SELLING A BUSINESS is a time-consuming and often emotional venture.
The process can be lengthy and stressful as the business owners maintain focus on day-to-day operations while trying to find suitable buyers at the same time.
Often they need to keep the process confidential and discrete to protect against loosing key staff or reducing the value of the customer goodwill.
Selling your business requires forward planning and a structured well thought-out process. You need to be in control of the process from start to finish to ensure a maximum return.
With that in mind, here are 10 steps to consider when you’re selling your business:
1. Plan your exit strategy
Whatever the reason, it is worth planning and preparing your exit strategy as early as possible.
It’s paramount that you find a business adviser who understands your requirements and strategic goals and who can guide you through a successful sale.
They can also help you understand the various exit strategy alternatives, options for the most appropriate buyers, the timing of the sale and the tax consequences of different transaction structures.
2. Build the business value before a sale
Consider your business’s ability to sell, its readiness and your timing. It is important to take a step back and look at the firm objectively through the eyes of a prospective buyer.
There are many attributes that can make your business appear more attractive: things like strong ,long-term relationships, an effective management team, recurring revenue streams and streamlined processes.
3. Determine a business valuation
For many owners the sale of a business is an emotional one. It is often the culmination of a lifetime’s work and owners can often have unrealistic price expectations or are poor at identifying where the real value of the business lies.
The sales process can often get derailed by sellers and buyers having completely different expectations about the value of the business.
A third-party valuation is a critical step in the process and is the best way to provide a realistic and objective estimate of what your business is worth.
Your adviser is better placed to provide evidence of the business’s worth which will bring credibility to the asking price.
4. Conduct internal due diligence
In today’s market, prospective buyers want as much transparency as possible and are performing more careful due diligence.
So spending the time to properly evaluate and present your company’s financial and business history and future projections is a crucial element of the sale process.
A seller can avoid red flags by ensuring that everything is in order and that the right information is provided at the right time.
5. Finding the right buyer
Finding a buyer can be one of the most time-intensive elements of the process, but is clearly an important factor in ensuring a successful deal.
Types of buyers generally break down to the existing management team, strategic buyers and financial buyers, each of which will have different evaluation criteria and come with their own pros and cons. Neither one is better by nature; it depends on the situation.
However, many potential buyers that express interest in a business will not be qualified to purchase the company.
Ask your adviser to screen interested parties and assess early on whether they are credible and have the financial standing to execute the deal.
6. Presentation of the business
Time and consideration should be given to how information is presented and the marketing material for the deal. A well-packaged information memorandum increases a buyer’s confidence and the likelihood of a successful sale.
Your information memorandum should capture the key credentials of the business – detailing the ownership and management structure, trading performance, key growth opportunities, competitive advantage and market data.
7. Transaction structure
The sale of a business has many financial and professional considerations for the management team and owner. The purchase price is only one component of the overall result.
Every deal is different and consideration should be given to the most advantageous corporate structure for the business owner prior to selling their business.
In advance of initiating the sale, the current structure should be reviewed from a legal, tax and stamp duty perspective, restructuring if necessary to help maximise the return.
Reliefs such as retirement relief, entrepreneurial relief and transfer of business relief need to be considered.
A business often holds investment assets or has assets surplus to its operations that could be sold off without affecting the underlying business.
It is important when considering the financial return that such assets are identified and consideration is given as to whether they should be included in the sales process or not.
8. Negotiating the deal
Once potential purchasers have been identified and marketing material prepared, a formal approach can be made to obtain first round offers.
Success from this point largely depends on managing interactions with potential purchasers. A strict deadline should be set at the outset of this stage to ensure competitive tension is generated.
The offers received in the first round often dictate the format of the next stage of the process – whether a second round of bidding is required or a preferred bidder is brought forward and an exclusivity agreement entered into to allow the potential purchaser to evaluate the company.
When negotiating the sale try to put yourself in the purchaser’s shoes to gain an understanding of the factors important to them and compare them to the factors that are important to you.
This will give you greater control over the process and visibility of any potential stumbling blocks.
9. Finalising legal documentation
There are a number of legal contracts that need to be drawn up when selling a business.
The purchase agreement will define all the details of the transaction and is the definitive document outlining the terms of the sale.
It often can include other transaction documents such as a non-compete agreement or an earn out for the seller to remain with the business for a set period of time.
10. Managing the profits from the sale
Once the sale has been completed it is important to obtain the correct financial advice to help map out your financial goals and determine how best to invest your money.
It is also important to review the tax structure put in place at the beginning of the process and liaise with your tax adviser on any changes that may need to be implemented.
Emma Shortt is senior manager of corporate finance at Crowe Horwath