Many have never purchased one. Those who sell a business are likely to do so only once in their lifetime. The process of selling a business is time-consuming and can be stressful and emotional. You might love your business. Your employees can feel like family. Your customers and suppliers are more like friends. And while you take a crash-course in legal contracts, corporate finance and tax planning, you still have a business that demands your full attention.
The decision to sell could be the biggest business decision you ever make. First, ask your accountant and your lawyer for advice. And before you decide, ask yourself the following questions.
- Why sell? Do you want to retire? Have your personal circumstances changed? Is the business ready to grow but needs investment and someone new at the top? Do the risks no longer seem in proportion to the rewards? Have you received an offer for your business? Is your business failing (see question 4 below)? Make sure you know why you want to sell.
- Right time to sell? Analyse the market conditions that affect your sector. Are you a small business at risk from larger predators? Does your business require a significant investment in new technology? It is usually best to sell when your business is doing well. A period of falling profits or the loss of a key customer might seem like a good time to sell, but it rarely is.
- Do I need to plan? Yes. You should spend time getting your business ready for sale. Give yourself one year at least. You might need to improve your financial records and tidy up your tax affairs. Is the business equipped to survive without you or do you need to strengthen your senior management team? Is your business heavily dependent on one key customer or can you broaden your customer base? Do you need to resolve any outstanding questions, e.g. ownership of Intellectual Property?
- How much is my business worth? “Price is what you pay, value is what you get”. The value of your business will depend on a number of factors: underlying profitability, risk profile, earnings, working capital, historical performance, recent sales of similar businesses, management strength, barriers to entry. Even if you receive an unsolicited offer that seems like a good deal, you should ask your accountant to value your business.
- How do I find a Buyer? You may not be thinking of selling and then receive an “out of the blue” offer from a competitor. Or you may have a strong management team that would be interested in buying the business in an MBO (management buy-out). If not, you may need to appoint a corporate finance advisor who can help discreetly find a Buyer by inviting interest from their list of potential buyers and investors.
- The right Buyer? You need to be sure the Buyer has the finance to pay the purchase price. A Buyer may make the highest offer for the business but, if half of the price will be paid over a number of years, you may prefer to choose a Buyer who makes a lower offer but is able to pay in full when you sign the contract (see 7 below). If the consent of a key supplier or key customer is required, the experience of the Buyer in your sector could be critical (see 10 below).
- What is an Earn-Out? An earn-out means the Buyer is prepared to pay you part of the purchase price when you complete the sale and the balance over a number of years (usually 2-4 years). If the business achieves agreed levels of profits in each year, you will receive the balance of the purchase price in further instalments. An earn-out usually involves the Seller continuing to run the business until the full payment has been made. Are you prepared to stay on after you sell?
- Do I tell my employees? The strict answer depends on whether you are selling the assets of the business or the shares in a company. If you are selling assets, you have a duty to inform and consult with your employees. If you are selling shares, there is no legal requirement on you to inform or consult with the employees. However, confidentiality is key to the success of many business sales.
- What is Buyer Due Diligence? This is the process by which the Buyer carries out a full investigation of your business by asking questions on legal, financial, tax and commercial matters. Due diligence can be time-consuming and it is often difficult for the Seller to handle it alone while also trying to run the business. You may need to confide in one or more trusted members of your workforce (see 8 above).
- Any Deal Breakers? Your business may rely heavily on a key supplier or a key customer whose consent is required before the business can be sold. Or you may know that a key customer is planning to renegotiate the terms on which you sell products to them. If the Buyer due diligence is likely to identify a major issue, it is usually best to be upfront with
These are only some of the questions a Seller needs to ask. And, of course, a Buyer will ask other questions. Even though you would expect a lawyer to say this, you should always seek legal advice as early as possible. The right advisors can take some of the pressure of the sales process from you so that you can concentrate on what you do best – running a successful business.
Published in Business Eye on 24 November 2018