Start preparing the sale of your business as early as possible because the process takes a while. The best time to sell is when your business is doing well and you’ve got enough energy and enthusiasm for the final push.
Oftentimes, business owners only start to consider selling during a downward trend – either they’ve run out of steam, the business isn’t going well or an event in their personal life has made work difficult. This makes the process unnecessarily stressful.
When planning, consider if you need to sell by a given date or for a minimum price. Also decide whether you’d like to act as a consultant to the new owner, or work for the business. This could improve your asking price and speed of sale and will also impact the type of buyer you can attract.
Preparing for sale
While you’re working hard to keep the business going, some issues inevitably get put off for another day. Now’s the time to gather up those loose ends and get your business in the best possible shape.
Focus on reducing financial burdens on the new buyer, freeing them up to take their own direction. Bring all costs back to short-term spending as much as possible – investing in long-term projects at this point could make a buyer feel obligated to go in a direction they weren’t planning.
You can make your capital position more attractive by reducing stock and tightening credit control. Any superfluous assets can also be sold off. Be careful with this – you only want to trim the fat, not force the new owner to start from scratch.
Improve your internal processes, documenting them carefully. You want to offer the easiest transition possible and a finely tuned machine will be very attractive. If a buyer asks for information, provide it quickly and accurately to generate confidence in your internal systems.
Your buyer ultimately wants to make money, so make sure the financials of your business are great shape. Time your promotions and large purchases with sales peaks and troughs to show a more stable pattern of growth. Be realistic with your sales figures, however – massaging the figures may drive buyers away.
The buyer’s perspective
The best approach to preparing for sale is to always think from the buyer’s point of view – what would you want to see if you were buying a business? In general, buyers will only be interested in a business with good cash flow, solid systems and potential for growth.
You’ve already been through the process of making the best possible case for your business in your business plan. Update this document and use it as your selling tool.
A business with only a few customers is a high-risk proposition for a buyer. Demonstrate multiple sources of income from a healthy customer base. If you only have a few key customers or suppliers, reduce the worry by locking them into longer contracts.
A buyer wants to avoid inheriting problems – especially legal ones. Demonstrate compliance with current legislation and if there are outstanding legal issues, do your best to resolve them quickly. Be transparent about them too – you need to earn your buyer’s trust.
Bringing in the experts
Seek expert advice on accurate valuation, properly accounting for the goodwill you’ve generated. Asking too much puts people off, but asking too little sends a poor message about the health of your business. Research what other business are going for and what is selling well to determine the right price.
Hiring a broker can smooth negotiations and free up your time to continue running the business as normal while they look for buyers. Make sure to interview several brokers – don’t go for the first one you meet or be overly tempted by wild promises of a high selling price.
Brokers can also help to protect your business by keeping your identity confidential. When selling a business, you want as few people to know as possible as it can cause unnecessary concern among suppliers and customers. A business for sale can also be misconstrued as failing so only tell those who need to know, such as your staff and professional advisors.
Your broker and lawyer can also protect your trade secrets by drawing up a confidentiality agreement to use during negotiations with potential buyers. Remember to also protect your intellectual property.
Finding buyers
Selling to staff members can be convenient as they already know your processes. It also eliminates the problem of protecting your trade secrets. Be careful not to go too far down this road only for it to turn sour – you and your successor will still need a good team to work with.
Your competitors may be interested in buying your business to acquire your competitive advantages and improve their market share. Avoid divulging trade secrets without legal protection, because they could pull out of the sale with all the information needed to make a play for your niche in the market.
Consider looking abroad for buyers as well. Your business may offer a great opportunity for an overseas company to break into the US market. A broker with international experience can help with this.
There may also be a distributor, supplier, customer or manufacturer who would be interested in having a stake in more than one level of the chain, as a way of increasing profitability. This would also help them to preserve the existing chain and protect the interest of their current business.
Choosing the right buyer
Avoid selling quickly to the first person who comes along. It may not be the best offer you’ll get and if they don’t have the skills to keep your business afloat, you won’t see the money from your sale.
You can use your lawyer and accountant to pre-qualify candidates before it gets to negotiation stage, but some key questions to ask might include:
- Do they seem serious?
- Do they have financial capacity?
- Does their track record show the right experience?
Closing the deal
Once you have found the right buyer, their offer will be subject to due diligence – going over the finer details of your business and ensuring there are no surprises.
Your buyer’s accountant will want to review all the finances; the lawyers will check issues such as ownership of assets and current contracts. You may be asked to sign warranties and indemnities so make sure your lawyer reviews these documents.
Members of your team may need to help with this final stage, but it should be a formality. If you’re confident your business is in good shape, you could well have found your buyer.
Next steps
- Put a plan in place to get your business in the best shape possible.
- Get expert advice.