Written by Olivia Millard
While there are multiple ways to sell a business, every successful sale is determined by two critical factors: timing and preparation. In a context where the average business owner has 70-80% of their net worth tied to their company, careful planning is key to maximizing profits. This article outlines six essential steps in formulating a strong exit strategy when selling a company.
Selling your company
Business experts recommend preparing a business for at least a year before the sale takes place. This time should be used strategically to establish clear personal financial goals and to get the company’s paperwork in order. When selling a company, demonstrating credibility is key to maximizing the company’s value, and buyers are particularly focused on revenue growth and profitability.
Step 1 – Organization
You can save time by creating an organized sale memorandum containing all the information a buyer may need. Start with a short summary of the company being sold, including premises, turnover, and profit. Next, write an overview explaining why the business is a unique and viable investment, detailing the products and services on offer. Finally, provide an outline of the management structure, as well as the seller’s role in the business.
Relevant documents to include are:
- At least three years of financial statements, including income statements, cash flow statements, and balance sheets
- Any licenses you may hold
- Insurance policy documents
- Tax return
- A complete list of assets
- Building lease information
- Supplier details
- Anonymized staff list
Step 2 – Find the right advice
It is advisable to hire a broker when selling your company. Business brokers have access to resources that will enable them to reach a large audience of strategic buyers. They can also offer experience in confidential marketing. Confidentiality is important when selling a business because its sale price could be affected if customers, employees, or competitors were to find out too soon. Brokers will ensure that buyers sign an NDA (non-disclosure agreement) before reaching sensitive information such as financial statements, supplier data, pricing, and strategies. Most NDAs are in effect for several years.
Take the time to interview brokers before settling on one, and look for realistic approaches in possible candidates. While it may feel like a waste of time, completing a thorough vetting process can save significant time and money.
Step 3 – Valuing your company
Before listing a company for sale you must ascertain its financial health, as this will be the principal tool for its eventual sale. There are multiple ways to value a company, and a broker should provide advice on this, but the two fundamental variables in determining the value of your business are:
1. The annual cash flow
2. The predictability of your business’s ability to generate these future cash flows
Valuations can take up to three weeks to complete because the sale price of a business is determined by multiple factors. These include revenues, industry, business category, location, cash flow multiples, and asking price.
A business with falling profits is unlikely to attract interest from potential buyers; in this case, you may decide to drive your company into a stronger financial position before listing it for sale.
It is also useful to bear in mind that if your company currently holds a substantial market share, competitors are likely to be interested, as this might increase their market share and industry presence.
Step 4 – Timing
Be patient. Selling a company is not a process that can be accelerated.
External factors also play a significant role. For example, a looming tax rise, regulatory changes in your industry, or a forecasted decline in trade (e.g. Brexit). With careful planning and forward-thinking, it is possible to mitigate the exposure of your business to possibly damaging circumstances and retain its financial value.
Step 5 – Maintain overall performance
Given that it can take time to close a deal, especially when selling a company, it is crucial to maintain the company’s overall performance over the selling period. A year in the business world is a long time, and your company may be subject to various changes. These might be internal (key employee departures) or external (industry shifts or regulatory risks). While some of these are clearly unavoidable, others can be mitigated with consistent leadership.
Step 6 – Finding a buyer
When it comes to identifying and qualifying buyers, a business broker will normally take the lead. However, if the sale is completed without hiring a broker, there are six key considerations to take into account.
- Pre-qualify potential buyers. Most new business acquisitions are partly funded by third-party lenders, and many transactions disintegrate because a potential buyer is unable to obtain a loan after entering into an agreement with a seller. Eliminating unqualified buyers from the off can not only save time but also avoid the leaking of sensitive information.
- Maintain regular contact with potential buyers. This will keep the momentum going and demonstrate sincerity on the seller’s part.
- A letter of intent (LOI) is a preliminary, non-binding document that sets out the buyers’ and sellers’ intentions regarding the sale of the company. It is crucially not a final contract, but a stepping-stone to reaching it.
- Work with a lawyer and an accountant to ensure you are aware of the tax implications of different deal structures and your possible tax liability.
- Leave room to negotiate, but decide on a minimum price before entering into a negotiation.
- Compile two to three potential buyers in case the initial deal falls through.
Start preparing early and ensure the company paperwork is in order to ensure a smooth transition. Maintain company performance to optimize value during the sale period and have a clear exit strategy.
Hiring a broker to guarantee confidentiality and speed up the sale is recommended. Take your time when choosing a broker; when interviewing candidates, look for realistic approaches and be clear about your own financial goals.
Timing is key when ensuring a successful sale, so plan well in advance. In addition to personal reasons, such as retirement or a shift in career, external factors such as industry tax rises can influence the sale price.
Once you have compiled the appropriate financial information, you need a business valuation. This can take up to 2-3 weeks and takes a number of factors into account, such as industry, cash flow, revenues, and location.
When purchasing a company, buyers will need:
· Any licenses you may hold
· Insurance policy documents
· Tax return
· A complete list of assets
· Building lease information
· Supplier details
· Anonymized staff list