In the first part of this three-article series we explored the most common reasons why entrepreneurs sell their business.
Once that momentous decision to sell your business has been made, it’s vital that you understand how the selling process works. While it does vary from business to business, the general steps are always broadly the same.
So, if you are ready to sell your business, read on to make sure that you are prepared to get through without any hiccups.
Appoint professional help
You may be tempted to forgo enlisting professional help so that you don’t have to pay a commission. This, however, could be a false economy as the money you save on commission you lose on the lower sale price that comes with going it alone.
Selling a business is not a simple process and a broker – providing you hire the right 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 keeping the business running day to day. It’s important not to let things slip before you have made the sale. Keeping the business running right up until the end will be vital if you want to prove that your business is able to run without you and in order to keep its value.
Generally, you will also need the help of a solicitor and accountant if you want to make it through the selling process unscathed. Taking shortcuts will only lead to disappointments in the end.
Selling a business is something that many entrepreneurs only do once in their lives. By having experienced professionals assisting you, you can get the right advice on best practices.
Preparing the business for sale
Before you put your business on the market you should strive to make the business as attractive to buyers as possible. You will need to do this to the aesthetics of the business as well as the way the business is run.
When it comes to what potential buyers will see, first impressions count double. Make sure your premises are clean and tidy. You could even give them a lick of paint and replace or refurbish ageing equipment. There are some businesses that rely on their equipment in order to run such as manufacturing businesses. If this is the case with your business, it is even more important that you keep your equipment in good condition and, perhaps upgrade it if it is no longer up to standard.
The day to day of your business will also need to be spick and span. Get your financial records and other important documentation up to date and filed correctly. You’ll need to provide information to buyers promptly when its 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.
Preparation for the sale should begin as early as possible. Getting your financials in order is best done years in advance rather than months. And, if you are hoping to make any upgrades to the business, this is easier if you can spread the financial cost over a period of time. You should also think about where you can lower your costs in the year leading up to the sale.
Valuing the business
Business valuations, which should be conducted by a suitably experienced solicitor or BTA, are based on many factors, including 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 intangible assets like customer goodwill and intellectual property.
Cash-flow analysis, meanwhile, projects future revenues and costs – usually for five years– and applies a discount to reflect risk.
There is no ‘correct’ valuation and they’re often based on a mixture of several methods.
Your business-transfer agent should 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.
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. There are questions that you can ask them to ascertain their seriousness. What are their plans for the business? Do they have experience in your sector or of running businesses generally? And importantly, 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, at this stage, 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, you can also 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 fraught very quickly if buyers and sellers negotiated directly with each other. Having a professional intermediary is therefore invaluable to keep the sale 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 online 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 be upfront with the buyer about any issues that could cause alarm. This also gives you a chance to reassure the buyer on how any problems can be overcome.
Make sure that your staff also create a positive impression when prospective buyers visit your premises. You will also need to give your businesses a facelift if it has started to look drab or rundown over the years. Upgrade equipment that needs it and paint the walls. These small changes can make a difference.
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 BusinessesForSale.com.