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Selling a Business - 5 Steps

Selling a business is not that dissimilar from selling your home. It is a place where you feel comfortable, have invested a lot of time and effort, have experienced moments of absolute despair, and great happiness. From a potential buyer’s view point it is a business, your emotional attachment to the business and your achievements have no value, it is to them a potential future source of earnings.

Good planning as always is key to a successful outcome. Ideally an exit strategy should be developed some 3 to 5 years prior to your planned sell date.

STEP ONE – fit for sale?
Having made the decision to sell, the most important first step is to take a good hard look at the business, not as the proud owner but as a hard-nosed businessman. Is it really "fit for sale" and how much could you get for it? Many factors can affect the final selling price of a business: market conditions, competition, location, commercial opportunity, and how much it depends on you, the owner. But the most important factor is the earnings stream the business currently produces, and the potential to increase this.

Many businesses are sold for less that their true worth. Often this is due to factors that depress the potential value – like the "clutter" that needs addressing when you are selling your house. These factors can include poor or outdated business practices, weak second tier management, procurement contracts that need revising, low profitability (or even losses) from some parts of the company, or lack of aggressive selling and marketing. But there are, often, aspects of your business that also represent "hidden value" – like the potential to add a product or service or opening up new sources of revenue, forming a joint-venture with another company.

Spotting – and addressing - these value-depressing factors can make a big impact on the sale value of your business.

STEP TWO – get professional help
Would you really sell your house without using an estate agent and lawyer? Selling a business is more complex than selling a house, so sound professional advice, support and excellent planning are the essential ingredients to deliver a successful outcome.

You may have had a long-term, successful relationship with your accountant, but do they have all the skills needed for the far more complex task of advising you on the sale of the company? There are ways of very significantly reducing your tax liability, how this is achieved will be dependent on your own personnel circumstance. A simple guide is to find out if your accountancy partnership has a partner who specialises in Corporate Finance. If they do not, it could be a good idea to look elsewhere for additional help, especially if the sale is for a substantial sum.

Your accountant may be able to give you some pointers about how to get the business "financially fit for sale". But they will not be able to really "get under the skin" of your business in the way that a professional - who specialises in this area - can. Getting the right kind of advice is therefore critical to maximising your chances of a sale at the right price. Some advisers just give advice; others are prepared to roll up their sleeves and help you directly. Some advisers will also help you minimise your risk by negotiating a success-based fee. You must choose what seems right for you.

STEP THREE – targeting your purchaser
A "For Sale" sign outside the front door is never the best idea! If you have engaged an adviser you will be well on the way to completing any changes to your business that will maximise its potential to a purchaser. At this stage the business will be in good shape for sale, and you and your professional advisers will have agreed that the time is ripe to start marketing the business.

Who might be interested, and what approach will get you the best price? You should think quite early about the likely profile of the kind of businessperson who might be interested in your business. To use the house-selling analogy again, you don’t try to sell a one-bedroom flat to a large family! A small high-tech business might appeal to an entrepreneur with a technical background. A retailing operation is likely to appeal to a businessperson with a sales background. As you think about potential purchasers it is worthwhile considering:

  • The other share holders (if you are not sole owner)
  • Family succession
  • Your own management (MBO)
  • A competitor
  • A supplier or customer
  • Merger
  • Management buy in (MBI)
  • A trade sale
  • Break-up / Liquidation

It may well be in your best interest to pursue more than one of the above.

The approach you take towards identifying potential buyers is critical. For instance, contacting a competitor openly may well negate the potential premium he might be prepared to pay, whereas a discreet approach from a third party (such as a Business Transfer Agent) could open the doors for discussion. In other cases, an informal chat over a coffee might well be the best approach to solicit interest.

Whoever the purchaser might be, they will require financial information. The amount and complexity of the information required will depend on the value of the sale. You will need to provide at least an audited set of accounts, and possibly much more; for example, proof of ownership of the business and its assets, description of the liabilities, details of customer contracts and their renegotiation dates. A critical point will be whether there is anything that could have a significant effect on the future of the business. For instance, is the business about to be sued, or is there a possible issue with raw material supply? Failure to disclose such information, if judged to be material to the business can result in prosecution, and significant financial penalties. Supplying detailed confidential information to someone who might be able to use it commercially against your company is always a worry, so it is important to be guided by your professional advisers.

STEP FOUR – setting the asking price
Most of us have a fair idea of what our house is worth, based on the selling price of similar properties locally. If only it were that simple for businesses!

Many businesses that are traded frequently are often valued using industry norms. Business may also be valued using discounted cash flows, or asset valuation, or a price / earnings multiplier. Unfortunately it does not end there, as the motivation of the purchaser to acquire the business will make a significant effect on what he or she will pay. A purchaser buying the business as an on going concern, will see a lower earnings potential than a competitor who sees the potential to gain market share, or a company who can see economies of scale from merging the businesses. The risk profile of the business will also significantly affect the likely selling price. A stable customer base is more attractive than a business that is totally dependent on acquiring new customers.

The asking price can also be driven up if you are prepared to continue to take some interest / risk in the business. This can be by taking part of the selling price as deferred payments dependent on business performance, or as shares in the new owners company.

STEP FIVE – the human factor
Prospective buyers do change their minds. Recognise this fact and develop a plan 'B'.

Try and get more than one party interested, and accept it could take a while for the sale to happen. Never lose sight of the need to keep your staff informed and motivated during the sale process, as one sure way to drive down value in your business is by having demoralized staff. And remember that good deals are done because both parties were able to learn to trust each other over time. Both can – and should - emerge from the transaction feeling that the deal was fair.

Above all, learn to manage yourself. Selling your prized possession can be a stressful experience. Don't let your personal relationships suffer during this period. Make sure you give yourself a break from it all from time to time, and you will be able to look back on the sale with satisfaction.