In the first part of this three-article series we explored the most common reasons why entrepreneurs sell their business.
Once that momentous decision is taken, it’s vital that you understand how the selling process works. While it does vary to some degree from business to business, the general steps are always broadly the same.
Appoint professional help
You don’t have to appoint a business transfer agent (BTA), the estate agents of the business selling process. Some sellers bypass this stage and go it alone.
However, eschewing expert help could be a false economy. Whatever you save in fees and commission might have been eclipsed by the higher price you would have achieved with their advice and support.
Selling a business is not a simple process and a broker – providing you hire a competent one – will guide you through each and every stage. They can value the business, find suitable buyers, protect your interests during negotiations (without alienating the other party) and advise on what information to disclose and when.
By handling the sales process a broker also frees you up to concentrate on running the business day to day. Generally, you will also need the help of a solicitor and accountant.
Preparing the business for sale
Before you put the business on the market you should strive to make the business as attractive to buyers as possible.
First impressions count double, so make sure your premises are clean and tidy. You could even give them a lick of paint and replace or refurbish ageing equipment.
Get your financial records and other important documentation up to date and filed correctly. You’ll need to provide information to buyers promptly when requested.
Imagine you’re the buyer. Is there anything about the business that might put you off? If so, is this something you can rectify in the next few days, weeks or months? For instance, you could persuade a key customer to renew a contract that is close to expiry.
Valuing the business
Business valuations, which should be conducted by a suitably experienced solicitor or BTA, are based on many factors, most obviously, cash flow, revenues and profits, but also the value of both physical and non-physical assets.
The formula applied very much depends on the industry, but the most common method is a multiplier of profits.
Alternatively, an asset-based valuation adds up the market value of tangible assets like premises and equipment along with that of intangible assets like customer goodwill and intellectual property. Cash-flow analysis, meanwhile, projects future revenues and costs – usually for five years hence – and applies a discount to reflect risk.
There is no ‘correct’ valuation. Often based on a mixture of several methods, they are simply an independent expert’s best guess – but nevertheless represent an essential starting point for negotiations.
Putting the business on the market
Your business-transfer agent should ask you lots of questions about your business to ascertain its strengths and weaknesses.
This will help them put together a sales package that presents your business in the best possible light. They will advertise the business for sale on both their own site and classified listings sites (hopefully including BusinessesForSale.com, which is used by more buyers than any other UK marketplace).
If your sale is confidential, then the broker will be more circumspect in what information they disclose in sales collateral.
Once your business is on the market the enquiries will hopefully start rolling in. But it’s quality, not quantity, that matters here.
With this in mind you should vet buyers to assess their credibility and weed out timewasters. Do they have experience in your sector or running businesses generally? How do they intend to finance the purchase?
Once you’ve found a credible buyer who is happy to proceed, it’s time to arrange a face to face meeting.
Before you share any sensitive information, however, it is wise to ask the buyer to sign a confidentiality agreement.
When the buyer puts down a deposit you can take the business off the market. Based on your initial valuation, each party will then enter negotiations with a price in mind. They will probably meet somewhere in the middle, depending on how negotiations unfold. For instance, if due diligence uncovers any undeclared problems, the buyer will probably drive a harder bargain.
Negotiations are as much about how the deal is financed as the price itself. The buyer will usually put down some of their own cash plus a bank loan. However, the seller could convince the buyer to agree to a higher price by accepting a portion of the funds in instalments.
Naturally in a transaction of such magnitude – financially and emotionally – things could get very fraught, very quickly if buyers and sellers negotiated directly with each other. Having a professional intermediary is therefore invaluable to keep the deal on track, protect the seller’s identity and strike a deal fair to both parties.
Usually lasting between 60 and 90 days, due diligence is the process by which the buyer checks whether claims made by the seller stand up to scrutiny. This involves visiting the premises, poring over accounts and contracts and researching the business’s reputation on social media and elsewhere.
Trust can be fatally undermined if the buyer uncovers problems during due diligence that the seller obscured in their sales collateral and answers to enquiries. It is therefore advisable to front up about any troublesome issues. This also gives you a chance to reassure the buyer how any problems can be overcome.
Make sure that your staff create a positive impression when prospective buyers visit your premises. If it’s a confidential sale then it’s wise to concoct a cover story – you could say that the visitor is an important new customer, for example.
Closing the deal
When a final price is agreed by both parties, the buyer will sign a binding contract of sale. At this point the seller can celebrate a financial return on many years of hard work.
However, that may not be the last the two parties hear from each other. Sellers often agree as part of the deal to stay on in a consultative capacity for a fixed period post-sale – especially if they’ve part-financed the deal themselves (accepting payments in instalments).
Jo Thornley is head of brand and partnerships at Dynamis