Key considerations when selling your business
If you are thinking of selling your business, you should ensure you take time to prepare and carefully consider elements of the process, before committing to sell.
There is a lot to organise and prepare when getting ready to sell your business. Below are some issues that you should consider before listing your business for sale.
- Why do I want to sell my business?
Be honest with yourself and consider the real reason for wanting to sell your business. Have you had a tough month of business? Are there issues with employees, other owners or other staff or suppliers making you feel overwhelmed? You should ensure that wanting to sell your business is not just a “way out” and that you genuinely are ready to move on.
- How long does it usually take to sell a business?
Selling a business is a complex process and takes time. How much time is required to complete the sale process depends on the type of business, its complexity and exclusiveness. It is important to not rush the sale process and to reevaluate your business growth plan, so your business is more appealing to prospective buyers. Getting a professional internal valuation and forecast is recommended as it can help make changes which allow for a higher sale price.
We also recommend seeking professional advice before preparing to sell your business.
- Who will you sell your business to?
The purchaser may be a third party you don’t know or could be a supplier, client, employee, family member or competitor.
If the purchaser is a competitor, your business will allow them to expand their client base and as a consequence, their market share. For these reasons, a competitor may be willing to pay a higher price.
The sale of a business to an employee is more likely to proceed over a number of years, with the employee buying into the business over an agreed period of time.
If you are hoping to keep the business in your family, you will need to consider factors such as, who will manage the business.
Who you sell your business to will determine the type of agreement/legal documentation required. For example, if you sell to a family member, you should have a documented Family Agreement setting out how the business will be managed and the roles and responsibilities of each family member. If you run your business via a company and you sell your business to an employee, you may wish to consider a Shareholder Agreement.
- What to sell and what to keep?
You need to clearly define what is included in the sale, so the purchaser is clear on what they are getting. For example, business contracts, employees, any Intellectual Property, access to key assets and property.
It’s also a good idea to include an ‘Information Memorandum’, ‘Term Sheet’ or ‘Heads of Agreement’ in order to provide a clear indication of what you are selling to potential buyers.
The assets included in a business sale will obviously differ from business to business, this is why we recommend seeking legal advice to ascertain the best options for your situation before you commence the sale process.
- How much is your business actually worth?
The value of your business is usually calculated on your net profit multiple, which is determined by a number of factors including its financial history, forecast of earnings, management team, operational processes and your business brand.
All of the above factors are used to determine what a potential buyer will most likely be prepared to pay for your business.
If you would like to increase the potential value of your business before listing it for sale, you need to work on increasing its profitability and improving key business assets such as its operational processes and brand.
If you believe you can improve the financial performance of your business, you should seek advice from a financial professional.
- Should I tell everyone that I’m selling my business?
If you would like to create competitive tension and sell your business at its full value then yes! If you are concerned and want to shelter your employees and clients, there are ways to do so, but it is vital to get the word out to relevant people that you are selling.
- How do I prepare to sell my business?
Preparing to sell your business is a massive task and requires a lot of your time, energy and emotion. We do not suggest undertaking this process alone and recommend you seek legal and other relevant professional advice to help make the process less stressful.
- Review your contracts
Potential purchasers will want to review the business’ contracts (including leases) and confirm that all contracts are effectively in place with customers, vendors and third parties. Potential purchasers will also assess whether they need consent from third parties, inclusion of any indemnification obligations, restrictive covenants and other relevant contract terms. This is why it is important to conduct an audit of all your business contracts before listing your business for sale.
Conclusion
Preparing to sell a business requires careful planning and patience.
If you want the sale of your business to provide a comfortable lifestyle and future for you and your family, it’s vital to get the right advice before selling.
If you or someone you know wants more information or needs help or advice, please call us on (03) 9592 3356, email us at office@citypacific.com.au or contact us here.
