A business is the pride and joy of its owner, often representing years of hard work and investment. So when the time comes to sell, you want to get the best deal.
This guide tells you everything you need to know about buying and selling a business. It can be a complicated process, but knowing how it works can make the whole thing run more smoothly.
How do you sell a small business?
Here are the main steps involved in selling a business:
- Make the decision to sell
- Create an exit strategy
- Decide where to sell
- Decide on a sale price
- Prepare your business for sale
- Talk to prospective buyers
- Negotiate a deal
- Commit to the preferred deal
- Complete the sale
This article explores each step in more detail.
Making the decision to sell
People sell businesses for a variety of reasons, from personal to commercial.
Personal reasons can include things like retirement, desire for change, relocation, family issues, or deciding to look for better opportunities.
Commercial reasons can include identifying a particularly good time to sell, wanting to move on because your business is not thriving, getting an unexpected offer, or maybe just having taken the business as far as you planned, and wanting to tackle a new challenge.
Some circumstances give you ample time to prepare for sale; others require a more urgent departure. Unfortunately the trade-off for less preparation is usually a lower selling price.
The best time to sell is when a business is in a growth phase, but has not yet peaked. The prospect of further growth offers a compelling incentive to buyers.
The wrong time to sell is when things aren't going so well. Sometimes an unexpected need to leave urgently can force selling at an inopportune time.
Creating an exit strategy
An exit strategy is a strategic plan for a business owner to sell their stake with the goal of making a profit or, if things aren't going so well, to limit their losses. It helps you decide how you’re going to get money out of the business, and how much.
The Balance provide this list of exit strategies for small businesses:
- Liquidation: Closing the business and selling the assets
- Liquidation over time: Profits are extracted rather than reinvested, then the company is sold or closed
- Keep your business in the family: Extract yourself and hand over to a related successor
- Sell your business to managers and/or employees: They either buy outright, or through a managed Employee Shared Ownership Plan (ESOP)
- Sell the business in the open market (the most popular option): A business is groomed for sale, then sold
- Sell to another business: Acquisitions are a great way to combine forces with a related business
- Initial Public Offering (IPO): Changing to public ownership
If you're not confident of getting the best deal, you can enlist the help of a broker: a third party who can advise on valuing your business, evaluating buyers, negotiating deals, and various other aspects of the process.
When working with a broker, the trade-off is between costs outlaid, and time and hassle saved.
Where can I sell my business?
Advertising in the right place will increase the likelihood of attracting the right type of buyer. You can sell via a business transfer agent, on an online marketplace, or to another business. Note that other businesses will browse the other two places.
Business transfer agents are the traditional route for selling a business. They take care of much of the process on your behalf, meaning you are not entangled in the day-to-day responsibilities.
Online marketplaces are the more modern spin on selling a business. The industry leader is Bizdaq, and a business advertised with them will be promoted to their network of 100,000 buyers, as well as automatically listed on Zoopla, Prime Location, Daltons and Rightbiz. It’s a great way to quickly get your business in front of a lot of prospective buyers.
An online marketplace offers an opportunity to save on agency fees, although you risk losing access to a certain amount of expertise.
How do you price a business for sale?
An early estimate will be made initially. This figure will be based on less rigorous metrics and is a good way of seeing whether you are still motivated to sell.
To reach this figure, look at listings of similar businesses for sale, then factor in potential risks. Attempting to quantify these will bring your estimate value closer to the real one.
In our experience, enlisting the help of a professional business evaluator is the best course of action here. Their expertise can save you the stress of carrying out your own evaluation, put buyers’ minds at rest, and help you avoid legal hassle later on.
They will decide which assets and stock should be considered in the sale price. Note: having stock in your warehouse does not automatically imply it will contribute to the sale price of your business. Stock will be evaluated on whether it is likely to sell.
What do I need to do to get my business ready for selling?
Getting everything in order makes your business a more attractive prospect for buyers, and protects you from skeletons in the closet being discovered during the due diligence phase. Here's what you need to do:
- Bring your records up to date
- Inspect physical premises and resolve any issues
- Keep your internal systems up to date
- Check all financial statements are accurate and formalised, for the current year and previous three years (if applicable)
- Prepare income statement, cash flow statement, and balance sheet (drafting in the help of a bookkeeper can help here)
You want to ensure that anything a buyer might ask about is in tip-top condition, and that any gaps you identify can be explained. Putting in effort at this stage reduces the risk of being caught short during the negotiation phase.
Talk to prospective buyers
Once your business is priced and listed, you will begin to get offers from potential buyers.
Carry out due diligence on each prospective buyer you’re interested in talking to: make sure their enquiry is serious, and that they have the financial capacity to back it up.
Interviewing prospective buyers will reveal which one(s) align best with the vision for your business outlined in your exit strategy.
Negotiate a deal
Once a shortlist of prospective buyers are identified, the negotiation phase begins.
Price is the key factor, but also bear in mind other things when deciding the right deal. Each of the following should be weighed into your decision:
- Will your payout be a lump sum or via installments?
- Will there be an earnout?
- Will your employees be safe in their jobs?
- Are you willing to be involved in a consulting capacity after the sale?
- Do you want to retain a stake in the business? This leaves the possibility open that the new owners will multiply the value of the business, making your stake more valuable than the whole company was at time of sale.
Having a walk-away figure in mind can protect you against losing sight of your criteria during the negotiating process. A seller will be trying to get the best deal,
Do your homework: a firm understanding of who the prospective buyer is, their credentials, and their negotiation style can help you to better prepare yours.
And finally: don’t be afraid of walking away. If it’s looking unlikely that a satisfactory deal will be reached, you’re allowed to move on.
When both sides are happy with a deal, they make an agreement in principle.
Commit to the preferred deal
Once the agreement in principle is made, the buyer begins their due diligence, and looks to confirm that your business is performing as advertised during the sale and negotiating processes.
This involves inspection of physical premises, assets, paperwork, systems, and more.
Due diligence is usually carried out alongside drafting of required legal documents to finalise the sale. Cooperating with the buyer at this stage will keep things moving quickly.
Complete the sale
A sale agreement is made once both sides are fully satisfied with the terms of the deal and the state of the business.
Qualified professionals, whether a solicitor or a business transfer agent, can provide huge value at this stage. They can prepare required documents, and even advise on any negotiation requests from buyers who have uncovered something in their due diligence that leads to them seeking a lower price.
A contract is then signed, and the sale becomes legally binding.
At this point you can sit back and enjoy the fruits of your labour!
As we said earlier, selling a business is a long and complicated process. Hopefully this guide has introduced the key concepts in enough detail to show you what to expect if you’re planning to sell.
If you have questions about buying or selling a business, get in touch with our team of experts today.