Issues when selling
Some of the critical issues that will be involved in the sale of a business are:
- Finding buyers. There are a number of options available to you when looking for a buyer for your business.
- Business Brokers. A business Broker is a professional who can handle the sale of your business. They usually have a portfolio of other businesses they are selling, as well as potential buyers. They act on your behalf, bringing you and the buyer together and then assist in the process of negotiation, to finalise a deal.
- Customers. A potential buyer is a customer who buys products from you. It may offer that customer a new opportunity in an area he/she is already involved in.
- Competitors. You may find that your business has taken some of the market share away from a competitor. They may be interested in taking over your business, in order to increase their share.
- Employees. Some of the best prospect may be right under your nose. They may be your business partners or staff. If you have been running the business with others, then these people may be likely candidates, interested in taking over. Your managers may be in a position where they would be happy to take over the business because they know how everything runs and are familiar with all areas.
- What is your business worth? Determining how much your business is worth is one of those complex areas that may need the help of an accountant. The accountant will try to establish the value of the business based on its financial records. At the end of the day, the value will be that which is arrived at by negotiation with a potential buyer.
- Arriving at goodwill value. The goodwill value is an intangible thing that is hard to put a value on. The goodwill is tied up with the reputation of the business and the relationship that it has with customers, suppliers and the community in general. It is to do with the image and reputation of the business, which causes people to come and buy there, rather than somewhere else. The fact that the owner has established a customer database, as well as buying patterns and payment history, and has promoted the business – all come into the mix as far as calculating goodwill is concerned.
Prepare the business for sale
Prepare your business before you put it on the market. As soon as the business is on the market there may be intense interest in it and you will have little time to make any other improvements you thought necessary.
Preparing a business is like preparing a car. You have to clean it out, tidy it up and present it in the most attractive way to a potential buyer. In preparing a business, you need to gather together all the information a potential buyer may want and have answers ready for all the questions they will probably ask.
What buyers look at
The first thing a buyer has to be when assessing a business is to review the track record and history of the business and see how it operates? This will necessitate a full investigation of the financial aspects of the business, as well as its suppliers, customers, employees, competitors, marketing, promotional strategies, production, selling methods, etc.
These are some pf the things a buyer needs to look at:
- Financial records. The profitability of the business is what will determine whether a buyer will want to buy or not. Unless the financial records show the business has been running profitably the buyer will not be interested in proceeding.
- Stock. The buyer will want to see the stock figures and will be interested in the method of valuation of that stock. He/she will also look at the age and condition of the stock to determine if any stock is damaged or obsolete.
- Assets. The buyer will want to see a full list of the plant and equipment, as well as the office machinery that belongs to the business. He/she will assess the condition and determine whether the price for each item making up the final price is fair.
- Staff. The buyer will need to check the staff records to determine the background, experience and the skills of each employee. If the employees are going to be retained, the buyer will be very interested in their employment contracts as well as other entitlements. Also union membership and their records as to sickness, etc.
- Customers. The buyer will look at the customers to identify the good customers as well as customers who do not buy very much. He/she will check if there have been any past problems with customers and what issues are involved if a new owner takes over.
- Intellectual property. The buyer will assess the value of the intellectual property, including a full investigation of the patents and trademarks and any copyrights the business owns.
- Debtors and Creditors. The buyer will need to see a list of the debtors (the people who owe the business money). The collection rate and the age of these debtors will be important. Similarly, the buyer will need to look at the creditors to see the bills that are paid on time and whether there are any long outstanding bills and the reason why payment has not been finalised.
- Competitors. The buyer will want to be very clear about the competition in the industry. If there are a number of competitors in the marketplace and they all appear to be operating well, this will give confidence to the buyer that the future business should operate profitably in the future.
- Insurance. The buyer will need to make sure there is sufficient cover in place to protect all the assets of the business. This will include such matters as professional liability and public liability.
- Lease. The buyer will need to look at the lease agreement to make sure the terms of lease are acceptable, the length of the lease and the cost involved will be important and the conditions of getting an extension will also have to be considered.
- Premises. The buyer will look over the premises and make sure they are suitable for the operation.
- Location. The location, of course, is important to any business and the buyer will need to know whether it will need to be relocated at a future for any reason.
- Marketing. The buyer will be looking at marketing methods used by the business to see if they are successful and whether any changes will be required.
- Legal matters. The buyer will need to know if there are any legal issues outstanding, including any unsettled litigation against the company, or any contingent liabilities that are not known.
Negotiate the price
After due diligence period has expired and the potential buyer has decided to proceed, the next step is to negotiate the price. The buyer will naturally try and reduce the price the seller wants and will give reasons for that. If the buyer is smart, he/she will want to show little interest in the business from their body language, because that would contribute to the seller agreeing to a lower price.
If the seller feels that he/she could lose the sale by seeing the negative body language of the buyer, (even if the buyer is putting it on) then the seller may want to agree to the buyer’s counter offer.
Why are you selling?
Many business owners come to a decision to sell their business for a variety of reasons. Even though many businesses are sold because they are not profitable, most businesses come onto the market running well and running profitably.
The main reasons owners sell their business include:
- The business is not making enough profit and is not able to pay the owner enough.
- The business has grown to an extent where it is highly profitable, but requires extra capital and expertise that it would seek from a new owner through a sale.
- There are other reasons, such as the owner retiring, a death in the family and other non-family reasons.
Other reasons may be to give the owner a complete change or the owner wants to seek another involvement, or to simply slow down. It is clear therefore that a business is not put on the market simply because it is not profitable.
If you see yourself pressured to sell because of one of the above reasons, but you don’t really want to make put your business up for sale, then look at other options that may allow the business to continue in operation while resolving other wishes you may have.
The final decision to sell
Whatever the reason that prompted you, selling your business is a critical decision to make. This decision is a final call, so while you may be better off financially (from the cash from the sale), as well as personally, (more time for yourself and your family) do nevertheless consider the big disadvantage of no longer having an ongoing income stream.
Many businesses involve members of the family. For many it would have been part and parcel of their lives. For many it would have been a great source of joy and satisfaction, especially where the business had been running profitably. Many issues have to be taken into account in that final decision.
The 3 main questions when selling
There are 3 major questions that need to be spelt out when you are selling a business because an astute potential buyer will also ask them.
- Why is your business for sale?
- How much is your business worth?
- How will the sale be finalised.
7 critical issues when selling a business
Some of the issues that will be involved in the sale
- Finding a buyer.
There are a number of options available to you when looking for a buyer for your business.
- Business Brokers.
A business Broker is a professional who can handle the sale of your business. They usually have a portfolio of other businesses they are selling, as well as potential buyers. They act on your behalf, bringing you and the buyer together and then assist in the process of negotiation, to finalise a deal.
A potential buyer is a customer who buys products from you. It may offer that customer a new opportunity in an area he/she is already involved in.
You may find that your business has taken some of the market share away from a competitor. They may be interested in taking over your business, in order to increase their share.
Some of the best prospect may be right under your nose. They may be your business partners or staff. If you have been running the business with others, then these people may be likely candidates, interested in taking over. Your managers may be in a position where they would be happy to take over the business because they know how everything runs and are familiar with all areas.
- What is your business worth?
Determining how much your business is worth is one of those complex areas that may need the help of an accountant. The accountant will try to establish the value of the business based on its financial records. At the end of the day, the value will be that which is arrived at by negotiation with a potential buyer.
- Arriving at goodwill value.
The goodwill value is intangible and is hard to value. The goodwill is tied up with the reputation of the business and the relationship it has with customers, suppliers and the community in general. It is to do with the image and reputation of the business, which causes people to come and buy there, rather than somewhere else. The fact that the owner has established a customer database, as well as buying patterns and payment history, and has promoted the business – all come into the mix as far as calculating goodwill is concerned.
How to plan your sale
Before putting your business on the market, do a little homework. Be clear on the areas that have to be looked at in order for you to obtain the best deal.
You will need to do some planning in the following areas and answer the following questions:
- Is this the best time to sell?
- Are all the books of the business up to date?
- Should you discuss your intentions with your advisers?
- What is your business really worth?
- Are your financial accounts up to date as far as showing the true position?
- Are you going to sell the business yourself, or get an agent involved?
- Will you be able to leave in any vendor financing?
- Do you have full stock takes available?
- Do you have full schedules of assets that the business has?
- Are you prepared to sign a restriction on trade clause preventing you from operating within a particular area?
- Do you have a list of the major things you need to attend to before the business can be put on the market?
- Are you prepared to spend time with the new owner after the sale is concluded, to train and take him/her through the ropes?
There are many areas that need to be considered. A lot of questions need answers so you don’t run into problems during the sale negotiations.
Do’s and don’ts for the sale
Here are a list of the dos and don’ts:
- Do talk to your advisers.
Don’t make any moves toward selling until you have talked with your accountant and possibly your lawyer, in case they see things you need to address before putting the business on the market.
- Do have good systems and records.
The sale of your business will be helped if your systems and records are clean and accurate. A new owner needs to see that things have been conducted professionally, and that your records show the true position of your business.
- Do make sure you take your time.
It may take some time for the business to sell, so be prepared for the possibility that it will take some months, or even years, before a qualified buyer is able to take over from you.
- Do make sure all your financials are accurate.
Make sure your accountant has completed all the financial results for you, right up to date, because these will be required for the buyer’s accountant
- Do keep everything secret.
It’s important that you retain confidentiality when selling the business. Especially with staff and customers, because you don’t want to lose staff and you don’t want customer to go elsewhere when they hear the business is going to change hands.
- Do keep your key staff informed.
You may need to talk to your managers and tell them what’s happening in the business. They need to be assured that their jobs are secure. They won’t mind if you are selling the business for good reasons especially if their jobs are secure with the new owner.
- Do set up an information memorandum.
You will need to put together an information memorandum, which is a profile of the business. Your profile will include all the information that a potential buyer needs to have, in order to arrive at a decision.
- Do retain a positive attitude.
You need to be upbeat and positive at all times when negotiating with a buyer. If the buyer gets the idea that you are negative about the business operation this will feed through and they may lose confidence or interest in your venture.
- Do offer vendor finance.
If possible offer vendor finance as this will assist buyers in the short term – they won’t need as much on hand to complete the sale.
- Don’t go for too high a price.
Make sure your asking price is fair, based on the profitability of the business as well as its assets and goodwill.
- Don’t sell at the wrong time.
The best time to sell your business is when it is running well and running profitably. You want buyers to inspect your business when it is at its best.
- Don’t get unnecessary valuations.
In general, a valuation from a professional Valuer is not necessary. This can cost you a lot of money and the figures arrived at may be far away from the real value of your business. An appraisal from an experienced business broker will probably be closer to a fair value. Ask your Accountant to come up with a realistic figure as well.
- Don’t forget to be “upfront”.
It’s no use hiding aspects of the business that you don’t want prospective buyers to see. Being totally honest and pointing out things that need attention will weigh in your favour. It creates trust and confidence. Buyers give you high marks for not hiding things.
- Don’t sign anything before your lawyer sees it.
If a broker or a buyer puts a contract before you, make sure it is referred to your legal adviser before you sign it.
- Don’t forget to get everything confirmed.
In your dealings have everything confirmed in writing. Sometimes representations made orally are relied on, and then you may be accused of saying something at a later date that you did not say at all. Try to keep everything in writing so if anything is given orally, confirm in writing later.
- Don’t appear too anxious to sell.
Play a little hard to get if you can. Don’t appear too anxious to sell. In this way you should be able to negotiate a higher price than if the buyer sees that you want to sell at all cost.
Be clear on these questions
When you are making the decision to sell, the following points need to be considered:
- Is this the best time to sell the business?
- What are the economic conditions at the present time and can they affect the success of the sale?
- How has the business been performing?
- Will the sale affect your staff and customers?
- Are you clear on the reasons why you are selling?
- If you feel you are being forced into selling because of other reasons such as the business not doing too well, are there any alternatives?
You should always talk over your decision to sell with your associates and close family. Also involve your accountant before you go too far into the process.
What they as buyers see as reasons why the owner is selling
Anyone interested in your business will want to know why you are selling. You should answer this truthfully and be open with the potential buyer.
The most common reasons why people sell their business are:
- They want to retire.
- The business is not doing well.
- They don’t have the capital to expand.
- There are internal disputes between partners or shareholders.
- There are problems within the family that are affecting the business.
- The owner’s interests were starting to drop off and they are looking at doing something else.
- The owner wants to cash in on all the efforts put in to date, so as to utilise the capital for personal or family use.
- The owner wants to raise capital to start a new venture.
- The owner is simply tired doing the same thing and wants a total change.
- There has been a death or illness to a family member or a key member of the staff.
Whatever the reason, be truthful because sooner or later the buyer will find out and if you are not up front this may have repercussions later on. It is important to keep in mind that the buyer must not know that you are desperate to sell. You don’t want to be in a situation where the buyer has the advantage and therefore will negotiate a deal less than desirable for you. Also remember the buyer may not believe what you say, so have supporting evidence or backup data to confirm your reasons.
What you the seller see as your reasons for selling
As already pointed out, the buyer may not believe your reasons for selling the business.
(a) Reasons the buyer will see as genuine
- Your retirement. It is obvious from your age or ill health that this reason is valid.
- You are looking at going elsewhere and starting up in a different field. This can also be confirmed from your documentation.
- You may want to move out because you don’t understand the new technology. Many owners want to leave because the world has become computerised and they have no understanding or interest in the new technology because of their age.
(b) Reasons sellers hide from potential buyers
- The business is starting to run at a loss.
- The lease of the franchise will expire soon.
- There are changes in the area, which could affect the business, such as a road coming through.
- You know there are new competitors moving into the location that could affect the business turnover.
- The plant and equipment of the business are getting old and obsolete and you don’t want to spend money on replacements.
- You know that a rent review is coming and the rent may be increased.
- You have a bad name in the area, which is causing a drop in sales.
- There is a shopping mall being planned for the area and that could take business away.
- You are experiencing losses through staff theft and cannot find the culprit.
- You are not getting production from your staff and they are talking against you, causing a drop in productivity.
- The hours you have to spend in order to keep the business operational are becoming too stressful and too long.
A wise buyer will be trying to get to the bottom of the real reasons for your sale, so be aware that questions will be asked.