The 9 steps to selling a business

The 9 steps to selling a business Global pandemics, geopolitical unrest and economic fallout have disrupted many businesses.  Along with this, business sales have also been disrupted. Many business owners who had intentions of selling are having second thoughts. They are now busy working on their profitability and adjusting their business models to ensure they have a business that will survive, thrive and at some stage be easy to sell. Fortunately not all businesses have been affected, and despite fewer listings, there are some great opportunities that continue to be listed. As buyer interest is high, this all points to a great time to sell a business.

If you own a business, then you have put a lot of time, effort, and equity into growing your enterprise. And when it comes time to sell your business, it is likely your main objectives are to get a sale on the best terms for you, and to maximise the sale price.

“Selling your business will be one of the most important things you’ll do and you get a single chance to get it right.”

When you make an effort to understand the 9 Steps of Selling a Business and identify your likely buyer, you will find that with careful planning - and the help of professionals - you will be well on the way towards negotiating a deal that is suitable to you.

The 9 Steps to Sell a Business:

1. Your timing and options

A number of business owners try to sell their business when sales have slowed, but this is usually not the optium time to sell. The best time is when you are at the top your game, the competition is light and the buyers are active. This will get you your best price.

Profits however aren't everything – an astute buyer can see past profits. For example, they may identify the effects of a covid lockdown and see the potential of a business. What is important is a well-organised and systemised business with a future. Ideally, a year or two of preparation is recommended but often this just isn’t possible.

Any preparation you can do to prepare your business for sale will enhance its prospects. This will give the new owner something solid to work with, and make your business and its bottom line profitability more attractive.

As you assess the attractiveness of your business, highlight the areas that you find need improvement. List all the areas that need attention and put an action plan together. It also pays to ensure you are mentally prepared to exit your business.

Be clear on your goals and objectives before setting your selling strategy. Your business exit strategy options should include when to ideally exit and how this will be best achieved.  Exit strategies can include the following: a strategic or outright sale via a listing; a management buyout; a merger; or bringing a family member onboard - although business owners should never automatically assume that children or family members will want to work in the business or have the skills necessary to run the business and keep it afloat.

A sound business exit strategy will help you manage the process with a clear goal and process to help you achieve the very best outcome for you.

2. Prepare your business for sale

No matter what the economy when selling your business, the perspective buyer will be weighing up a number of factors when assessing its value. They will be wanting to close the deal at the lowest possible price and you, as the seller, will want to maximise your price and negotiate a sale on favourable terms. Building the value in your business is vital to achieving the best outcome.

Where possible, plan your exit well in advance with a business sale strategy that ensures you get the best price for your business. By increasing your profits by $10,000 you could well be adding $30,000 to $40,000 to the value of your business.

Key characteristics that add value are: a strong cash flow; a good history and reputation; being in a growth industry; having a competitive advantage; being a niche business with room for growth; having good plant, location, systems, and good staff.

  • First impressions count - fix, clean and spruce up the physical appearance of your business and assets. Buyers will want to invest in something they like and will enjoy working in.
  • Get your financials in order - buyers will often want 3 years accounts and will be interested in the sales and profits. Ensure everything that should be in you accounts is, and sort out any non-business or irregular items.
  • Improve your cashflow - boost your sales. Revenue and expenditure are two of the greatest contributors to cashflow. Collect any outstanding debts, tighten up on all expenses and eliminate any shrinkage.
  • Ensure the business has a future – if the market has shifted, or some of your products and services are no-longer relevant, look to re-position these so potential buyers can see your business has a future.
  • Customers are key - if possible don’t have all your eggs in one basket. A mix of customers and of recurring income is highly attractive to prospective buyers.
  • Hone your systems and processes – improve or introduce new systems and ensure all processes are documented (have an operations manual). This makes it easy for someone to buy and operate the business and reduces its dependence on you. Do your best to move the goodwill to the business.
  • Sell down excess stock and unused plant - keep the price down and the value high by disposing of any old or damaged stock, and any plant that is surplus to requirements.
  • Organise and document - make sure your business is organised and documented. Ensure all IP (intellectual property), leases and contracts are in place and up-to-date. Tidy your database and ensure you have favourable terms in place with suppliers.
  • Property leases - if the property you operate from is critical for your business, then having the ability for the incoming owner to secure a suitable lease is important.
  • Reason for selling - have a clear and valid reason for selling. Reduce the business's reliance on you and have a management succession plan in place. This should detail who will support the incoming purchaser and what training will be provided.
  • Your employees - treat employees fairly and ensure staffing levels are correct. Look to incentivise key staff if they are critical.

Where possible attend to these factors and prepare your business for sale before you market it. This will help you get a sale and maximise your price.

3. Pick your team

Talk to your Accountant

- Because a business is valued on its profits, good financials are required. Preparing an adjusted profit and loss statement is required to present to buyers. Your accountant can help with this and can also provide advice on how best to structure the deal to minimise any tax implications.

Decide if you will use a Business Broker

- Selling the business yourself can save you a commission and can be the best route if the sale price is low and the transaction simple as business brokers usually have a minimum fee, or if you are selling to a family member or employee. Generally though, using a business broker is a good idea as the benefits will well out weigh the commission. This is especially true if you have limited time for marketing and working with buyers or if you are difficult to contact. You may also lack the necessary knowledge and skills to market your business for sale.

Choose a competent business broker - one with experience in your industry and who has a current and qualified database. A good broker will deploy multi-faceted marketing initiatives to reach your potential buyer, and help compile sales documents. They will also assist in setting a price, and helping handle and negotiate the technical aspects of your business sale from a more neutral perspective.

It is a good idea to talk to several reputable business brokers to gain a complete picture of their services, how they will market your business, what they specialise in, and how they can help you. As with any professional, check out their history and reputation. It is also a good idea to ask the broker about recent sales and for the names of satisfied clients you can contact.

Using a competent Business Broker can make all the difference in obtaining a quick sale and getting your best possible price.

Meet with your Lawyer

- Aspects of the sale and purchase of businesses can vary considerably. In many cases there are additional legal issues that must be considered. So good legal advice is essential.
 
In New Zealand it is best to use a standard “Agreement for Sale and Purchase of a Business” contract produced by the Auckland District Law Society (ADLS) and REINZ - this covers most of the key areas.

Your lawyer will review the agreement prior to signing to make sure it reflects your intentions and that you are adequately protected. They will assist with any contract conditions, and will help identify any issues that must be legally disclosed to a potential purchaser before the agreement is signed. They can also help with the transfer of any leases or property.

On the settlement day your lawyer will receive the purchase funds from the purchaser, and repay any outstanding loan money to your bank to enable the release of any security.

4. Value your business

Nothing raises the doubts of a prospective buyer more than to find out you've been trying to sell for a long time, so it pays to price it right from day one.

To value your business, it is best to ask someone who is in touch with the market and who does regular appraisals. This could be your business broker, a valuer, or if you choose to use an accountant, they should be business savvy and experienced in valuations. A good appraisal is expensive (generally upwards of $2,000), but it can be worth it to ensure you are pitching your business in the right way.

Businesses are generally priced depending on how much money they make. It you are making no money, the price could be based solely on the value of assets. If it is making some money, then it is the seller’s discretionary earnings (profit) that is used, ie. EBPIDT - Earnings Before Proprietors Income (wages or drawings) Interest and Depreciation. And if it is making a lot of money it is a multiple of EBIDTA – ie. Net earnings before taxes, interest, depreciation and amortization. An example of the Earnings Multiplier method would look like this: A business which has a profit of $60,000 may sell for $90,000. The Earnings Multiplier in this case is 1.5 ($60,000 X 1.5 = $90,000)

SME's in New Zealand generally sell between 1 - 4 times EBPIDT

It is important to seek professional advice here. There are a number of factors that can affect the multiplier. Such factors include the business’s risks and profits, the type of industry, its location and condition, the turnover, barriers to entry and prospects for its future. This is a job for the experienced.

5. Identify your likely buyer

It is important to understand who your most likely buyer is and what their motivation is. Put yourself in their shoes and work out what it is they are looking for.

There are many types of prospective business buyers. They could be looking for an investment, a strategic purchase or a change of lifestyle; They may be returning citizens or new migrants looking to buy a business, or someone who has found themselves out of a job. All will have their own reasons for wanting to buy a business, and many will have already identified the type of business they want to purchase and the price they are willing to pay.

Most business buyers will be wanting;

  • Good cashflow,
  • Sound systems and a
  • Proven track record.
They will also be looking for strong branding, stable staff, and a business with a positive outlook.  Furthermore, strategic buyers are likely to be bigger companies that are looking to take out a competitor, or to build on something they already have, and will often pay a premium. Investors will be looking at the ROI and growth potential.  Job buyers are likely to be seeking something small to pay the bills and run as an owner manager.  A SME purchaser is often looking for a vehicle they can get some leverage from while enjoying a great income and building an enterprise they can one day sell and profit from.

Consider the type of buyer your business is most likely to appeal to. What are they looking for and how much are they willing to spend? Then ask yourself if are you meeting the market? After all, your business is only worth what someone is willing to pay for it, so it makes sense to marry up the business with your most likely buyers - the people that are searching for the type of business you are selling and who will recognise the value attached to it.

Profile your likely buyer so you can identify what they potentially want to spend. Think about how they search, and what their hot points are. This way you can tailor your marketing medium and your copy and tone - ensuring your efforts are well targeted.

By defining your buyer's needs, you ensure your marketing plan has the right mix to reach this group, thereby ensuring the best value for your marketing dollar. If you have engaged a business broker they will help with this.

6. Create a marketing plan

"You can't sell a secret", so it is important to have a well thought out plan to draw out your best prospect - this way you get to enjoy the sale you want!

What is important to your potential buyer? The numbers, the status, the lifestyle or work hours? You will need to spell out the value of your business’s key attributes in terms that are important to your buyer.

Having defined your buyer and their needs, pull this into your marketing plan and determine how to best market your business for sale so you reach this group. Look for ways to get the best value from your marketing by targeting your most likely buyers. In today's market a multi-pronged approach, that is heavily weighted to online marketing is likely to draw out your best prospects.

When marketing your business for sale, decide whether or not you will engage the services of a business broker - a broker will bring together a marketing plan for you. If you’re going it alone, profile your most likely buyer, what their motives are and where they search. Create a marketing plan or strategy to ensure you target and attract the right buyers. This should include an advertising schedule with the best timing and type of ads, and the best advertising mediums to maximise the exposure of your business.

Invest well, as businesses can take time to sell. Influencing factors include the price, the type of business, the ease of finance, the market conditions and your marketing efforts. Spend time on your ad copy and ensure it is sharp, punchy and creates interest. Use great images. If you want the best price and buyer, then quality targeted advertising is the best way forward.

Use proven mediums and tools run by reputable operators:
Key specialist websites - what are the main business for sale listing sites? Are they well established? Are they business-for-sale specific with good traffic, buyers, history and credentials?
Social Media - this can be a black hole, but if done well it can boost the interest in your opportunity (usually linked back to your online listing).
Possibly print media - consider how well it is targeted and what the readership is. While the effectiveness of print is dropping, there may be some specialist editions that can be effective.
Use databases - they need to be current, qualified and suitable. Most brokers and specialist listing websites will operate suitable buyer databases.
And word of mouth - yes, this still works and works best with active, well-connected and respected people.

Prepare an Information Memorandum (Sales Brochure) - your broker may do this. This document needs to encapsulate your business and set out its main features and its benefits, as well as a financial summary. Memorandums are both persuasive and informative and reference the buyer's needs in a way that captures their interest.

You need to manage the process, tell the right people, and promote your opportunity wisely and widely to your potential buyers - after all, you are looking for the best prospects and for a sale. Your plan will include an advertising schedule, your budget and timelines. Get your business opportunity recognised and connect with your best prospects then get the conversation going.

Selling your business will be one of the most important things you do - you get a single chance to put a price on it, and market it. You may have put in years of effort - and once you sign the sales documents, there is no going back!

7. Negotiating the deal

It is important to screen any interested parties to determine that they have sufficient funds, and that they have the appropriate skills and commitment to buy and run your business.

When working with an interested and qualified prospect, plan your negotiation strategy carefully. Remember that your goal is to sell, and not to beat the buyer at some negotiation game. Determine what is important to you and work with your team to set any conditions for the sale. The agreement sets out the price, and the terms and conditions of the offer, and will usually be dependent on the purchaser completing due diligence to their satisfaction. Work with your team and the buyer to satisfy any concerns so you get the best deal and a satisfactory outcome.

Don't allow yourself to get bogged down in disputes or point scoring with the buyer - you need to keep focussed on the sale. Focus on interests, not on positions. It helps to generate a number of solutions before deciding what to do about any particular problem.

During negotiations, a business broker can be most advantageous by staying in the middle to resolve and temper any issues that arise.

Generally the larger the deal, the longer it takes to sell a business. To sell your business quickly, price it attractively. Assisting with finance and training can also help. One way to sell your business quickly is to offer an earnout option to someone with no (or a small) up-front payment.  The earnout of the balance should be based on performance or on time-based milestones. This could work with a business partner, your employees or someone in your network.

Once you have a confidentiality agreement signed, and an offer has been made and accepted on a “sale and purchase of a business agreement” you will need work with the buyer to satisfy the terms of the contract.

8. Due Diligence

Once both parties have signed the contract, there are usually conditions that need to be satisfied. The process of due diligence is where the purchaser, along with their accountant and lawyer, examine the business in more detail.  They verify that all the information provided is as suggested - some of this may have been sensitive till now. If this doesn’t all stack up, the buyer may pull the deal.

This process normally takes between 10 and 20 working days to complete, depending on the availability of personnel, and the information and the complexity of the business. During this part of the sales process, work with the buyer to help satisfy the conditions of the offer promptly, and to minimise seller fatigue. It isn’t uncommon for sales to fall over through the final phases, so work wisely to minimise that possibility.

Once satisfied with the terms, the contract is declared unconditional by the purchaser’s lawyer, and the business is considered sold. Of course your business isn't 100% sold until the money is paid.

9. Closing the deal

Once the agreement is unconditional, wrap it up as soon as possible. Advise staff (new contracts may need to be offered), perform a stocktake, and ensure all plant and equipment is inspected. Bring databases and contracts up to date and ensure any IPs and licenses are transferred across. There are likely to be lease and contractual issues to finalise, and some training assistance undertaken.

Successful business sales produce a good result for both the buyer and the seller. Being proactive helps create a smooth transition as the buyer takes over.

Communicate with stakeholders - customers, employees and vendors - to create an effective transition after the sale, and be available to address questions and concerns.

Wahoo! Now make sure the money is in the bank before you go on that well-deserved holiday!

 

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By Richard O'Brien - nzbizbuysell


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