There are many reasons that you may think about selling your business, ranging from retirement, lifestyle changes, ill health to simply looking to move onto something new. If your business has a good reputation and brand and is growing and making profits you may even find that you are approached to sell your business.
Here are some things to consider and bear in mind if you are thinking about selling, to make sure you maximise the opportunity and avoid the pitfalls.
Get professional help
Trying to sell your business can be a difficult task to take on when you are already running a business. Professional help can be invaluable to ensure you get the best deal and best buyer for your business and that you can stay focused on keeping your business running.
When to sell
Timing a sale can be tricky and needs to be thought about well in advance taking into account how the business is performing, what are the prospects for growth and when owners might want to retire or move onto new projects or make lifestyle changes.
Finding the right buyer
Patience may be required here as this can take some time.
You might be able to find a buyer through your own or your broker’s contacts or through an online listing.
When writing your listing online write it in a way that will attract the kind of person who may be interested in your business – useful phrases that may attract buyers are ‘lifestyle business’, ‘family business with good reputation’ or ‘plenty of repeat business/regular customers’.
If you can get more than one potential buyer interested then this will instil a little competition and can be useful to move the deal along and stop buyers delaying or messing you around.
Preparing for the sale
Before you sell your business, you will need to make sure that it is prepared for the scrutiny of potential buyers. These preparations will help to increase the value of your business and the speed of the sale.
You will have to provide documents and information promptly to your chosen buyer during a process called “due diligence” (more detail below) so it is important to make sure you are prepared and your have gone through all your records and your finances to make sure that there aren’t any red flags that could be off-putting to a buyer or reduce the price you hope to attain for your business.
Valuing your business
There are various different methods of valuing your business and it is important to get an independent expert to value your business. Few sellers undervalue their business and many overvalue them due to a natural bias. Methods include looking at a multiple of the business profits, valuing assets, ascertaining what it would cost to build the business for scratch, looking at cash flows over time or a combination of methods can be used.
Striking the right deal requires compromise on both sides. It is a good idea to have a clear idea in advance of starting negotiations of what you want from the deal and perhaps set limits on minimum/maximum price. It is best to be as flexible as is reasonable to make a deal happen.
Parties will normally agree a deal, set a price range and sign a letter of intent.
Then a period of due diligence will start.
Due diligence process
“Due diligence” is a comprehensive appraisal of your business’s assets and liabilities and its commercial potential. A potential buyer of your business will want to conduct due diligence to check out what they’re getting what they expect.
The period of due diligence usually lasts between 60 and 90 days.
Whoever’s carrying out the due diligence will likely send you a due diligence questionnaire – this will list all the information and accompanying documentation that the potential buyer needs to conduct its due diligence – examples of items that may be covered are:
- Company details and structure
- Share capital
- Financial accounts
- Intellectual Property
- Litigation and disputes
You as the seller will normally set up and meet the costs of a “virtual data room” that will house all the requested information and documents. When the documentation in the data room has been reviewed, the buyer will compile a due diligence report.
If the report reveals some problems or risks, you can expect the buyer to want to knock the price down.
At this point the parties will agree the final price for the sale of the business.
In a perfect world you would receive all of the price, up front, and in cash but this does not always happen. In order to reach a final agreement or to get a better price you may end up having to accept an “earn out”.
An earn-out is where a part of the price is deferred, with the exact amount to be paid determined by the performance of the business after its sale to the new owners. The amount to be paid is most commonly calculated by looking at the profits made by the target business in the two to three years following the sale.
Once the price is agreed the parties should enter into an “Agreement for the Sale and Purchase of a Business”.
It is important to get legal advice to ensure that the agreement terms are correct – problems can arise just as much for what’s not in the agreement as for what is. Leaving important items out of a contract, can cause problems months after the sale goes through. The agreement needs to be clear about what both parties are getting at the time of signing, as well as in the future.
Remove ongoing risk
You will want to make sure that you exit cleanly from the business and do not accept ongoing liabilities. The “earn out” arrangements are one of these ongoing liabilities but there can also be legal liabilities in the sale agreement in the form of warranties and indemnities.
Warranties are guarantees or promises that you as seller give to the buyer in the sale agreement that provide assurance to the buyer that specific facts or conditions about the state of the business are true or will happen.
Indemnities are promises to reimburse the buyer for all costs associated with claims in relation to warranties you have provided.