Selling a business can be a confusing and complicated process and for most people a once in a lifetime experience. Spending 15 minuets of your time reading through this section of the site will give you excellent information on how to prepare and what to expect.
1 – Decision and Research
Your decision to sell could be initiated from all different types of circumstances.
Whatever the reason to sell your business is; retirement, change in your private or business circumstances, decision to change your lifestyle or anything else, make certain you have explored all the alternative options and that you are making an informed decision.
Get a good understanding of the business sale process and the business market, understand the value of your business and set a realistic price.
Your accountant, solicitor, business adviser or financial planner can help a great deal with all of this. This step is probably the first time you will get in touch with a business broker or agent. This is probably where you are at the moment as well.
Engaging into an informative conversation with a business agent can give you a very good idea of what price you can get for your business and how the process works. Most agents will provide free business appraisals. The business agents price is based on what they think somebody will pay for the business not on book value.
It is not uncommon for the opinions of your accountant and business agent to disagree when it comes to pricing of the business for sale. Don’t get discouraged by this, get everybody to clearly explain to you how did they arrive to their price and why. The better informed you are, the better decision you are likely to make.
Consider all financial, legal and emotional issues prior to putting your business on the market. Failing to do so can cost you time as well as money.
Costs involved in selling the business don’t stop at fees and charges for advertising and professional services, if the sale is not undertaken properly and the owner takes their attention away from running the business, loss in revenue and profits can be measured in tens of thousands of dollars.
There is also the danger of losing crucial staff or customers if the news of selling your business leaks out, which will almost definitely create further losses.
Because of all this it is crucial not to “experiment” by putting the business on the market unless you are certain that it is the best line of action to take.
Once you decide to sell your business you must do this efficiently and for best price possible.
A good business agent can definitely do this for you.
2 – Choosing the Business Broker
As a seller, you have to be very careful whom you select to sell your business.
Engaging the wrong agent could mean loss of time and money even compromising confidentiality, especially if you are required to enter into an exclusive agreement for a period of time.
Choosing the right agent will mean a stress free process with great results. You need to select an agent or a broker that won’t just list your business and run the ads and then send the potential buyer to you to deal with them.
You need an agent who will help you prepare the business and yourself, who will lead you and assist you in all steps of the process, who can locate the buyers and closely cooperate with you in order to achieve the best results.
Following are several points that will help you make the right choice.
Interview questions
- Ask all the agents the following questions and then determine the best person for the job.
- How are they going to help you prepare yourself and your business for sale?
- How will they help you during marketing, buyer’s introduction, due diligence and negotiation?
- How are they going to locate the buyers?
- Are they available for after hours meetings if necessary?
Check the existing clients
Lets face it, every business has several good references and if you ask for referees these are what you are going to get. So how do you check your agents competence, reliability and honesty?
The best way is to get from the agents website a list of 5 to 10 clients they are currently selling businesses for and ask them to provide you with contact details for those businesses. This is probably the most accurate way to see what kind of service and subsequent results you can expect from the agent.
This may involve a bit of time since the agent will have to ask permission from the seller for you to contact them and may also involve signing of a confidentiality agreement to protect the seller, but it is definitely worth it.
How quickly the agent does this will also give you a very good indication how much he values your business.
Exclusive contracts
Be aware of long excusive contracts. If the agent claims to have buyers looking for your type of the business and are demanding a six month exclusive contract, ask why do they need six months to contact existing buyers? Do they really have the buyers or just using this “line” to get the listing?
Locking yourself into a long exclusive contract with the wrong agent can create a lot of trouble and account for a lot of lost time and opportunity.
Check their business knowledge and experience
Talk to the agent about their business knowledge and experience. It would be very hard for somebody to help you prepare for the sale and sell your business if they don’t have fundamental business understanding.
The fees and charges
Some agents charge up front fees, some don’t, and it depends on the agency as to how much they will actually charge. You shouldn’t make your decision on which agency to represent you on the grounds of how much they charge you. An agency that has a higher engagement fee or commission may be able to get you more for your business than somebody who charges you nothing. You should choose an agent that you feel will be able to do the best job for you and your business.
3 – Preparation for Sale
Businesses need to be prepared in a way that will present itself to potential buyers completely and transparently, but without giving away any of the business secrets.
All books and records need to be brought up to date, and ready for potential buyers inspection (Not after the acceptance of the offer)
All loose ends need to be addressed and tidied up. For example, lets say the business is not struggling from a cash flow problem and has a very good customer base, however some of the customers are paying their bills more then 30 days after invoice even though payment terms are 7 days.
This is simply happening because no one is really enforcing strict payment terms since these customers always pay. If this is left untouched, to potential customers this may look as potentially bad customers or even bad debts and could affect the business price.
A Sales Memorandum needs to be prepared outlining everything needed for a potential buyer to assess the business. The following information is to be included:
- Brief description of the business and it’s history
- Description of customers and markets
- Description of products, services and pricing
- Business suppliers description
- How the business generates new business (Sales and Marketing)
- Description of premises and lease terms
- Financial highlights for at least 3 years
- Employees and wages explanation
- Assets owned by the business that are for sale with the business
- Explanation of contracts with customers and suppliers
- Any current issues
- Strengths of business
- Potential for future expansion
- Reasons for sale
- Asking price
- And any other information relevant and necessary for buyers assessment of the business
In addition to preparing your business for sale, you need to prepare yourself.
You have to have clear answers on following 3 questions:
What is your entry point, your asking price and terms for sale?
What is your exit point, minimum acceptable price and terms?
What you will do if you can’t reach your minimum acceptable terms of sale or what is your alternative to sale of the business?
For example:
Your maximum price based on profits of the business could be one million dollars, and for this price you are prepared to stay with the business for one year to assist the buyer. The first 3 months are to be part of the business price then for the next 9 months an annual salary of $120,000.
Your exit point could be $900,000 for the business and no free period during change over with minimum annual salary of $90,000.
You alternative to selling the business if you cannot reach a price higher than your exit point could be to employ advisers and put the business under management.