The ‘Holy Grail’, for many business owners, is to launch a business, grow it, sell it at a profit and retire early. Even for entrepreneurs who are committed to their business for life, the mere knowledge that they could sell if they chose provides a security blanket.
However, selling a business can be a complex process. In the case of those that turn a steady profit and pose an appealing sales prospect, there still exist a series of marketing, administrative, and legal hurdles to be cleared before a buyer can be secured.
Business sale and purchase lawyers from online legal services provider, LegalVision, spoke with Dynamic Business about the key challenges business owners face when selling their businesses – and how they can best overcome them.
1. Finding the Right Time
According to LegalVision Practice Leader Helen Kay, identifying the correct time to sell a business is of chief importance.
“Timing is crucial when it comes to selling your business,” she said.
“Determining the best time to sell is an art rather than a science. However, market conditions and industry performance at the time of sale will have an impact on the price you can get for your business.”
For profitable businesses, Kay recommended that owners sell towards the end of the growth arc to maximise the price. In the case of a “fading business” – in other words, a business with declining revenue – Kay said the business vendor should temper their expectations.
“Selling a fading business can be difficult – declining financial performance is detrimental to the purchase price,” she explained.
“In this situation, you could consider selling the business’ equipment through an Agreement to Sell Equipment. This is different to a business sale because you are not selling the business’ goodwill or intellectual property.
“Failing that, you can implement a transformation strategy for your business, or look to reduce costs by renegotiating agreements with suppliers. This could give you the option to continue trading until business performance improves.”
2. Finding a Buyer
For first-time business vendors, the search for a buyer can feel like a daunting concept. However, there are a number of resources that exist to connect available businesses to interested parties.
“You can cast a wide net by advertising your business online, for example, on Seek Business or Gumtree,” said Masao Watanabe, a Business Sale and Purchase Lawyer at LegalVision.
“Alternatively, a business broker can take on much of the work that’s involved with selling a business and help you promote your business and find a buyer. They can also assist with negotiating some of the terms of the sale with a buyer.”
Watanabe also suggested looking internally for potential buyers: “You may decide that it is a good idea to tell your employees and suppliers that you are planning on selling – not only to prevent people panicking about a shotgun sale, but also because you may find a genuine buyer within this group.”
3. Adequately Preparing for the Sale
While less glamorous than courting a buyer, collecting all pertinent information is no less integral for a business sale.
“The information that you collect will give both you and the buyer a clearer understanding of your business and will also help you to identify your business’ strengths and weaknesses,” said LegalVision Business Sale Lawyer Bianca Reynolds.
“If your business owns a well-known brand and all of its equipment outright, has a team with a low churn rate and exclusive contracts with reputable suppliers or customers, these are strengths to highlight. On the other hand, a weakness could be that it has experienced a downturn in profits in the past few months or there are issues with intellectual property ownership rights.
“Having all the information on hand will also speed up the sale process, and allow the buyer to undertake their due diligence quickly.”
Relevant sales documents include financial information; business name registration; asset and IP lists; licences and permits; supplier and customer agreements; and the business property lease.
- Determining a Fair Sale Price
Many business vendors can feel nervous when naming a sale price. Too high, and they will deter potential buyers. Too low, and they risk undercutting their own profits. Fortunately, Kay said there exist two main methods for pricing a business: asset valuation and multiplier basis.
“An asset valuation is where you add up the value of all your assets including both physical and intangible assets to set a sale price,” she said.
“The multiplier basis involves multiplying your annual profit or revenue by a specific number — the ‘multiplier’ or “multiple’. This valuation method is most common for growing businesses. One way to think about a multiplier of profit is that if someone buys your business on a multiplier of 3x profit, they would hope to be able to make back their investment within three years.”
Kay warned that both methods have their limitations, and it is important for any business vendor to think on which approach will suit their needs.
“If your business is one where most of the value is in the goodwill, such as brand awareness, customer lists, reputation, an asset valuation may not really be meaningful and a multiplier method will probably be more appropriate,” she said.
“When using the multiplier basis, there are also many other factors that might apply to a business.
“One of the key ones is the industry that your business operates in. You can look around and see what multiples of profit or revenue similar businesses in your industry have sold for recently as an alternative way to get a feel for what an appropriate multiplier might be.”
LegalVision will be hosting an event titled “How to Sell Your Business” on Wednesday 21 February from 6pm. To RSVP for the event, click here.