Selling Your Business
If your business has been successful, it is probably due to the time, effort and money you have invested over the years. Now is to time to recoup that investment. If you have decided not to exit through succession, but through a sale of the business, preparation is critical to achieving the best possible return. The decision to sell and how you go about the sale will be one of the last business decisions you make (for this business), but it will also be one of the most important. Selling a business requires careful planning. You’ll need to come to a realistic conclusion regarding the worth of the business, and you’ll want to determine the best time to sell in order to maximize that worth.
Having decided to sell, the most important issues to be considered and addressed include:
- Business valuation – a business is worth what someone will pay for it, and this is often very different to what the owner believes it is worth. A realistic valuation is critical.
- Who are the potential buyers? Will it be investors, someone wanting to come in and run the business or an industry buyer looking to merge with their existing business?
- What will be included in the sale of your business? You must be very specific about the assets that will be transferred to a buyer upon purchasing the business. The business’s assets should be clearly itemized for potential buyers. Are freehold assets included? ?In some instances these may be the most valuable part of the sale.
- How will the transaction be structured and financed? There may be significant tax implications for one or both parties if the deal is not structured most effectively and efficiently. Will the owner assist in financing the deal?
- Completing the sale – from initial enquiry, to Letter of Intent through to exchange of contracts there can be no room for error or confusion. The process must be clearly defined and managed.
Steps in the sale of your business:
- Making the offer known – Obviously the owner can take steps to make the offer known through advertising or word of mouth, but in most instances a Business Broker will be involved and handle to ‘promotion; of the sale.
- Determining what your business is worth – it is often less than the seller expects. Most industries have guidelines for valuing businesses, but ultimately the value of the business is what someone is prepared to pay.
- There are a number of generally accepted methods for valuing a business, including:
- Net Asset Value (Based on a sale at fair market value of the firm's assets on an on-going concern basis);
- Discounted Future Earnings (Based on the capital required to produce income equal to the projected future income stream from continuing operations of the firm);
- Excess Earnings or Treasury Method (Adding the estimated market value of its tangible assets to the capitalized value of projected income resulting from goodwill);
- Capitalisation of Earnings (Capital required to generate an income equal to an average of the firm’s recent, historical results). You can simply set the price in the same range as similar businesses for sale or have the value determined by an independent business broker.
- Alternatively, you can set the price at a number you’d like to achieve, and see if anyone is willing to pay
Managing the sale – Regardless of whether a business broker is involved or not, there are critical issues that need to be considered. As a minimum, the seller should be considering the involvement of their:
c. Financial &/or Tax Advisor
d. All stakeholders, both internal and external
The seller must consider how serious potential buyers are so as not to waste time with ‘tyre-kickers’ and must also check the reputation and access to finance of serious prospective buyers. Sellers will also need to ensure any
existing leases or financial agreements can be legally terminated or transferred as part of the sale.
The savvy buyer is going to want to see a successful track record and historical performance against plans and a thorough investigation of the businesses finances. Typically a buyer will want to see figures fro the past 3 – 5 years. To make the business as attractive as possible to buyers, you should have low debt levels on your balance sheet indicating strong earnings.
Other areas of the business that will come under scrutiny include:
* Patents and trademarks
* Intellectual Property
* Outstanding legal matters
* Marketing methods
* Licenses and permits
* Stock (inventory)
Finalising the Deal
As a seller, you will be looking for the highest possible return for your years of hard work. The buyer, while looking to minimize the price they pay for the business will be most interested in the earning potential. Negotiation, often best conducted through an intermediary, will be required to bridge the gap. And remember, the final deal may not simply be an agreed purchase price, the buyer may be looking to structure a deal that involves the sellers longer term involvement with the business, an ‘earn-out’ or deferred payment based on future performance.In finalizing the deal, the tax requirements of each party will also play a major part in how the deal is struck. By putting a low value on assets and a higher value on goodwill, the seller will look to minimize there taxable income from the sale. The buyer on the other hand may be looking to minimize the amount paid for goodwill as this is not tax-deductible as such. There are
various ways this can be addressed with professional support and guidance.
As a safeguard against any costly errors, legal advice should always be obtained before any agreement is made up and signed. The agreement should always be drawn up by a lawyer to ensure that all essential points are covered and that both parties know exactly where they stand.
Selling your business may be one of your last business decisions, but it is without doubt one of the most critical – having professional support to guide you through the process will minimize stress and maximize your return on years of effort.