Guide to selling or buying a business for the first time
For many people, buying or selling a business can be a daunting experience. As a seller, you want to extract the maximum value for all your hard work. As a buyer, you will be looking for a business where you can grow your investment and add value, creating a sustainable return.
Buyer and seller are two sides of the same coin, so it is worth considering both roles in the process. Understanding what you and the person on the other side of the table are trying to achieve, can help the process enormously. In this article, we will lead with the view of the seller, and relate that back to things that a prospective buyer might want to consider.
Questions to be answered in this article
Why are you selling your business?
There are many reasons to sell a business. It might be triggered by a pre-existing exit strategy to grow the business to a certain value. You might be looking for a new challenge, or wish to relocate for family or personal reasons. Retirement to a sun-drenched villa is always an attractive option. Equally, there may be less-positive reasons, such as the business or market being in decline.
The best time to sell a business is when things are going well. Growing businesses attract more buyers and a higher price. The worst time is when growth in your business is slowing or the market is in decline. Timing the sale of your business is one of the most important factors in obtaining the highest price.
As a buyer, understanding the real reasons why a business is being sold is not always possible, but it can help both parties when it comes to things like valuation, timescales, and the overall selling / buying process.
Deciding to sell
You will never sell a business just by thinking about it. The start of the sale process is to make a commitment to sell. This positive decision helps you not only with driving the activities which need to happen next, but also mentally by starting to depersonalise the process.
Part of this decision is to think about what you are trying to achieve.
- Are you looking to simply get the highest price in a one-off payment?
- Do you care about what happens to “your” business in the future?
- Do you want to have some ongoing involvement, or indeed is the buyer likely to want your help for a transitional period?
- Are you selling to a family member or friend, in which case, what are the implications?
Take some time to consider these points carefully. You are aiming to arrive at a point where you have a clear and unambiguous mission statement, something like:
“I am going to sell my business because I want to retire. I would like to know the business continues to serve the local community and would be happy to stay involved part time, if required.”
“I need to sell my business by next June. I want a complete exit and to maximise a single payment within that time frame. I have no interest in what happens to the business going forward”.
Having this clarity of thought will help with the decisions ahead. If you are a buyer, knowing at least some of these drivers can greatly aid the negotiating process.
Getting ready to sell your business
When you sell your home, you make sure it is clean and tidy, minor repairs have been done and the house is as welcoming as possible. It is the same with selling a business. The buyer is going to want to inspect your business, poke around in the building and books. You need to prepare for this by:
- Making sure your accounts and trading records are up to date.
- Preparing a current view of trading, income, cash flow, balance sheet etc.
- Ensuring that physical assets are in good order, buildings, machinery, vehicles etc.
- Ensuring there are no outstanding legislative or environmental issues to be resolved.
- Making sure all your internal systems are accurate and up to date.
Your accountant should be able to help with some of these tasks. If there are issues, then be clear as to what they are, ready to discuss them with the prospective buyer. It is best to be as honest and open as possible, to avoid the suspicion that other problems may be lurking.
Valuing your business
It is important that you start with a realistic valuation of your business. This could be based on a multiple of profits or net assets. It might include a premium for good-will, an ongoing annuity stream of revenue or a very loyal customer base. There may be some Intellectual Property to consider, a patent or the know-how to make “Granny’s Secret Sauce”. Each business has a unique value. Ask too little, and you lose potential value, ask too much and you will not sell. We recommend seeking professional help to get an accurate valuation. This will maximise your return and help remove some of the emotion in selling a business.
Where to sell your business?
In today’s digital world, there are multiple options for advertising your business. The traditional route of business transfer agent or commercial business team, is very much an option for more complex businesses or where the vendor would like the benefit of professional help.
Smaller businesses might consider the online Bizdaq marketplace. This provides a lower cost, fixed fee option which many smaller businesses have found attractive, especially if limited professional assistance is required. Depending on the nature of your business, there may also be a specialist route that is applicable.
Talking to prospective buyers
Once your business is advertised, you will get interest. It is vital that you quickly ascertain if their enquiry is serious and they have the financial capacity required. This will help avoid wasting time on unsuitable candidates. A short interview should help with this, ensuring that their vision as a buyer matches your requirements as the seller. For more complex businesses, consider professional help in this area.
Negotiating a deal
Hopefully by now, you will have a shortlist of potential buyers who want to buy your business. Their job is to get your business with a deal that suits them best, your job is the same in reverse. This is where you need the clarity about why you are selling your business and what you want to achieve. Price is important, but it is not the only thing that matters:
- How solid is the buyer’s ability to pay?
- Is the buyers requested time frame acceptable?
- Are you happy with any earnout stipulation?
- Do the overall terms of the agreement meet your needs?
Be clear as to what your red lines are and stick to them. You may need to be flexible in other areas to close the deal. Be prepared to walk away, or at least withdraw from the ‘negotiation table’ if you are not satisfied. As previously mentioned, consider professional help for more complicated business sales.
Once you have selected a buyer and agreed a price, there is a period of time where the buyer gets to formally examine your business and accounts. This is called ‘due diligence’ and allows the buyer to check that everything they have been told is correct and they are getting what they think they are getting. There are three areas where due diligence is performed:
- Financial – checking the books and accounts.
- Legal – making sure that the seller owns what they claim to own and there are no outstanding legal issues or litigations pending.
- Commercial – a broader look at the marketplace, competitors, and any regulatory issues.
Completing the sale of your business.
Once both buyer and seller are happy, a sale agreement can be drawn up. This should be done by a qualified professional such as a solicitor. Once the agreement is signed by other parties, the sale is legally binding and the agreed transfer of monies will happen, as detailed in the agreement. Congratulations, you have sold your business, or indeed if you are the buyer, started out on a new adventure.
Whilst many things can be done by the individual to reduce the cost of selling a business, there are a few stages where the use of professional advice and support could save you a great deal of hassle and money in the long term. If you have any questions about selling your business, or indeed buying one, please get in touch with one of our dedicated team.