Whether buying or selling a small business, there are several factors that you will need to take into consideration. This article aims to give you the main steps in the sales process for businesses.
Deciding when you should buy or sell your business is a crucial step as the timing can be key to making a profit or losing money.
Sellers will need to consider the financial state of the business and why they are selling. Is it to move on to a new project, to retire or to grow the existing business? The ‘right’ time is a tricky thing to predict, but you should be thinking about this for years before taking any action so that you are fully prepared when it is time to sell.
Before selling your business you will need to ensure that everything is in order for potential buyers to look at. This means all the books and records, the premises and any staff that need to be prepared. Just like selling a house, the smallest details can make the difference, so if it’s broken, fix it and if it needs refurbishing then do it.
For buyers timing will mostly come down to personal circumstances. If it is the right time for you to take on a business and you have the financial backing to do so, it is unlikely to be hindered by much else.
However, market fluctuations will affect both buyer and seller in businesses that rely on either the real-estate value or popularity of the product. But this will all come into the due diligence aspect later on.
Valuation of The Business
The problem with business valuations is that they are often overvalued by the seller. This could be through a misguided bias or because of wanting a higher return on their investment. The best way to avoid this bias is to have an independent valuation performed by an expert.
Generally speaking, most businesses will be valued by a multiple of profit. However, there are also asset-based valuations and entry valuations, discounted cash flow valuations and rule-of-thumb valuation that includes elements of a few different methods.
So for buyers, it is worth asking the seller which of the methods they used to arrive at the valuation and then perform your own check against the relevant financial records. You will want to be looking to identify anything that has not been accounted for in the valuation, such as disruptive consumer trends.
Do Your Due Diligence
The dictionary definition of due diligence in legal terms is: a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.
Due diligence usually starts once both parties have agreed on a deal before signing a letter of intent. The period allocated for due diligence to be carried out is usually between 60 and 90 days.
During the period the seller will need to prepare everything that the buyer may request. All documents should be provided promptly and any additional information required should be given swiftly to avoid your buyer backing out. If they feel that you are stalling, they may get nervous and pull the plug.
Make sure that before the buyer has even started the process of due diligence that you have been through all your financial records and that everything is in order with no red flags that could dissuade the buyer from continuing with the purchase.
For the buyer, you are the one carrying out the due diligence, so you want to make sure you have all the relevant paperwork. You will want the financial accounts, surveys of the buildings, equipment and stock records. It is not so easy to ascertain what goodwill and brand reputation the business has built up already, but you still need to try to assess this. You may also need to look at the staff of the business as they are an asset too.
There will always be a deal of ‘haggling’ when it comes to buying a business. Both sides need to have a clear idea of what they want out of the deal and be prepared to walk away if it doesn’t suit them. There is no point in over-stretching your limits before even embarking on your new business venture. You may need to compromise and a certain amount of flexibility may be required to make the deal happen.
As the seller, you would probably wish to receive the full asking price up front. However, you could likely find yourself accepting a portion of the sale price in instalments. These instalments are called ‘earn-outs’ or ‘seller finance’ and maybe the only way to encourage the buyer to increase their offer to what you are willing to accept. You may also find yourself staying on as a consultant for a set period after the sale.
For the buyer, your financial resources and a risk assessment will help you to look at your funding options. It is advisable to seek professional advice on this. You may wish to ask the seller to stay on in a consultancy capacity for a short period. Usually, if they currently play a fundamental role in the day to day operations of the business or you lack experience in running this particular type of enterprise.
If you are offered seller finance, this is a good sign that the seller believes that the business will do well in your hands. They aren’t likely to agree if not as you could default on payments.
Hire Professional Advisors
It is unlikely that you will be able to afford the time and dedication it takes to go through all the legal processes of buying or selling a business.
Sellers need to ensure that they have all the relevant records and can answer all queries raised during the due diligence process. But you will also need to keep the business running throughout the process. It is easy to miss things if you don’t have the back up of professional advisors.
For the buyer, the professional advisor will help you to navigate your way through the necessary paperwork and assist you with negotiations. This can be a very emotional time for both buyer and seller, so putting it in the hands of professionals takes the pressure off.
If you would like to speak to one of our professional advisors about buying or selling a small business, please get in contact with one of our friendly staff today.