As a business owner, there are numerous reasons why you would opt to sell your business. Whatever the motive, pursuit of other ventures, financial gain, to scale the business, or retirement, the decision to sell any business should not be made hastily.
Selling your business is a multi-faceted process, where to maximize the chances of success, several factors should be considered. Most importantly, proper preparation is key to getting it right, both for you and for the business.
The following are some vital things to consider before selling your business:
1. The Selling Price:
The selling price is much dependent on the valuation of the business. The valuation will give you an estimate of the actual worth of your business. Here you generally look at three figures.
- The current financial position of the business: This is simply the sum of assets and liabilities. Also included here is accrued debt.
- The current net worth and profitability of the business.
- Current market selling price of your type and size of business.
Apart from these figures, you need also to understand the buyers mindset. To buyers, revenues are not as crucial as cash flow, profitability, and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and these make up the main metrics in their determination of value.
Additionally, buyers look at:
- Customer acquisition costs, customer concentration, and retention
- Capacity for future growth.
- Strong management that’s independent of the
The majority of sellers often overlook taxes. Capital gains tax and other possible business taxes may eat into profits made on the sale. Business tax write-offs may become an additional hidden cost for the buyer.
2. Confidentiality, Letter of Intent, and Due Diligence
Confidentiality is key to
the success of any deal. Both you and the potential buyer have to exchange
sensitive information about each other. Confidentiality is especially important
where financial records are being exchanged. Confidentiality can be maintained
in two ways:
- Using a third party, business brokers, to
engage interested parties, this offers you anonymity.
- Having a detailed and effective
Non-Disclosure Agreement(NDA). Attention should be taken in the drafting of
this document, so it protects but does not hinder a future deal.
The Letter of Intent (LOI) is
a document that sets out in detail what the buyer is offering in the deal, and
what they expect to get out of any future agreement. The LOI sets out the basic
positions of the seller in any agreement, and by signing it, the Buyer agrees
to meet these basic terms. This gives you a good platform to begin
In any transaction, both additional information will be requested as part of due diligence. The faster the response, the more transparent you are, the more comfortable the buyer, the faster you close the deal.
3. Employees and Intangible Assets
What happens to your
employees after the sale of the business is very important. Their job security
and their value as assets should feature significantly in any negotiations. The
reaction of your employees to a change in ownership is key to the survival and
future success of the business.
Your business probably has assets you do not know about. Client lists, supplier relationships, and employee experience are some of the intangible assets that may be considered when selling the business.
Trademarks and Patents are assets that require special treatment, as they may either be sold to the new owner or licensed, allowing you to retain ownership.
4. Vulnerabilities and Post-Deal Agreements.
A clear understanding of your businesses operational vulnerabilities is essential before a sale. Knowledge of these vulnerabilities allows you to create contingencies and decide the best course of action regarding disclosure and the protection of your interests.
You may want to sell ownership but remain engaged in some capacity in the business. The buyer may wish to retain you at the business fully or just engage you to facilitate a smooth transition. You need to determine whether if needed, you will be available to the business, and in which capacity you will serve.
The new owner may also require you to sign a Non-Compete Agreement saying you will not work for existing competitors, or open a competing business.
5. The Right Buyer
The highest bidder may not
always be the right buyer for your business. The price is right, but the buyer
intends to cut staff. The new owner may lack the necessary skillset, mindset,
or be a weak leader.
You need to assess all the options available to you and make the best long-term choice for the business. Always remember just as buyers choose what to buy, sellers choose whom to sell to. Find the people who are enthusiastic about the business, will best connect to your client base, quickly learn the ropes; market effectively, and grow the business.
The bottom line is you worked hard to build a thriving
business. Selling your business is no small feat, so take your time. Only with
early, in-depth careful, and detailed planning will you
be able to get the most significant rewards and satisfaction from selling your