Congratulations! If you’re reading this then it sounds as though you have reached a point in the development of your business where you’re either starting to work towards selling, or you might already be there. Selling a business is an incredible moment – it’s the culmination of all that blood, sweat and tears, finally paying out the ultimate dividend.
Then again, selling a business can also be an anxious and even emotional time as you reach the end of a long journey and finally set a material value on all your hard work. Selling a business is a bit of an art form, which is why there are companies out there who are dedicated to matching buyers with businesses for sale. After all, you don’t want your business to take a long time to sell, sell below its value or have a sale fail (which can easily happen) and therefore create question marks over the potential value of your organisation.
So, with that in mind, how do you go about selling a business? Here are our top tips.
How much is a business worth?
The first thing most people want to know when it comes to selling their business is how much it’s worth. We can all understand that, you’ve worked hard and now you want a payout or you want to know what payout you’re working towards. However, putting a number on how much a business is worth isn’t entirely straightforward. Much like selling a house, there can be a lot of variables, including the market itself at the time you come to sell. Most businesses take a while to prepare for sale – up to a year. To some extent that means you’re at the mercy of the market, in some ways it means you need to be strategic with your timing. However, much like selling a house, there are also things you can do to maximise the value of your business and prepare it for market.
Key things to consider are:
- Its positioning: the key USPs and their relevance to potential buyers
- Its readiness: Do an assessment of your business (or better, get an external expert to do it) in the same way that a potential buyer might, to highlight any areas of weakness.
- Your goals: Looking at the market as well as what you want to achieve – do these things align with the realities of what a sale might look like today.
How do I sell my small business?
Selling a small business isn’t very different to selling a big one – it’s just that the numbers are different and therefore the potential buyers might be as well. Most people seek the support of a specialist broker/agent when it comes to selling your business – they have the connections to know who’s looking for what and who might be the best fit for you.
As there are smaller margins involved with small businesses however, you may prefer to negotiate a sale yourself and avoid the fees. There are pros and cons to doing this – the main downside being that you might not maximise the value of your company and you could risk failed sales, which can be both frustrating and damaging to market value.
How do I make my selling business successful?
- Do you have a growing, loyal customer base?
- Have your profits been increasing consistently?
- Do you have a strong position in your market?
- What is your potential for expansion?
To make a business sale successful you need to give yourself enough time to prepare and get it right. That means knowing what you want financially, in terms of the structure of the sale, understanding who might be the right buyer and what their motivations are, and also making sure your business is structured properly.
That means everything from having your records, contracts, and paperwork orderly to making sure your accounts are up to date, any ongoing disputes are resolved and that you have an appropriate infrastructure in place within the organisation so it can run without you (management, HR etc.)
How to sell a business: Maximise the sale value of your company
Every business owner wants to maximise the sale value of their company. You can actually increase a company’s value by a significant amount by dotting the Is and crossing the Ts. That might mean improving branding and marketing, growing the customer base or putting an up to date infrastructure in place. Forbes highlighted six ways to increase the value of your business:
- Diversify your customer base
- Create recurring revenue streams
- Show good and improving cash flow
- Demonstrate scalability
- Show your competitive advantage
- Show financial foresight and controls with appropriate reporting
Focus on preparation. Start by reviewing your business and seeing where it needs improvements before it’s ready for sale. We have already talked about pre-sale preparation for maximising sale value of your business including exploration of your goals, business readiness and positioning.
Areas to cover should include:
- Financial performance: such as historic earnings, future growth and the quality of income.
- Operational quality: including areas like management, business processes, and key employee and supplier relationships.
- Market: include your market share, market growth, and your market position.
- Negotiating strength: this is things like the volume of likely buyers and your flexibility on transaction structures.
Then make sure you have the appropriate lawyers, tax advisors and due diligence experts involved, and someone who is equipped to work with them to get them what they need to make the sale process as easy as possible. This is one key area where lots of business owners prefer to have a dedicated, trusted agent involved.
How to sell a business: finding a buyer
Next look at the process preparation for maximising sale value of your business. That basically means, who are you going to approach? How big is the pool of buyers for your business – are there multiple options in different sectors, for example? Do your research so you have considered their questions before they’ve answered them and can present your business in the best light for them to say yes at the price you want.
How to sell a business: decide on the type of sale you’re interested in
You might think that selling your business is a simple process, but there are lots of different types of buyers out there and different transaction types to choose from. It’s important that you find the right type to suit you – you may feel more comfortable with some than others.
For example, sale options typically include:
- Employee Ownership Trust (EOT): This is an indirect type of employee ownership where shares are held by an independent trust on behalf of all employees.
- Trade Buyer: This is where you approach companies that operate in a similar business to your own either in terms of geography, product or market.
- Financial Buyer: This might be a high net worth individual, family office or private equity firm who take a stake in the business as part of a leveraged buy-out (LBO) transaction.
- Management Buyout: This is where you sell to a capable senior management team within the business via a management buy-out (MBO), usually receiving part payment upfront and then the remainder over the next few years.
- Initial Public Offering (IPO): This is generally for larger companies who turn their private company into a public limited company (plc) on an exchange such as Alternative Investment Market (AIM) or the London Stock Exchange so shares can be bought and sold on public markets.
How to sell a business: agreeing the terms of the sale
This is the final point in selling your business and it can feel like a long time getting there. It comes down to the details, and this is where having a great lawyer on hand is important to make sure nothing is missing. You begin with a Heads of Terms agreement, which lays the groundwork for commercial transactions including contract terms that will later be finalised.
Key areas to consider include:
- Date of document
- Date of intended completion
- Details of parties involved
- Sale price (if agreed)
- Pre-conditions
- Agreement terms
In itself this is not a legally binding document, but it can form the basis of a Purchase of Business Agreement, which can be formalised by your solicitor.
Do you have a business you’re looking to sell? Or are you in the market for buying a promising start-up? I am – contact me for more information.
