A beginner’s guide to buying and selling a business

In this piece, in association with BusinessesForSale.com, we look at the key considerations to make for both buyers and sellers when a business changes hands.

Buying and selling a business

When is the right time to sell a business?

Buying or selling a business is a serious undertaking. Whether you’re getting a well-earned payday for years of business building or fulfilling a long-held dream of entrepreneurship, it’s not something you should go into lightly.

Research is the watchword and you should take advice where you can find it.

Hopefully this article, which sets out the major steps in the business-sales process, is a good starting point.

Deciding when to buy or sell

Whichever side of the deal you’re on, one of the most important decisions is taken before the sales process even begins.

Sellers: People sell businesses for many reasons, either personal in nature or related to the business or economy. Taking into account the state of the business, prospects for growth and when you want to retire or move onto your next project, timing the sale is as important as it is tricky.

Buyers: When to buy is part of the equation for the buyer too, but is less complicated. But they also must decide what to buy. Do you plump for a lucrative industry, something in which you have experience or simply a sector you have always found appealing? Hopefully you can combine all three.

Hiring a professional adviser

Just because you’re experienced in running businesses, doesn’t mean you’ll have the skill set – or indeed time – to oversee the process of buying or selling one yourself. Not everyone appoints a broker, but there are, despite the costs involved, persuasive reasons for doing so.

Sellers: Fancy doing a part-time job in addition to your role as business proprietor? That’s what entrepreneurs effectively take on when they coordinate a business sale alone.
It doesn’t come for free but without professional help – in business valuation, handling and filtering enquiries, screening buyers, handling negotiations – you may struggle to find buyers or be short-changed in the deal structure.

Buyers: For the buyer, a professional adviser acts as an invaluable buffer in what is an emotive process. It’s useful to have a third party share bad news (eg that you won’t meet their valuation). They will also help you with paperwork and negotiations.

Preparing the business for sale

Sellers: Preparing your business for sale is one of the most important things you’ll ever do. The more fastidious your preparations, the better the chance of a quick sale at a satisfactory price. From tidying up books and records to refurbishing premises, even minor details could make the difference.

Business valuation

Businesses are most often valued by a multiple of profit. Asset-based valuations, meanwhile, subtract the value of the business’s liabilities from its assets, while entry valuations ascertain what it would cost to build the business from scratch, and discounted cash flow discounts the value of cash flows over time to reflect risk. A rule-of-thumb valuation often includes elements of several methods.

Sellers: Few sellers undervalue their business and many overvalue them, either through subconscious bias or a desire to get a strong return on their efforts. There’s a simple way to avoid the distortive effects of cognitive bias: appoint an independent expert to value the business.

Buyers: Ask the seller which method(s) they used to arrive at the valuation and double check their calculations with reference to relevant financial records. And identify anything else, not accounted for in the valuation, that could make the business more or less valuable, such as disruptive consumer trends or technologies on the horizon or ways to add value (like diversification).

Finding the right buyer/business

Neither the buyer nor seller can be sure how long this stage will take. It might be just a few weeks or could take a year or more – if you find the right business or buyer at all. Patience is certainly a virtue.

Sellers: You might find a buyer through your own or your broker’s contacts, but most likely you’ll find them online.

When writing your listing on BusinessesForSale.com, ask yourself what kind of person would be interested in your business and couch your language accordingly. Some buyers might appreciate a ‘lifestyle business’ or a ‘family business with pedigree’; others might prefer ‘plenty of repeat business’ and ‘scope for extending opening hours’.

Buyers: It’s worth narrowing your choice by price range, location, turnover or profit and to businesses that are freehold/leasehold, owner-financed, that include accommodation or can be run from home – all filtering options available on BusinessesForSale.com. Take a look at plenty of businesses to get a sense of the going rates in your market.

Due diligence and confidentiality

Undertaken by a prospective buyer, due diligence is a comprehensive appraisal of the business’s assets and liabilities and its commercial potential. The period of due diligence tends to start after both parties have agreed a deal and price range, before signing a letter of intent, and usually lasts between 60 and 90 days.

Sellers: Preparation is everything. You must provide documents and information promptly when requested, as delays could give the buyer cold feet. For confidentiality’s sake, you also need to obtain key documents and show the prospective buyer round your premises without arousing the suspicion of staff.

Buyers: There are two obvious components: relevant paperwork – particularly the financial accounts – and the physical building, equipment, stock. Trickier to measure is ascertaining things like brand reputation, goodwill and staff.

Finance and deal structure

Striking the right deal requires compromise on both sides. Whichever side of the table you’re on, it’s helpful at the outset to have a clear idea of what you want from the deal and perhaps set limits on minimum/maximum price. Beyond those ‘red lines’, however, it’s recommended that you be as flexible as is reasonable to make a deal happen.

Sellers: In the seller’s perfect world they would receive all of their asking price, up front, and in cash – alas, such a scenario is rare. Accepting a portion of the sale price in instalments – called ‘earnouts’ or ‘seller finance’ – might get the deal over the line and even encourage the buyer to raise their offer. You could also offer to stay on in a consultative capacity for a specific period beyond the sale.

Buyers: Depending on your financial resources and how risky you perceive your target business to be, your professional adviser can advise you on a range of funding options. If you lack experience in the sector or the current owner apparently plays a fundamental role in day to day operations, it might be worth asking the seller to stay on as a consultant for a period after the sale.

If the vendor agrees to seller finance, whereby they part finance the deal themselves by accepting payment in instalments, then that’s strong reassurance that the seller believes the business will thrive under your stewardship (otherwise you could default on your payments).

Ready to start hunting for your dream business opportunity? Check out the world’s largest marketplace of businesses for sale.

Ready to put your business on the market? Find out how to sell your business on BusinessesForSale.com.

Further reading on buying and selling a business

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