When someone is willing to pay “good money” for something you have built from scratch, there is a different sense of worth and accomplishment – CRANKY BOSS
will take about 12 minutes to read…..
Whatever your preference, whether you plan to close your doors, retire early sell, merge, or pass your business down to the family, you should ideally plan your exit strategy. More importantly, it should be included in your initial business plan.
Having an exit strategy can in part, help you strive towards increasing your profitability which in turn increases the value of your business.
Selling my business was always part of the bigger plan when I first started. It was the end goal, the cherry on the cake.
But I knew this wasn’t a simple process, and I knew that to achieve a successful business sale, I would need years of solid sales, profitability, and ‘goodwill’ behind me. We look at the following key elements on how to sell your business.
Knowing When to Sell is Important
In 2014 we decided to begin manufacturing what we had successfully been selling for the last eight years. At this precise moment, I started to see the end game. It was the beginning of the end.
It made sense that a manufacturing facility was much needed in providing us with total control over our production line. We were now entirely in charge of our destiny.
We held a different type of authority in the industry. It was a game-changer.
Manufacturing bought enormous challenges and risks with it, but it was an asset and a great value to the business. One year later, we purchased the premises as well. This was now the complete picture.
I gave myself a timeline of 5 years – and that by 2020, ideally, I would have loved to see an exit. But 2020 had a mind of its own.
You guessed it – the year of Covid!
However, one year later and after endless lockdowns, the sale was successful, and the whole process ran smoothly.
This is how I did it.
You will need the following experts to assist you:
- A Good Business Broker
- Your Accountant
- A Lawyer experienced in business sales
The best approach would be if all of them worked together before. One can generally recommend the other. This worked a treat for me. Things just got done; When you put your business up for sale, you need to be able to strike when the iron is hot and when momentum builds.
There’s no point in having a deal ready to go, and everyone is waiting on your lawyer to arrange the documents needed to sell a business. If your business broker recommends a lawyer they have worked with extensively in the past, then go with it. Get the job done.
Our first meeting was in May. By June our business was for sale and by November, we had settled. This was a fantastic outcome and one that would not have occurred, in my opinion, if that team of experts hadn’t worked with each other before. It was just a seamless experience.
It would help if you considered that it would take approximately 6-12 months to complete your sale. It can be a lengthy process. That’s why it’s key to plan early. Let’s go through some of the things you have to do when you sell a business.
This is what you should prepare for well in advance:
- A minimum of 3 years (5 years is excellent) to be showing profitability.
- Start reducing your costs. This will assist significantly in increasing those profits.
- Increase your social media / online presence – you want to be out there so any potential buyer can see you.
- Get rid of any liabilities you may have, including warranties/claims/tax.
- Recession proof your business so any potential buyers find the purchase appealing without the threat of economic downturns.
- Don’t commence any legal proceedings. Tie up any outstanding ones.
- Ensure you maintain a strong team. Your staff should be indispensable.
- Maintain a strong customer base. It would help if you had several sales channels in place. These are strengths.
- Start setting aside staff entitlements as these become payable at the time of sale.
- A note for small businesses: In the State of Victoria, Business Sales under $500,000 –are required by law to complete a Section 52. If your sale price is above that, you do not need to complete this. A Section 52 is basically a statement that includes your financial performance and tax information about your business.
- Be prepared to ‘open up’ your financials to any serious potential buyers. As part of their due diligence, they will seek to look at your financials in detail with their accountant.
- Your financials should be in good order, straightforward and understandable.
- Ensure that any claims about the business are correct and true to avoid claims against you. Ensure your reviews are authentic and never post fake reviews about your own business.
- Ensure you have a registered business name that you can transfer. Remember, you are transferring a business name, not a company name.
Transferring a company name can be done, but it is highly complex, and it often involves meticulous planning from both sides.
What are you selling?
It’s essential to identify what it is exactly you are selling.
Do you want to sell the whole business and its assets? If not, identify which assets you would like to keep.
Does the business have any property you would like to include in the sale? If your company owns the building, it is probably good to sell the whole thing as a package. It can generally appear more attractive to a potential buyer. It’s also, in my opinion, advisable that you separate yourself entirely from the after-sale. Having the new owner pay you rent on a building that is still yours may have some negatives.
Your business broker & beginning the process
When looking for a broker here are some things I checked for / asked:
- I ensured they were licensed to operate as a business broker,
- checked their reviews
- checked their credentials / to see if they were part of any organisations
- looked at their listings to ensure that they were familiar and had experience in my industry and the size of my business. I asked them if they had sold something similar to my business.
- I asked if they have an existing database and how big it is and if they intended to use this.
- Asked how many businesses they sold in the last few months to get an idea of their current stand.
- I asked them how they intended to find buyers and their strategy.
- I asked what their fees are and if there is a minimum fee, plus any marketing costs that would be in addition to their prices.
- I asked what sort of an exclusivity agreement would be in place and for how long, and what this meant.
- Asked how frequently they intended to communicate? Was it a standard weekly report? Or was it day to day based on enquiries and results?
Once you have decided on a broker, you will sign an exclusivity agreement and pay them marketing costs to get the process moving. It would help if you got everything in writing. It supports both sides and avoids any misunderstandings along the way.
A good business broker should prepare an Information Memorandum that will include detailed information about your company. The IM forms part of the documents needed to sell a business. It is generally a buyer’s kit intended to get the best result for your business sale. It contains very comprehensive information about your business, including your Business Profile and your history, which includes key milestones, Industry Reports, Business Financials, a SWOT analysis, Key Highlights of your Business, your staff structure, both your tangible and intangibles assets, any intellectual property you may have, any leases/agreements in place – to name a few! This process alone can take weeks, so ensure you have this information ready if you want to sell your business quickly. Once this is ready your business broker will list your business for sale.
So what is the best site to sell your business? You want to be everywhere! Anywhere potential buyers are looking, you want to be there. In general, your business broker will know where these places are – let your broker lead the way.
Potential buyers will generally sign a non-disclosure/confidentiality agreement before obtaining this. If your broker is good, they will first retrieve as much detail as possible from any potential buyer before handing out any information. Your broker should always have your best interests ahead of anyone else.
This includes protecting as much as they possibly can, your information, from getting into the hands of competition and stickybeaks🐤 and ensuring there is a low profile kept. A significant part of their job is eliminating non-genuine interests and time wasters.
Displaying a sale price on your advertisement is generally good practice and is inviting to potential buyers. Being straightforward and honest is always the best practice – so ensure your broker is.
If a potential buyer feels at any given time that something doesn’t add up – they will walk away.
Likewise, it’s equally crucial for a seller to be mindful of the buyer. Always remember that this process can take six months to eventuate. I dealt with them through my broker almost daily until our settlement was complete, and then I worked with them for 4-6 weeks doing the handover. Don’t just sell your business to anyone. Ensure you are dealing with professional and common-sense people.
The first two offers I received I rejected. They were both higher in dollar value than the buyer I settled with, but they were both illogical and unprofessional.
Those initial meetings should ideally be done after office hours. You should try and keep a low profile at the beginning. As part of their due diligence, potential buyers may often ask to be able to work with your business before they commit to buying. Try and steer clear from these sorts of requests. Things can derail quickly, and you can lose both the buyer and your staff. Your broker will set the terms and the pace.
What’s my business worth? How much does a business usually sell for?
It’s important to be realistic with your sale price.
Many people think that their business is worth all the money they have thrown at it, irrespective of its profit margins, while others believe their business is worth whatever potential profits they think it has, without much clear evidence to back it up.
Your mindset is important. Listen to your broker and if you are not satisfied with their evaluation – seek a second and third opinion or negotiate within reason. If your broker is evaluating your business at $500,000 per se, your negotiations should be within reach of this dollar amount. It should not become a figure over 1 million dollars. You will waste your time and resources trying to achieve something unrealistic.
Try and get comparable sales or current marketplace value – a price that similar businesses have sold for. Your broker would have this information.
At the end of the day, your business is worth what someone is willing to pay. It is unlikely that someone would come along and invest 1.5 million dollars for a company making a 100K profit.
There are so many variables and things to account for when someone buys a business, making it difficult to place a value. Other than the fact that business is considered to be a high-risk investment there are other subjective things that need to be taken into consideration. The buyer may need for example to make a big lifestyle change.
There are a few methods used to calculate the value of a business and each industry has a different formula.
Your broker will run you through which method is best used for your business.
The most common way is the earnings “multiplier” method.
In simple terms, you multiply your yearly net profit or EBITDA by a certain number of years (aka the multiplier). The amount of years varies amongst industries.
A common multiplier is 3.
In the very basic and most straightforward of terms, if you have an adjusted average net profit margin of $150,000 over the last three years, your business would be valued at around $450,000. Bear in mind that in addition to this you will also get paid for your stock. For example, if you are selling a retail clothing store, you would get paid for your business plus all the stock at hand.
A buyer will also look at their ROI (Return On Investment). In simple terms, how many years it will take them to cover their investment. A good ROI is three years.
Negotiations.
In general, these are best left for your business broker. Through your broker, you will be able to negotiate the price and the terms of your sale. If there is something you don’t fully understand, your best bet is to seek advice from your broker or lawyer or both! Some of the things that you will need to negotiate are:
- Sale Price
- deposit amounts
- date of settlement
- due diligence time frames and what it pertains
- Warranty time frames on the business
- when you can tell staff
- any training periods for the buyer
- contract terms/heads of agreements
- exclusivity once an agreement and a deposit are in place
- period of restraint of trade (this is the amount of time, including geographic locations, that you agree not to trade and compete against the buyer in the same industry)
Deposit & Due Diligence
Once you have gone through your negotiations and agreed to a price together with the terms, you will draw up a Heads of Agreement and accept a deposit. This is generally kept in a trust account at your lawyer’s office or a business broker. From here on, you will move to the stage of due diligence. During this phase, the buyer will seek to thoroughly assess your business to ensure they are safely investing their money and that there are generally no cracks anywhere. It is typical to dive into your financials and analyse every detail with their accountant. This process took us 2 – 3 weeks.
Telling Your Staff & Suppliers.
In the initial phase, you should keep a low profile and not disclose your selling plans to your staff. This will create unnecessary stress and uncertainty because people generally do not like change. Remember, you would want the process to go as smoothly as possible, both for the buyer and your team. If you have key people or higher-up managers in your company, it would be good to tell them first.
However, there is a time frame that you should be mindful of when telling your staff. If for example, you need to terminate their contracts so that they draw up new employment contracts with the new owner, then the legal notice period would apply.
I told our staff four weeks before settlement and ensured that the new owner came in for an informal chat on the same afternoon to confirm to them that they are not losing their job and there is a direct continuation of employment.
Once you are done telling your management and staff, the next logical move would be to tell your suppliers. You can then set up meetings to introduce your suppliers and service providers to the new owner.
Transferring your business.
Your broker and lawyer should ideally walk you through every sale stage. They should be with you on settlement day to make the transition as smoothly as possible. These moments can be proven to be highly stressful or emotional; your broker is there to keep the waters calm on both sides.
Ensure that you do not transfer anything before settlement. If settlement has a time to it – stick to that. Don’t transfer anything out of your name before the funds have landed and cleared in your bank account. Not even 5 minutes before.
It’s very easy to lose focus on settlement day and take for granted that everything will fall into place. Things will most likely be fine, but what if they aren’t?
Make a note of all the things that need to be transferred to the new business owner, and note all the things that you will need to cancel, tie up or terminate that are now no longer needed.
The following are some examples:
- Transfer of Business Name and the cancellation of your ABN if applicable
- Transfer of any intellectual property/trademarks
- Transfer of any domain names and websites, social media accounts
- Utility Bills, Internet, Phones
- Your taxes and any business activity statements
- WorkSafe Cover
- Insurances
- If you are online, you will need to cancel your merchant facility and any other facilities that accept payment.
- Transfer / cancel any subscriptions that you have that are related to the business.
- Remove your credit card from any platforms that are now theirs.
- Staff entitlements are generally transferred over to the new owner.
- Give them a tour of the facility, show them small things, like power boards, heating and cooling and where the light switches are.
- Create an easy go-to suppliers and contacts list.
Don’t forget to give them a Key to their new business! The simplest thing is sometimes the one overlooked the most.
Now that you are done selling your business think about what you will do with your money. Be mindful that there may be a tax on selling a business. Think about handling it in a way where you reduce your tax bill by simply rolling over the funds into your super account. Your accountant / financial advisor would step in here to assist you with these issues.
Tips to both the buyer & seller!
💡TIP to Seller:
Stick around for the first month until the new owner transitions into the business. I know you are probably keen on using all those miles to travel for free, but try and keep a line of communication open. Remember, this can be a daunting time for them until they adjust. They have just spent a fortune, and there may be times they feel they are swimming in deep waters. Be kind and compassionate and give them the time they need. You built this up from scratch. You would want to see the new owner succeed.
Then, take that much-needed vacation travelling with some of the best airlines!
💡TIP To Byer:
You should take the first three months to familiarise yourself with procedures and get a general feel of how the business runs and use this time to bond with your new team/staff.
It’s crucial that your team feels secure and understand that nothing changes in their world. Managing change can be challenging, especially when trying to adapt to change yourself. However, it is imperative to ensure minimum disruption to your new business. You may need to show flexibility initially until you gain their trust and the chemistry starts to work.
My strong recommendation is not to change how the business is running for the first 12 months. One of the biggest mistakes buyers make is that they think they can “save money” by changing things around and increase their profits. This is the absolute worst thing you can do. You bought a profitable business. It’s profitable because there are systems that make it like that. Don’t try and fix something that is not broken. You may break a link in the chain that sets off a complete reaction and derails the business. Always remember, it’s what you don’t know that you should be mindful of. Have patience. Watch, learn and wait. Take note of what the previous owner is saying to you. When the time comes, start making small changes if you see fit.
This is a new ball game for new business owners who are entering from the corporate world. If you come from a big corporate company and purchased a small business be prepared initially to work on and in the business and learn every aspect.
All that experience you have built up over the years could benefit your business greatly but be mindful that your pocket is now paying for all those resources that were made available to you that contributed to your success.
Finally, you should always consult with a licensed and experienced professional when selling or buying a business. The information I have provided above is based on my experience and should be seen as a guide and view only, not as professional advice.
Selling your business is a bonus step in my 5 basic step guide on how to run a successful business. I have included this as this can form part of your exit strategy as it did mine.
Feel free to check out the other 5 steps below and see more information on each or scroll a bit further down and see an easy way to navigate through the rest of my site.
It’s essential to understand these 5 steps and their content as they are the foundation of running a successful business. Practical real-business life information that every business owner needs to know.
