Preparing to sell your business

1. Deciding to sell your business

It is good practice to plan and regularly review your exit strategy even when your business is in the early stages. Some founders start a business with the aim of growing it then selling it for a substantial sum. For others, changing personal or economic circumstances prompt a decision to sell. 

Your approach to selling will be influenced by your personal and business objectives e.g:

• to realise some or all of your investment in the business 

• to retire or reduce the time you spend working 

• to attract new investment to grow the business.

Your objectives will affect whether you aim to:

• sell part of the business, a stake in the business, or all of the business

• exit completely or remain involved financially or at a management level. 

2. Who might buy your business?

Not every business is sellable, so you need to consider if a sale is realistic, by thinking about who might be interested. For example, whether you could:

• pass on or sell to family members

• arrange with the existing management team to buy you out

• facilitate a handover to employee ownership

• attract a private investor or private-equity buyer

• sell your business to a competitor or a buyer looking to move into your market.

As well as your size and sector, decisions you made around how your business operates can affect how you plan an exit through a sale, including your:

• Articles of Association

• partnership agreements

• legal, capital and ownership structure

• accounting procedures

• key contracts.

The priorities of others may also inform your options, such as shareholders, managers, employees, key customers, suppliers and competitors. 

Ideally you will find a buyer whose objectives complement your own and who is willing to negotiate a deal structure that aligns with tax and legal advice you have received.

• Some buyers may be interested in buying your business in its entirety with existing employees, or may want to bring in their own management.

• In other cases, the deal may be structured so that the buyer pays in installments, dependent on you and other key staff remaining in the business for a period of time to ensure continuity. This is often called an “earn-out” period. The amount paid may be dependent on specific levels of sales or profits being achieved.

• Sometimes, buyers may only be interested in assets such as equipment, premises, intellectual property or customer database.
  

Generally you should keep any plans to sell your business confidential to prevent uncertainty for employees, suppliers or customers which could disrupt the smooth operation of the business and negatively affect the value.

3. When to sell your business

Selling at the right time can improve the valuation and price you achieve. If possible, plan ahead so that you can choose the best moment rather than being rushed into a quick sale.

The stability and success of your business is an important factor. Aim to sell when profits are increasing and look likely to grow further. 

The economic context can impact the valuation of your business and the best time to sell. This includes:

• how easy it is for a buyer to access funding - this will depend on how keen banks are to lend, interest rates and how well the buyer’s own business is performing

• the balance of supply and demand -  level of demand from buyers and how many similar businesses in your sector are on the market

• any tax consequences - if there are forthcoming changes to tax rules.

It may help to obtain a preliminary valuation to help you assess if achieving a sale is realistic. While some buyers look for businesses in distress to turnaround, you will probably only achieve a good price if, across your operations, sales and finances, you can demonstrate good performance, management capability, and evidence of potential future growth. 

4. Choosing advisers

Experienced advisers can positively impact the success of your sale and the amount you receive. They can help you prepare your business to be “buyer-ready” so it can achieve an optimal valuation. You will likely need a team of advisers, including:

• Accountant. Your accountant concentrates on the financial aspects of the sale - like preparing accounts for the business. 

• Tax adviser. You also need advice about business and personal tax planning which might affect how you negotiate any deal to minimise the tax burden. Your accountant may also be a tax specialist, or may be able to introduce you to one.

• Broker or corporate finance specialist. Your accountant or solicitor may be able to recommend a broker to help with:

• pre-sale preparation

• producing credible sales documents

• researching, finding and vetting potential buyers

• negotiating a sale on your behalf.

• Solicitor. You will need a solicitor to cover drafting a sale agreement, completing legal due diligence and finalising contracts. 

Make sure you feel comfortable with the people you'll be dealing with and check their credentials, including:

• what experience they have of selling similar businesses and how successful they have been

• how they can help you to market the business for sale

• what contacts they have among potential buyers

• what references they can provide

• what the fees involved are and what they cover

• how they will keep a sale confidential.

Many advisers charge an hourly rate or up-front fees. You may be able to negotiate a fixed rate for a particular piece of work. Some advisers, particularly corporate finance specialists and business brokers, may be prepared to negotiate a success fee as part of their payment. For example, you might pay lower fees if you don't achieve your target price.

5. Preparing your business to be buyer-ready

Planning a sale well in advance and pre-empting potential issues will make it more likely that your business achieves an optimal valuation, is attractive to buyers and can withstand the scrutiny of a due diligence process.

Show strong financial performance

Ask your accountant for advice about how to manage your finances over the longer term to build your credibility with a reasonably stable performance and increasing profits year-on-year. The value of your business is affected by elements such as:

• historical, current and projected profits and cashflow

• how well you control costs

• the need for capital expenditure in the near future.

Areas to keep an eye on include:

• management of working capital, through controlling stock levels and creditors

• identifying obvious areas to cut costs, such as renegotiating supply contracts

• selling underused equipment to reduce debt

• appropriate timing of purchases and longer-term investment

• realistic provisions for bad debts.

It is also good to be able to demonstrate:

• goodwill and strength of customer relationships - including how profitable they are

• economies of scale a new owner could leverage

• value of assets such as property, equipment and stock.

Buyers and their advisers will usually see through any quick fixes you try to use to boost profits. Likewise be realistic with sales forecasts.

Evidence robust operations

Buyers need to be confident they are purchasing a business that has proper planning, established processes and governance, and can continue without you. They may look for:

• a clear business strategy showing growth potential

• a strong and stable management team with a record of success and complementary skills so your business is not too dependent on any individual

• a customer base that ensures you are not overly dependent on too few customers (and likewise for suppliers)

• policies and procedures ensuring compliance with health and safety, employment and other legislation, and reassurance there are no outstanding legal or regulatory disputes

• evidence of ownership of any intellectual property and other assets

• clarity that property contracts are in order

• implementation of suitable management information systems (e.g. inventory control, accounting systems, business reporting, etc)

• transparency around the level of debt and other liabilities.

6. Common methods of valuing a business

The value of a business depends on:

• financial history, current performance and projections

• external factors such as the economy, regulation, competition, and demand for this type of business

• assets and liabilities

• intangible assets such as intellectual property, licences, brand strength, and customer goodwill

• skills, experience and commitment of key staff

• reason for sale.

There are various approaches to apply this information, and buyers and sellers may use more than one method. Usually expert advice is needed from an accountant, business broker or corporate financier.

• Price to earnings. Businesses with a record of sustainable profits are often valued at a multiple of earnings. Profits are adjusted for any unusual, one-off items to arrive at an estimate of 'normalised' earnings. Smaller businesses are usually valued at a lower multiple than similar, larger companies.

• Discounted cashflow. Mature, stable, cash-generating businesses can be valued in a similar way but based on cashflow. Future cashflows are estimated and discounted to account for any risks. This may be a preferred method if you are looking to attract investors.

• Asset valuation. An asset valuation might be appropriate for stable businesses with significant tangible assets - for example property or manufacturing businesses. Your starting point is the value of assets stated in the accounts - known as the 'net book value'. These figures are then refined to reflect factors such as changes in the value of assets or bad debts. If a lot of your assets are intangible, this may not be the best method.

• Entry valuation. This involves calculating the cost of creating a business similar to yours such as buying equipment, employing staff, developing products, attracting customers. It may be suitable for new and niche businesses or useful for sense-checking other methods of valuation.

• Sector criteria. In some industries, there are established criteria for valuing businesses, e.g. by the number of branches an estate agency has.

A potential buyer may use more than one method to get a range of values for your business. In the end, however, any price will be a matter for negotiation.

As every business is unique, valuations are usually subjective and it can be tempting for owners to place too high a value on their business. The value of your business is only as much as a purchaser is prepared to offer in the current market.

Once you have a valuation, you are ready to find a buyer for your business.