Preparing to sell your business

Selling a business can be the largest and most important deal of an entrepreneur's career. Whatever prompts the sale - illness, age, partner disputes, financial hardship - selling your business is a high-stakes transaction, with far-reaching financial and emotional consequences.

Selling your business could be the most important financial deal you'll ever make. For many owners, selling the business they've spent years building up can also be emotionally difficult. And unless you've sold another business previously, you'll have no experience to help you.

Is selling my business the right option?

Before you embark on selling your business, you need to carefully assess your reasons for doing so.

You need to consider four key questions:

What are my objectives as the owner of the business? For example, you might want to realise some or all of your investment in the business to fund your retirement.
What are my objectives as manager of the business? For example, you might want to retire as soon as possible or prefer to keep running the business.
What are my objectives for the business itself? For example, the business might need new investment in order to grow.
Who else will be affected and what will they want? For example, other shareholders, managers and employees, and even key customers and suppliers.

Selling part or all of the business may be the best way to achieve your objectives. You might, for instance, want to sell your business outright, leaving you with no financial or management involvement. For more information, see the page in this guide on ways to sell your business.

But a sale may not always be the best solution. And, of course, it may not always be realistic either - for more information, see the page in this guide: is a sale realistic?

There's a range of other exit routes that may suit your needs better. If, for example, you want to retire but already have enough money, you could pass the business on to your children. Or a stock-market flotation could give you access to capital to develop your business while making it easier to sell part or all of your stake in the business.

Ways to sell your business

Most businesses are sold in a trade sale to another business. Alternatively, you may be able to find a private-equity buyer. For example, a venture capital firm might be prepared to help your management buy the business.

There are several different sale options:

Partial or full sale

You may want to sell the entire business. Sometimes the purchaser prefers you to retain partial ownership and continue to run the business. This can give the purchaser confidence that the business will do well.

Sale of assets

You can sell assets such as equipment, intellectual property or your customer list rather than selling the business itself. This may be attractive to a purchaser who does not want to take on liabilities and obligations. For example the purchaser might not want to take on your employees. You will be left with whatever assets and liabilities are not included in the sale.

Immediate or phased payment

You can ask for payment in full when the sale is completed, or you may be prepared to accept payment in instalments. The purchaser may well prefer to pay in instalments. But you will be at risk, for example if the purchaser cannot make future payments.

Your choices can affect whether buyers are interested and how much they are prepared to offer. They can also affect the tax treatment of the sale.

You can get guidance from an adviser. For help in how to choose one, see the page in this guide on how to choose advisers to sell your business.

Is a sale realistic?

You can only sell your business if someone is prepared to pay for it. If you can't identify strong reasons - that can be easily substantiated - why your business would make a good acquisition, it's likely to be difficult to find a buyer. Ask yourself the following questions:

Is the business healthy? A business in trouble is difficult to sell and potential buyers are likely to wait until they can get assets at a knockdown price.
Are the basics in place to make the business attractive? Buyers like well-organised businesses with strong management.
Does the business have a good financial record? Buyers prefer a record of smoothly increasing profits with good growth potential.
Can you identify potential trade purchasers and a good reason why they should want to buy your business? Buying a business can be disruptive and expensive. Potential purchasers may prefer to concentrate on their existing operations.
Are the existing management team interested in buying the business? You may find that they are the only potential purchaser and that they only offer a modest price.

It usually pays to start planning a sale well in advance. This gives you time to groom the business, making it as attractive as possible to potential purchasers. You may also want to get a preliminary valuation before you offer it for sale.

When to sell your business

Selling at the right time can have a significant impact on the price you get for your business.

If possible, plan ahead so that you can pick the best moment rather than being rushed into a quick sale. For example if you plan to retire in five years' time, it's a good idea to start planning the sale of your business now.

The general state of the economy - and your sector in particular - can have an effect. It's easier for a trade buyer to fund a purchase when their own business is doing well, interest rates are low and banks are keen to lend.

The state of your business is a more important factor. Aim to sell when profits are increasing and look likely to grow further. Consider the impact of sales cycles or seasonal fluctuations in your business - you might have fuller order books at a particular time of year, for example.

Planning well in advance also allows you to groom other aspects of your operations to ensure your business is as attractive to buyers as possible. For example, you can ensure that equipment is well-maintained, key contracts are in order, and that you are complying with all legislation.

The detailed timing of a sale may also depend on the tax consequences, and any forthcoming changes to tax rules.

Choose advisers to sell your business

Experienced advisers are essential for an effective sale. The right adviser can have a big impact on whether you sell your business successfully and how high a price you get.

Your most imporant advisor is a Busines Broker who is expert in the sale of businesses. A lot of businesses also choose to use a specialist business broker as well. The business broker should be involved at an early stage and helps you choose the timing, find potential purchasers, groom the business for sale and negotiate the sale. The broker will manage the whole sale process, leaving you free to continue running the business.

Always examine advisers' skills and expertise carefully. For example you should look at:

what experience they have of selling similar businesses and how successful they've been
how they can help you to market the business
what contacts they have among potential purchasers
what references they can provide

If you're using a firm of advisers, make sure you feel comfortable with the people you'll be dealing with on a day-to-day basis.

Of course you will have to pay your advisers. Many advisers charge an hourly rate. Alternatively, you may be able to negotiate a fixed rate for a particular piece of work. Some advisers, particularly corporate finance specialists, are prepared to negotiate a success fee as part of their payment. For example, you might pay lower fees if you don't achieve your target price.

Show strong financial performance

In the best of all worlds, the owner begins to prepare his or her business for sale at least one year, and preferably three years, in advance. Start by assessing financial books with an eye toward creating audited financial statements that illustrate the company's revenue and growth potential. Planning well ahead helps you ensure that your business has a financial record that attracts buyers.

A first step is to ensure that your finances are in good order. Although this should be the case at any time, planning to sell your business can push you to focus on this area. One major area is control of working capital, through reducing stock levels and controlling creditors. There may also be opportunities to cut costs, such as renegotiating supply contracts and eliminating unnecessary perks. You can also sell underused equipment to reduce debt.

You will also want to present your accounts as attractively as possible. Buyers usually prefer businesses that show increasing profits year on year. If possible, your financial performance should be reasonably stable throughout the year. You may be able to bring forward or delay purchases and sales to help with this. You may also want to change some of your accounting policies.

Good sales forecasts will help to increase prospective purchasers' confidence in your business - but you must ensure they're realistic and can be supported with evidence. A full order book is a good sign.

It's important that buyers believe your accounts. For example, you should make realistic provisions for bad debts. Buyers will usually see through any quick fixes you try to use to boost profits.

To maximise short-term profits you can reduce longer-term investment. For example you might avoid expenses like advertising heavily or taking on new staff. But avoid excessive cost-cutting - you need to maintain spending in essential areas, otherwise the business suffers and so does the price buyers offer.

Streamline your business operations

The more confidence a buyer has in your business, the higher the price they are likely to offer. It's essential to set out a clearly defined strategy in your business plan.

You also need to show that you've got a strong management team in place. If your business is too dependent on your own skills, it will damage the price it can fetch - and could even make it impossible to sell. Appointing a deputy or department managers can enhance a company's value by alleviating that risk. You may also want to encourage key employees to stay by considering appropriate incentive schemes.

Aim to reduce your dependence on too few customers or on one or two key suppliers. Show how your customer base is expanding and formalise any informal deals you have with customers and suppliers.

You should also:

ensure you're complying with health and safety, employment and other legislation - consider asking your legal advisers to review the business
settle any legal disputes
make sure you have clear ownership of any intellectual property
ensure property contracts are sorted out
put in place suitable management information systems
ensure your finances are in good order

The sooner you start planning, the more effectively you can do all this.

Throughout the sale process, continue to demonstrate that you will be flexible and co-operative. Show that you would also be willing to spend some time after the sale helping the buyer get acclimatised to the business.

Records should be formalized and should clearly document all transactions so that a new manager can take over with minimal training. Eliminate idiosyncrasies: If you have similar vendors or customers who are receiving different payment terms, or if you've played favorites with friends and relatives, try to establish unilateral rules. The new owner will not want to face the customer who expects special treatment or, worse yet, be the ogre who cancels a long-standing verbal agreement with the company's oldest customer. If handshake pacts cannot be canceled, document the arrangement so the buyer is not surprised.

Examine all supplier and customer contracts. Make sure terms and conditions will not expire or require renegotiation just as a new owner unpacks. Terminate contracts that might trouble a potential buyer or that drain the company financially or serve no purpose.

As you examine records, start codifying company policies and procedures that exist as unwritten rules. If necessary, create a procedure manual that documents exactly how to best run the business, and be sure to include your unspoken, undocumented techniques.

Review your real estate leases, especially if your business is tied to its location. Make sure the lease does not expire or require renegotiation at the same time you plan to sell the company. If the company's location will discourage buyers, consider moving the location before you place the business for sale.

Equipment leases require the same scrutiny. Analyze the lease from the buyer's perspective. Don't saddle a new owner with leases that include high interest rates or leases that have already earned tax advantages for you. Such leases will diminish the company's value.

You must also fully evaluate and catalog company assets, from property to warehouse inventory to employees. Assuming you've run a tight ship and managed inventory well, warehouse conditions and supply won't be a problem. But potential buyers will want to see the records and assess your tracking system. If you delayed investing in computer upgrades designed to manage and control the flow of inventory, now is the time to modernize. No one wants to buy a company that's rooted in the Dark Ages. For one to three years before the sale, keep inventory at a minimum to demonstrate company efficiency and maximize profit. If advisors suggest a complete sell-off of inventory, do it.

Assess your computer systems. If you aren't already on the Net, it may be wise to evaluate and document what it will take to Web-enable your IT systems. Although many small companies have yet to make the switch to e-commerce, companies that are ready to move online will bring a higher price.

If company assets include property, separate or sell the property before your company hits the market. Property can devalue a business simply because it complicates the financial records, which in turn can make potential buyers hesitant to assume a new business with added expense.

Finally, don't forget about your employees. The loss of key employees during a sale can kill a deal. Key employees may be crucial to the new owner's success, so it's important to determine which employees are prepared to stay with the company during and after the transition. It is important that your employees hear about the pending sale of the company from you and not a third party in order for the new owner to retain as many employees as possible and ensure a smooth transition.

Follow this list of Top Tips in Preparing your business for sale