Selling your Business - a Guide
Introduction:
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Selling a business is not as easy as it may first sound. It often depends on the type of business. Does part of the business include bricks and mortar or is it mostly goodwill that you’re selling? The reason why you are selling your business is also a very important factor. It needs to be a genuine reason and not just simply to make a quick injection of cash. Sensible and genuine Buyers are looking for sensible and genuine Sellers.
Well, there are of course many ways to sell your business. This will mainly depend on the type of business you own and its legal entity i.e. is it a sole trader; partnership; limited liability partnership or a limited company. If your business is a sole trader or partnership, then you will have to sell via an “asset and goodwill purchase” agreement. See our page "The Deal Structures to Sell a Business for various Business Legal Entities" - Click Here
If your business is a limited company, then you have the dilemma of either selling via an asset and goodwill business sale agreement or more commonly via a share sale i.e. sell your shares to a new buyer. The challenge here of course is for the buyer because if you want to sell your shares then the buyer has to raise finance to buy the shares. Maybe the buyer is itself a limited company entity, in which case does the company have sufficient funds available or can access sufficient funds to buy your shares? If the buyer is a person, the same applies, does this individual have sufficient finance or can they get hold of sufficient finance to buy your shares? Raising money to buy shares presents a big challenge to a buyer because the lender is seeking collateral to secure their loan and very often, in our experience, funders are seeking bricks and mortar assets and/or strong realisable fixed assets to lend against.
How do you value your business? Again, there are several methods used to value a business. Will it be an asset and goodwill valuation or will it be a 100% share sale valuation? We value Businesses - Click Here for more on our Free No-Obligation Valuation Service
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Top 10 seller mistakes:
TEN MISTAKES
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1. Wrong price. This can mean asking for too high a price in the first place or asking for far too low a price.
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2. Inadequate financial records. It is very important to be able to justify the financial performance of the business you are selling. We have sometimes seen Sellers verbally state that they have received undeclared cash from customers which of course has not been declared in the accounts. While this is clearly wrong and legally bad practice, such a statement really has to be ignored by any potential buyer, and funders will certainly ignore it and frown upon it.
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3. Lack of a firm decision to sell. If you intend to sell your business then we suggest you really mean it. Indecision will create indecision with buyers.
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4. Lack of buyer qualification. It is very important all buyers are qualified to find out if either they have finance available or they at least have the chance of accessing the finance available to buy your business.
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5. Selling to the wrong buyer. Sometimes the buyer is simply not a very nice person and particularly if seller finance or an earn-out has been adopted over a period of time, the question then becomes - will the buyer honour the deal?
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6. Demanding all cash. If the seller demands all the cash up front, particularly in countries where seller finance is common e.g. the USA and Canada, then this may be frowned upon by the buyer.
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7. Trying to sell it yourself. While selling your business yourself sounds an interesting proposition, it is often far better to sell it via a reputable business transfer agent.
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8. Negotiating too hard. A seller needs to be as real as possible and not too greedy. If several offers from buyers are similar in value, then the seller needs to live in the reality of the offers rather than live in the unreality that they will receive much more that actually is being offered.
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9. Sale timing not right. As an example, sometimes Sellers want to sell a business after only a few years of it being established. The value will often be lower than it could be and the buyer may be reluctant to buy such a newly established business.
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10. Lack of a business plan. Formal written Business planning is often regarded by business owners as a nuisance value, where the business plan is often done and produced to obtain finance and then put in a draw - never to be seen again. A good quality up-to-date produced business plan with financial forecasts including profit loss, cash flow and monthly balance sheets - is a very good selling tool which helps in selling the business.
A key legal point: when selling a business, it is essential to receive good legal advice concerning the transaction. Specifically, asset and goodwill sale agreements or share sale agreements can be produced by a good quality corporate lawyer, often assisted by us. In our experience, one major key issue often relates to the seller not clearly disclosing to the buyer a particular issue which has been or is being incurred in the business sale and may have a detrimental effect on the business achieving predicted results e.g. if the seller has annual sales with one or more major customers and the seller has not disclosed this fact to the buyer and more importantly has not disclosed that one or more of its customers orders actually is in decline with a history of producing sales from a major customer. The seller must disclose as much relevant information as possible which accompanies the legal sale documentation produced by the lawyer.
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