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Ask These 5 Questions Before Selling Your Business

By: Annie Button

 

White clock with words Time to Sell on its face

Ask any business owner or entrepreneur and they will tell you that the decision to sell a business is never an easy one. Every commercial enterprise is different and some can be intensely personal, long-term achievements, which can make the sale a deeply emotional and often stressful experience.

It may not surprise you to hear that there is a multitude of factors to think about when selling a business. It is highly advisable to get professional advice and assistance to guide you through the process to ensure that you maximise the value of your business and achieve a successful transaction. Here are five key questions you should be asking.

What is the main goal you are hoping to achieve with the sale?

Why are you selling? The reasons may be personal to you but they can impact on the deal structure that you should choose for the sale. One of the most common exit routes is to sell the business to another trader in the same sector. Then again, perhaps you wish to pass the company to your children, effect a management buy-out or float it on the stock exchange! Typical goals for a business sale include the need to raise cash due to retirement or ill health, a desire to secure the future success of the business and its staff, or a strategy to minimise personal tax liabilities.

Depending on your exact objectives, you now need to assemble a team of professional advisers. This should include a commercial solicitor, financial adviser and tax accountant. You may also need employment law assistance if you have employees, as well as a commercial surveyor to advise on premises-related issues.

Top Tip:

“A Vendor Survey or Disposal Survey is a detailed property survey that can be presented as a Vendors Survey Pack to be issued to potential purchasers. If required, the report can be assigned to the final purchaser to give assurances that the building is in suitable condition, avoiding delays and saving time during the purchase period.” (Bradley-Mason LLP)

When is a good time to sell your business?

Preparing your business for sale takes time – months, even years. The decision to sell in principle should be followed by a period of careful ‘grooming’ to ensure your business is in the best possible financial shape and able to realise its maximum sale value by the time it actually goes on the market.

Many business owners make a big mistake by selling too early. The lack of forward planning means that owners find themselves in panic selling mode when the market is in decline. Much better to ride out the storm and spend time improving planning, performance and profitability across the business. That way, you can show prospective buyers that the business is well managed inside and out, as evidence by accurate management information. In particular, you should focus on

  • Creating a stable financial plan for at least a year
  • Disposing of redundant equipment and commercial property
  • Tightening up on stock control
  • Overhauling and smartening up premises

Top Tip:

“If you have run your business for a long time, it’s easy to forget that some of your systems and procedures may be outdated. Making sure you use effective, streamlined and modern invoicing and credit control methods, for example, shows that you understand the importance of efficient in-house systems and their positive effect on business operations as a whole.” (The Gazette)

How do you actively start the sales process?

When your commercial enterprise is shipshape and ready to be offered for sale, your solicitor will prepare a ‘sales memorandum’, highlighting your business’ key features and basic performance indicators such as turnover and profit. No confidential information will be disclosed at this stage.

You may choose to instruct a specialist business broker or business transfer agent to help market your business, identify and pre-screen prospective buyers. Any serious buyers must be asked to sign a Non-Disclosure Agreement before any sensitive information is shared with them. It may also be a good idea to inform your employees of your intention to sell, so that site visits and tours can be conducted without anyone feeling in the dark.

Top Tip:

“Before marketing the property, it is important to understand what your buyers will be looking for. Their primary considerations will probably be location, suitability and property price. You should ideally look to prepare a Buyer Pack to give to prospective buyers, so that they have everything they need to make a decision.” (Robert Irving Burns)

How do you decide on the best offer?

This is where it gets interesting. Offers to buy your business may come in all kinds of shapes, and some proposals for funding the purchase and taking over your operations will be more attractive to you than others. Are they offering cash upfront, guaranteed deferred cash payments, share swaps or earn-outs (payments linked to future business performance)?

Discuss any offers you receive with your advisers to ensure you choose the right way forward for you. Be prepared to negotiate before asking for final offers. Issues that could affect your decision might include the buyer’s plans for the business going forward, such as selling off some parts, incorporating it into a wider group or making redundancies.

Once you have a firm buyer that you are happy to go with, your solicitors will draw up a Head of Terms Agreement that sets out the main points of the transaction including the subject of sale, the agreed sale price and payment terms.

Top Tip:

“Buyers know that if their goal is to buy a business for the lowest price and on the best terms, the simplest way to do so is to isolate a seller and actively seek a ‘proprietary deal’. But how can you know that you are talking to the best possible buyer if you never explored conversations with other potential buyers? You probably wouldn’t buy the first car you test drove, or marry the first person you date.” (TKO Miller)

What is the process for finalising the deal?

After the sale has been agreed, you can expect the purchaser’s solicitors and accountants to carry out detailed due diligence checks into all areas of your business. Clearly, it is in your interest to be as cooperative and transparent as possible in providing requested documents such as business accounts, property deeds, supplier contracts, employee contracts and more. 

If you have employees that will remain with the business, they will be transferred to the new buyer according to the Transfer of Undertakings (Protection of Employment) regulations (TUPE), as is explained here.

Finally, you may be asked to give warranties that all the information you have provided is true and/or indemnities to protect the purchaser from specific risks. Your buyer could also ask you to agree to a no-competition clause which would prohibit you from setting up a competing business.

Top Tip:

A new employer inherits all existing liabilities under the employee’s contract including any oral or customary terms that are not on paper. He might find himself responsible for honouring a Christmas bonus agreement although there is no mention of it in writing! Due diligence is crucial here and the seller is required to provide comprehensive employee liability information.” (SO Legal)

Published: July 13, 2020
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