain additional future consideration based on the business achieving certain future business goals,” which means part of your price depends on results you will no longer control.

The purchase agreement, and asset sale versus stock sale

The SBA’s own guidance is blunt about the document: “You must prepare a sales agreement to sell your business officially. This document allows for the purchase of assets or stock of a corporation. An attorney should review it to make sure it’s accurate and comprehensive.”

The choice between selling assets and selling stock drives the tax outcome for both sides, and the two sides rarely want the same answer. For asset sales, the IRS position is that “the sale of a business usually is not a sale of one asset. Instead, all the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss,” and “the residual method must be used for any transfer of a group of assets that constitutes a trade or business.”

Under IRC section 1060, a written allocation agreed by the parties binds both of them, “unless the Secretary determines that such allocation (or fair market value) is not appropriate.” Both sides report it on Form 8594, Asset Acquisition Statement Under Section 1060, across seven classes.

Class	What it covers
I	Cash and general deposit accounts
II	Actively traded personal property, certificates of deposit, foreign currency
III	Mark-to-market assets and debt instruments, including accounts receivable
IV	Inventory and property held for sale to customers
V	Everything else, including furniture, fixtures, buildings, land, vehicles and equipment
VI	Section 197 intangibles other than goodwill and going concern value
VII	Goodwill and going concern value

Source: instructions to Form 8594 (revised November 2021).

The price is reduced by Class I, then allocated to Classes II through VI in order, in proportion to fair market value within each class, with the remainder falling into Class VII. Nothing outside Class VII may be allocated more than its fair market value on the purchase date. That ordering is why goodwill absorbs the residual, and why the buyer and seller pull in opposite directions on the classes above it.

Where a stock purchase is treated as an asset purchase for tax purposes, the mechanism is an election under IRC section 338(h)(10), which treats the target as having “sold all of its assets in a single transaction.” Whether that election is available and who benefits from it is a question for the tax advisers on both sides.

Getting paid over time

An installment sale, in the words of IRS Publication 537 for 2025, is “a sale of property where you receive at least one payment after the tax year of the sale.” Regular inventory sales, dealer dispositions and publicly traded stock or securities are not eligible. Income under the installment method is reported on Form 6252.

One trap is worth naming because it lands in the year of sale regardless of what you were paid. Publication 537 states that “you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year,” reported on Form 4797. A seller who spreads the price over five years can still owe tax on recapture in year one.

The tax rules to know before you sign

These are rules, not advice about your situation, and the last section of this guide says who to put your own facts in front of.

The sale is many sales. Because each asset is treated as sold separately, parts of the price are ordinary income and depreciation recapture rather than capital gain. The allocation you sign decides how much of each.

Long-term capital gains thresholds for tax years beginning in 2026, from Revenue Procedure 2025-32:

Filing status	0 percent rate up to	15 percent rate up to	20 percent above
Married filing jointly, surviving spouse	$98,900	$613,700	$613,700
Married filing separately	$49,450	$306,850	$306,850
Head of household	$66,200	$579,600	$579,600
Single	$49,450	$545,500	$545,500
Estates and trusts	$3,300	$16,250	$16,250

Under section 1(h), unrecaptured section 1250 gain is taxed at 25 percent and 28-percent rate gain, which covers collectibles and the includible part of section 1202 gain, at 28 percent.

Net investment income tax. A 3.8 percent tax applies to individuals, estates and trusts above modified adjusted gross income thresholds of $250,000 for joint filers and surviving spouses, $125,000 for married filing separately and $200,000 for everyone else, reported on Form 8960. These thresholds are set by statute and are not indexed for inflation.

Qualified small business stock now runs two regimes side by side. Public Law 119-21, enacted July 4, 2025, rewrote section 1202. Stock acquired on or before July 4, 2025 keeps the prior rules, with a 50, 75 or 100 percent exclusion by acquisition date, all requiring more than five years of holding, a $10,000,000 per-issuer cap and a $50,000,000 gross assets ceiling at issuance. Stock acquired after that date can qualify for a 50 percent exclusion at three years, 75 percent at four and 100 percent at five or more, with a $15,000,000 cap indexed for tax years beginning after 2026 and a $75,000,000 gross assets ceiling. Which set applies turns entirely on when the stock was acquired.

Holding the business longer does not improve the rate. Long-term treatment turns on a holding period of more than one year, and the bracket depends on taxable income rather than on how long you owned the business. The one exception is the section 1202 tiering above, which applies only to qualifying stock.

Our guides to exit planning financial considerations and exit planning for retirement cover how the proceeds fit into the rest of your planning, and exit planning legal considerations covers the agreements around the sale.

Closing, transition and the filings the sale creates

The SBA advises settling in advance how the business will be run before close and how much access the buyer has to information, and consulting “your lawyer and accountant” before terminating a lease, selling equipment or disconnecting utilities.

If the sale ends the entity rather than transferring it, the IRS closing checklist sets out what follows. File a final return for the year the business closes, with the final return box checked on Form 1065 for a partnership or Form 1120 or 1120-S for a corporation, and Form 966 for a corporate dissolution or liquidation. Sole proprietors file Schedule C, plus Form 4797 for property sales and Schedule SE where self-employment tax applies. Settle employment taxes and issue W-2s, report payments of $600 or more to contractors, pay the tax owed, cancel the EIN by letter to the IRS giving the business name, EIN, address and reason for closing, and keep the records: employment tax records for at least four years, property records until the statute of limitations runs out.

Who to bring in, and when

Four people, and the order matters. A CPA or enrolled agent should see your books at least a year before you go to market, because the add-back schedule and the reconciliation between statements, returns and bank data cannot be built retrospectively in a hurry. An accredited valuer produces the number a lender will rely on, and if SBA financing is involved the lender orders its own from a Qualified Source accredited as an ASA, CBA, ABV, CVA or BCA. An attorney drafts or reviews the purchase agreement and the allocation, since the SBA itself says the sales agreement should be reviewed by one. A broker or M&A intermediary earns their fee on reach and process rather than on paperwork, so ask what their fee is and what it buys before you sign a listing agreement. Our directory lists CPA firms by state and city, exit planning consultant services covers what an exit advisor does, and where the gap is reporting quality and margin analysis rather than compliance, that is fractional CFO work. None of this article is tax or legal advice; take your own numbers to your own advisers.

Frequently Asked Questions

How long does it take to sell a small business?

No source publishes a reliable all-market figure. BizBuySell’s Insight Report for the second quarter of 2026 gives two sector numbers: service businesses reached a median of 155 days on market and manufacturing transactions took 247 days to close. Both measure businesses that sold, so they leave out listings that expired without a buyer, and neither is a forecast for any particular business.

What are business broker fees?

Broker fees are negotiated privately and are not published. The International Business Brokers Association publishes no fee schedule and its glossary defines none of the tiered commission formulas commonly attributed to the trade. Ask each broker for their fee schedule, their minimum fee and the listing term in writing before signing anything.

Is an asset sale or a stock sale better for the seller?

They produce different tax outcomes and different liability outcomes, and which favors the seller depends on the entity, the asset mix and the buyer’s own position. The IRS treats an asset sale as a separate sale of each asset, with the price allocated across seven classes on Form 8594, and a written allocation agreed by the parties binds both of them under section 1060. That trade-off is the single most valuable thing to put in front of your own CPA and attorney before you sign a letter of intent.

Does the SBA require a Quality of Earnings report?

On some deals, from October 1, 2026. SOP 50 10 8.1 requires the lender to obtain a Quality of Earnings report in addition to the business valuation on Business Expansion and Initial Acquisition transactions where the purchase price is $3 million or more, measured before buyer equity, seller debt or other financing. Owner Buyout and ESOP and cooperative transactions are exempt, and the report must be prepared by an independent professional for the lender, not for the buyer or the seller.

Can I sell my business and spread the tax over several years?

An installment sale, defined by IRS Publication 537 as a sale where at least one payment is received after the tax year of the sale, reports gain as payments arrive, on Form 6252. Regular inventory sales, dealer dispositions and publicly traded securities do not qualify. Depreciation recapture is the exception to the spreading: it must be reported in the year of sale whether or not an installment payment was received that year.

Sources

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