As a new year beckons, you may think that the time to sell your business is approaching. If so, there is much to consider, so prepare well.
The good news is that putting the right things in place and establishing best practices before the sale will allow you to stand the best chance of not only selling to the right person, but also of getting the best price. We share 7 practical tips on how best to go about this, underlining the need to start the requisite planning as far in advance as possible, and emphasising the value of taking professional advice every step of the way.
“As much as you might love running your business, you must have an end-goal in the plan. At the very least, an exit strategy keeps you from turning your business into a glorified job – working from home, but with longer hours.” (Kevin J. Donaldson)
A new year beckons, and you may be thinking that it will soon be time to sell your business. Perhaps you are nearing the age of retirement, or want to move on to a new endeavour? Whatever your reason, your business could well be your most valuable personal asset, and something you have invested in for years, if not decades. The prospect of selling can therefore feel overwhelming, and clearly you want to receive a fair price for the asset you’ve worked so hard to create.
Selling your business is therefore likely to be not only a busy period, but an emotional one too and you’ll need to engage in extensive preparation if you want to come out satisfied at the other end.
These tips will help you to prepare for a business sale and get the price you deserve for your company.
- Have a reason why it is for sale
Anyone who is going to buy your business will want to know the reason why it is for sale. Your reason should be clearly thought out and easily explained to avoid spooking potential buyers. Simply saying “It’s time for me to move on” will not build anyone’s confidence. The aim here isn’t to obfuscate your reasons; honesty will always be appreciated.
A serious buyer will spend time doing their due diligence investigation and so know a fair amount about your business, its reputation and sustainability. So remember that whilst your books are likely to tell them more about the health of your business than your words, your words will give them an idea of what the reputation of the business might be and just what they are likely to be dealing with when it comes time to deal with existing clients and suppliers. Common reasons for exiting a business include retirement, partnership disputes, illness or death, feeling overworked or even plain old boredom. When explaining why you are exiting there is an opportunity to add in some of the strengths of the business. “I am feeling overworked”, becomes a lot stronger from a sales perspective when it’s backed up by, “We have so many orders” or “We have a reputation for never letting our customers down”.
- Give yourself time
Selling a business takes time and should not be done in a hurry. Trying to sell in a hurry can only mean the correct things are not in place, and buyers will sense your urgency. In general, you should give yourself at least one year to sell a business and preferably two.
- Get your finances in order
A company with clear, legible finances is also going to sell much quicker than one with a drawer full of receipts and a box of demands from SARS. It is essential at this stage to liaise with your accountant to ensure that all financial records are in place, fully up to date and that any outstanding issues are cleared up.
The more organised and accurate your accounting records are, the easier it is for a potential buyer to assess your company’s value. A potential buyer needs a clear picture of your financial condition, and that includes accurate financial statements for the past several financial years. When someone buys your firm, they may need to integrate your accounting data into their systems, and your accounting transactions must follow industry standards.
A company’s finances tell potential buyers a lot about a business and very few will take the plunge if things aren’t organised and transparent. For example, a purchaser can review your interest expense to determine if the expense is increasing as a percentage of sales. If interest expense climbs say 5% to 8% of sales, your firm’s total debt is also increasing.
There is a second, even more important reason your finances need to be accurate, and this is that you will need them to determine the value of your company. It is impossible to sell something if you don’t know what it is worth, and just how much value there is in it. Knowing your bottom-line price will be important come time for negotiations.
A vital consideration in determining the price is future prospects and profitability. The final purchase price will not be simply based on net asset value but also on likely future profits giving a potential return on investment (the purchase price). There is no substitute for professional advice here!
Also, be clear in your mind how you expect the payment to be made – a lump sum, an earn-out over so many years based on the projected profits being realised. A note here – most sale agreements have clawback clauses if the future profits do not materialise. You will need sound advice on what is in the agreement in this and other considerations.
- Succession Planning
Making sure your business can thrive after you have left will make it a far more attractive proposition for a potential buyer. Hopefully you have always had a succession plan in place in the event that something happens to you, but if you don’t it’s time to get to work.
A succession plan may require you to train and mentor a successor, and to put legal documents in place (be sure to incorporate some flexibility in case a buyer has other ideas!). Both of these tasks are time consuming. If you plan on selling the business on to the employees then an Employee Stock Ownership Plan (ESOP) will need to be developed and, employees funding the ESOP will need a number of years to accumulate the funds to buy out the owner.
For each of these reasons, you should plan for succession as soon as possible. Putting a detailed plan in place can help you avoid a forced sale. A forced sale occurs when the owner is under pressure to sell the business, or the owner’s heirs are trying to sell the company. The seller does not have any bargaining power and will likely receive far less for the business when the sale is finalised.
Finally, in this regard: Consider your reaction and plans should the buyer ask you to stay on for a term or two while they prepare their own successors to take over from you.
- Increase the value of your business
While it may be tempting to take your foot off the gas pedal as you prepare for a sale, this is exactly what you shouldn’t be doing. Businesses whose performance noticeably declines before all the documents are signed only give the impression that the owner is the only thing that matters, and this will give prospective buyers all the excuse they need to make a lowball offer.
On the contrary now is the perfect time to perform a SWOT (strengths, weaknesses, opportunities, and threats) analysis. Write down the key issues in each of those four areas. Get input from your staff, share your SWOT analysis with your team and ask them for feedback. Once you perform this analysis, you can start focusing on business improvements.
The aim is to make sure that the year before you sell is a record breaker. Imagine you are starting all over again and spend this year getting the word out about your business, building clientele, cementing long term contracts and relationships and cutting back on costs. So ideally start planning to maximise value at least a year before you sell!
Make sure that you account for every cost you incur to operate your business and if there are areas of the company that are not profitable, consider closing them. Now is not the time to be keeping your pet projects alive. Having a great year, cleaning out the business chaff and showing investors that the company has a strong future will undoubtedly provide a huge boost to your sales price.
- Identify target buyers
As already indicated, selling a business takes time. You can speed up this process if you identify potential buyers and understand exactly why they might be eager to put in an offer. There are generally two types of reasons for buyers to take on a new going concern: financial and strategic.
Financial buyers treat the purchase as an investment, looking at the potential returns they can achieve. Their aim is to make an acceptable return on their investment and then flip the business either to another buyer or through an IPO. Financial buyers will consider the company’s track record based on a history of strong financial statements, and potential for solid growth. They won’t necessarily worry about flaws in the business as they will see these as opportunities to quickly increase the value before selling it off, but they will haggle every cent on the sales price to ensure the most profit for themselves.
Strategic buyers look for purchases that will fit into their own long-term business strategy. They may, for example, be competitors who are looking to expand vertically (to different parts of the supply chain) or companies that need to expand horizontally to a new industry to diversify their portfolio. Strategic buyers are typically larger and willing to pay more for the purchase, since they can immediately take advantage of economies of scale.
- Bring a good team on board
The final step before actually putting the business up for sale is bringing in a strong team of experts. At the very least you will need an accountant to handle any financial questions the buyer may have and to advise you on choosing a lawyer to attend to the contractual side.
Seek advice also on whether you should employ the services of a specialist broker to help oversee and facilitate the sale. Negotiating a sale yourself allows you to save money and avoid paying a broker’s commission, so it may be the best route to take when the sale is to a trusted family member or current employee, but still bounce that off your accountant first.
In other circumstances, getting a broker on board can help things run more smoothly as the broker will help free up your time to keep the business up and running, will help keep the sale quiet and get the highest price, because brokers are incentivised to maximize their commission.
At the end of the day, having the right people working toward your sale means that at the very least they will pay for themselves, and more often than not they will increase your profit.