Selling a Business: What you Need to Know
Read our step-by-step small business guide to selling up; from making the decision, to getting the maximum return from your company
As a business owner, selling a business can simultaneously be one of the most stressful, liberating, bittersweet and potentially exhilarating experiences of your life.
It should not be taken lightly – the process of selling a business is tricky, and introduces all sorts of variables which could scupper the whole process at any point.
This article is intended as a step-by-step guide to the sale process for business owners.
We cover how to determine whether the time is right to sell, how to increase your business’ value prior to the bidding process, the sale process itself, and how to choose a buyer and complete the deal. Read on to find out more.
How do I know whether the time is right to sell?
Ask yourself these questions:
Have I planned ahead?
Selling a business requires careful planning and preparation; don’t enter into the process on a whim. You should have carefully planned your exit process and taken steps to increase the value of the business prior to a sale.
Is selling the business my only option?
Selling up isn’t the only way to exit a business. You could investigate the possibility of a management buy-out from within, or passing the entire operation on to a member of your family.
Why do I want to sell?
If you’re not clear why you want to sell up, think carefully about whether it is really a good idea. Common reasons for selling include generating a lump sum for retirement, moving on to new pastures, or ill health.
What do I want to achieve from the sale?
Work out which factors are important to you. Think about:
- Do I need to sell by a certain date?
- Do I need to sell for a certain price?
- Do I need immediate payment, or can I accept payment in instalments?
- Do I want to remain involved in the business?
- How can I minimise my capital gains and other tax obligations?
Is the time right to sell?
Consider whether the current economic climate and the conditions in your particular sector favour a sale. In addition, work out whether any upcoming legal, tax or regulatory changes might affect the sale.
Where should I go for advice on the sale of my business?
Attempting to sell up without the benefit of professional advice is a false economy. There are many aspects of the process that only an expert can navigate. Particular experts that can help with the process include:
A corporate finance adviser – They can help show your business in the best light to potential buyers, find potential buyers and sound them out anonymously, and write the Sales Memorandum for you.
A non-executive director – Non-execs can provide a valuable objective view of the process. It can be difficult to get an outsider’s perspective during the stressful sales process, so value their advice.
A corporate lawyer – A solicitor can draw up and negotiate the sale agreement with the buyer, and help conduct the due diligence that is required before the sale.
An accountant – An accountant can keep your tax obligations to a minimum during the sale.
A business valuation expert – As you might have guessed, they can accurately value your assets and business as a whole.
What should I consider when hiring professional help?
When considering hiring professional help you should mainly consider two things. Namely, the fee structure and the division of labour.
The fee structure.
Fees are normally charged on one of three bases:
- An hourly rate – ensure you have at least an estimate of how many hours the work is likely to take
- A fixed fee for a specific piece of work
- A contingency fee – this is generally dependent on the eventual sale price of the business
The division of labour.
Avoid overlap if you can. Make sure every expert knows their role, and provide everyone with contact details so they can coordinate with each other if necessary.
How do I show my business in the best light?
Focus on short-term goals for now to boost the appearance of the business to potential buyers and create a healthy set of finances.
Shuffle major purchases and sales around to create a stable financial pattern
Sell assets that the business doesn’t use, like old computers, equipment and vehicles
Call in outstanding debts from customers and improve your credit control
Tidy up your premises and equipment. Buyers will want to see a well-presented business, so if you have a messy warehouse, cluttered office or dirty equipment, now is the time to start a clean-up operation.
Cut down on risk as the less risky your business is, the more attractive it seems to potential buyers.
How do I cut down on risk?
- Tying down customers and suppliers to long-term contracts
- Widening your client or supplier base if you rely too heavily on just a few
- Renewing agreements that are due to expire soon, like vehicle leasing and office rent
- Incentivise key people to stay with the business
- Improve your management information systems.
- Ensure that everything runs smoothly and that systems accurately reflect the true state of your business. Potential buyers will want to access information promptly.
What is a sales memorandum?
Essentially, a sales memorandum is like a brochure for your business.
It is the initial marketing document you use to generate interest in your business from potential buyers.
You and your corporate adviser will normally draft this collaboratively – they should be able to give you an idea of what it should contain.
In general, though, your sales memorandum should contain marketing information, hard figures and your potential for growth.
The marketing information is simply a general summary of your business. It should be written in such a way that it appears as attractive as possible for potential buyers.
Make sure to back up your marketing hubris with objective information and hard figures.
This would include turnover, profit and growth figures.
Finally, buyers will want to see a return on their investment, so demonstrate how the right buyer could take the business to the next level with your businesses’ potential for growth.
How can I find buyers and market my business?
Firstly, identify where potential buyers might come from.
This might include: direct competitors, especially larger companies, major suppliers or customers, financial investment companies or VC firms, or even your own management (for a management buy-out).
Following this, draw up a list of potential buyers and divide your list into two tiers.
Tier A should be the buyers you target initially.
Tier B listing your backup options should your initial efforts fail.
Try not to include more than a few dozen names – spread your net too wide and you risk becoming unfocused.
Sound out your list of buyers by using a corporate adviser to keep the name of your own business anonymous, and assess whether they are interested.
Get your solicitor to draft a confidentiality agreement and make potential buyers sign this before entering into discussions.
Send out the sales memorandum to potential buyers. This should include details of your timescale and how buyers can contact you with opening offers.
Finally, shortlist potential buyers who have made offers and weigh them up using the criteria below.
How do I weigh up my offers?
It can be difficult to know when to start when you have received multiple offers. Use a methodical approach to find the right buyer for you. Ask yourself:
Does the buyer have the ability to pay?
Unless the buyer can demonstrate the ability to pay with proper financing, the offer is not worth the paper it is printed on.
How will the buyer pay?
Buyers will generally offer to pay in one of three ways:
- Cash up front – This is the most secure option, although it can be less advantageous for tax purposes.
- Deferred payment – This may be simple payment by instalments, or it may be contingent on the future performance of the business. In the latter situation, ensure you retain some control so you can ensure performance targets are met – or you might not get the full value.
- A share swap – Unless the company is publicly-listed, this is not a good option as a seller, as it will be difficult to get a true value of the shares on offer.
Do they want to keep me on?
Some buyers will insist you retain some kind of role to ensure a smooth transition. Consider whether this is something you want, or whether you would prefer a clean break.
How will the deal affect my employees?
Most business owners don’t want to be seen as betraying their loyal staff. Does the buyer plan to make people redundant?
How do I choose a buyer?
Follow these simple steps:
- Play buyers off against each other. Select two or three potential buyers and get them to raise their offers. It is unlikely a buyer will pull out simply because of hard-line negotiating tactics.
- Select one buyer to take the deal forward. Don’t try and negotiate further to get a better offer – this is disrespectful and unprofessional. When you have decided to accept an offer, take it forward on this basis.
- Agree Heads of Terms with the buyer. Get your lawyer to draft these – this is essentially a signed agreement setting out the key elements of the proposed deal. It is not a legally binding contract of sale, but other parts of the agreement may be – such as a period of exclusivity in which you cannot negotiate with other buyers.
- Keep one other potential buyer as a backup option. Tell them you have signed heads of terms, but try and keep them interested in case the deal falls through.
How do I complete the sale?
After completing the above steps, all that is left to do is complete the legal due diligence process.
This is essentially an investigatory process involving the buyer’s accountants and lawyers, examining aspects of your business including its finances and legal ownership of assets.
Assuming you have nothing to hide, this aspect of the purchase should be relatively straightforward, and you can move on to finalising the sale and purchase agreement.