Selling a Business

There are three important stages to the sale of a business.

When considering selling your business there are many important decisions to be made. To make wise informed decisions you need to know specific details about the best method of selling your business. Selling a business is different than selling anything else you own, because your business is a lifestyle as well.

Business owners sell their business for many reasons:

• Retirement.
• Partnership dispute
• Lost interest in the business due to frustration or boredom.
• Illness or death of one of the owners/partners.
• Company lacks working capital or the resources to grow.
• Losing money.

You may have spent many years of hard work building the business to the size it is today and now be looking forward to retirement or moving on to something else. You want to be assured that the sale of your business will bring you the result you require.

Now that you are considering selling your business, you need to assess the marketability of the business and a well-planned approach to the process is required. What is the best time to sell? How will you achieve the best price for your business? Any prospective buyer will require information about your business and the presentation and accuracy of that information should be made in a way that gives an accurate summary of the business.

1. Preparing the business for sale

What information do you need to prepare?

It is important that you have all the right information and details available before you start to market the business, a business well prepared for sale will sell more quickly. This information is also required to establish the selling price for the business and certain calculations need to be made to work out the true net profit of the business.

Have all the information required ready and current. Buyers want to know what is happening in the business currently, along with any existing or future trends. Have your accountant prepare up to date financial information.

Items you should have available are:

• Profit and Loss accounts from the previous 2 to 4 years.
• Identify and quantify abnormal and/or non-recurring costs in accounts.
• Identify all items of a personal and drawings nature.
• Copies of accounting reports for year to date and/or GST returns available.
• Copy of the Lease if any.
• Information on your product or service and background on the business.
• Staff details.
• List of plant, equipment, and any equipment leases.
• Copy of franchise agreement if a franchise business.

Like many small business owners, you will probably have to search out these items and some may need to be updated. Make sure the financial information is current and accurate. If you are selling half way through the year, you could get your accountant to prepare half-year accounts for the purpose of selling.

2. Deciding on a price

What is your business worth?

This is a very important aspect of selling your business and probably the most difficult part of the buy-sell transaction process. There will be many views on what constitutes value. Sellers will have one view, buyers another, accountants another, bank managers another etc. There are multitudes of formulations, including rule of thumb, all of which produce different figures depending on who you are talking to.

What you want for your business, or what it owes you, is not its value and the only ‘rule of thumb’ is that there is no rule of thumb. Rule of thumb does not address the unique aspects of your business and no two businesses are alike. Your business will sell in an open market, with a willing buyer and a willing seller – the market will determine the true value.

The key factors that determine the value of a business are:

• Recent profit history.
• General condition of the company.
• Market demand for your type of business.
• Economic conditions.
• Ability to transfer goodwill or other intangibles.
• Future profit potential.

These factors are impacted by other issues that help determine a fair price.

• Special circumstances of the buyer or seller.
• Trade off between cash and terms.
• Vendor finance.
• Availability of staff and management to stay with the new owner.

If you are unrealistic and price your business too high the serious buyers will not even look at it and likely buyers will become frustrated; you could also be harming the prospect of a sale in the future. If you are too low, you are throwing away hard-earned money, you obviously miss out and/or create suspicion.

3. Negotiating the deal

Confidentiality is required from most business owners wanting to sell their business, for commercial reasons they don’t want their competitors and suppliers to know they are selling and it is a good idea to have any prospective buyer sign a confidentiality agreement.

On average, businesses take three to four months to sell. If you have to sell in a hurry you are in a weaker negotiating position and likely to get less. Sell at the right time for you.

The process of negotiation to facilitate agreement between both parties can be exciting, show the prospective buyer how easy it will be to take over and introduce your key staff. List your suppliers and major customers, work in progress, the hours of operation, service providers, and what records must be kept.

When discussing the business with a potential buyer, tell it ‘warts and all’. Even if it is only a small fib and the buyer catches you on, you will loose their trust – and probably the deal. If it is a large lie or misrepresentation then you could end up in court.

When a buyer indicates they want to make an offer, this needs to be in writing and in the correct format. Any verbal offers can become complicated, as they do not detail the terms and conditions of the offer. As a business owner, you need to ensure you are protected by having the right clauses in the agreement and it is advisable to seek professional advice.