Selling a business is a complex venture that involves several considerations. The sale also requires a lot of time and effort, and whether your business profits will rely on you establishing a good reason for the sale, planning the timing of the sale and the strength of the business’s operation.
In this article, Douglas Craig, a Regional Partner of Business Partnership, shares his expert advice on how business owners can build a solid plan and make negotiations as successful as possible.
1. Establish the reasons for your sale
What are your reasons for wanting to sell? This is the first question a buyer will ask you. Of course, there are many reasons for a business owner to want to sell their company. Whether you are looking to start a new venture, want to relocate, or it is time to retire, it is important that you communicate your purpose to prospects.
2. Timing is everything
As the saying goes, if you fail to prepare, prepare to fail. And the sooner you start preparing for your sale, the better. Early preparation will put you in the best possible position when it comes to negotiating by allowing you to improve your financial records, business structure, and customer base to make the business more profitable. Remember, your business will be attractive to buyers if it has increasing profits, consistent income figures or a strong customer base. Use this time to work at getting these attributes in place ahead of your sale.
3. Evaluate your business
Before a sale, it is vital to determine your business’s worth. This way, you avoid pricing it too high or too low. This means working with a business broker and accountant to establish an accurate profit before personal expenses . Planning for an exit may mean that rather than trying to reduce your net profit in order to pay less tax, perhaps by making large pension contributions, you leave the cash in the business to demonstrate a higher level of profitability.
4. To broker or not to broker? That is the question
Selling a business independently allows you to avoid paying a broker’s commission. However, if you are still an integral part of the day-to-day operations of your company, spending your time trying to get the most out of your sale is simply impossible. A broker will help free up time for you to keep the business up and running and allow you to keep the sale quiet whilst also getting the best deal. A good broker will offer a secure online portal so you can always monitor progress and feedback to ensure you are never out of the loop.
5. Get your documents in order
When selling your business, it is important to prepare your documents ahead of time. I recommend gathering your tax returns and financial statements dating back three to four years and reviewing them with an accountant. Also, start putting together a list of all the invaluable equipment you are selling with the business. Similarly, you will want another list of contacts related to sales transactions and supplies, as these will add value to your sale. If you can, dig up any relevant paperwork, such as your current lease and create copies ready to distribute once you have financially qualified prospects.
Create an information pack which gives an overview of how you run your business and include an up-to-date operating manual. If a prospect wants to view the business’s premises, ensure it is presentable. For example, if some of the equipment in your workplace is broken or run down, you must fix or replace it before the visit.
6. Keep the process moving
Due to the challenges of finding a buyer, a business sale can take time. The average timescale is usually around nine to twelve months. So, once you eventually find two to three prospective buyers to safeguard you in case one deal falls through, it becomes important to keep the process moving.
Do this by keeping in touch with your potential buyers. Also, determine if your potential buyer is pre-qualified for financing before giving out information about your business. If you plan to finance the sale, work out the details with an accountant or lawyer to reach an agreement with the buyer.
This is the time to stand firm on the price you set out to get for your business. Of course, you can be flexible, but stay as close to your desired figure as possible. Then put any agreements in writing. It should be your priority to ensure your potential buyer signs a nondisclosure or confidentiality agreement to protect your information immediately after their first enquiry comes in.
7. Managing the profits
Ideally, you should be speaking with your financial advisor before the sale completes to begin to understand the options you have available with the lump sum you are going to receive. Work with them to create a plan outlining your financial goals and learn about the tax consequences of different investment strategies. Doing this will allow you to see the long-term benefits, such as using the money to get out of debt or saving for retirement.