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SO YOU WANT TO SELL YOUR
BUSINESS ?
One of the most emotional decisions business
owners can face, is that of deciding to
sell their business. At Nexia we recommend
that business owners receive professional
advice long before negotiating the sale
of their business with potential purchasers,
as well as getting professionals involved
during the transaction process itself (
as well as in any after sale considerations
).
We could sit down with you for many hours
with examples of business sales gone wrong,
that have resulted in heartbreak for the
owners - this is also true for some business
purchases.
To give you some appreciation of what might
be involved in selling your business, we
highlight below some key considerations:-
1. Initial considerations
At the outset, we recommend that you consider
exactly you want from the sale. For example,
do you want an all-cash deal, so that you
can walk away from the business or would
you be willing to finance part of the sales
price? Is it important to you that certain
persons remain with the business, eg, related
parties? How long are you willing to stay
with the business to assist the new owners?
It is our experience that most successful
transactions are a result of compromise.
Rarely will a transaction completely meet
all of the seller's objectives — or
all of the buyer's. The more flexible you
can be on terms, the closer you'll get to
realising the maximum value for your business.
2 Timing
It is our experience, that with small to
medium sized businesses, decisions to sell
out have much more to do with personal circumstances
than with what’s happening in the
wider economy. However, all other things
being equal, you will realise a higher price
when selling during favourable economic
climates.
Internal factors are still important, though,
and regardless of the state of the economy
or your industry, there are a number of
things you can do to your business to make
it more attractive to purchasers - mostly
revolving around improving earnings and
your businesses systems and processes, etc.
( ie, its risk profile ). Note, that on
average, once your business is on the market,
it may take several months ( if not longer
) to find a buyer and complete the deal.
All these factors make it clear that if
you know you'll want to sell by a certain
point in time, you should start planning
for it at least a couple of years in advance.
While a deal can sometimes be put together
in six months or even less, plainly, your
best chance of receiving a higher value
for your business is to allow plenty of
time for the sale.
Hint - if possible, we believe its best
not to try to sell right before your major
leases or other key contracts expire. When
prospective purchasers look at your business,
they'll want to be able to predict what
they'll need to spend for rent, labor, materials,
supplies, and all the other major items.
As a general rule, they won't want to have
to renegotiate key contracts immediately
after purchase, or take the chance that
a lease may not be renewable at all.
3 Potential buyers
Potential third-party buyers can usually
be divided into two groups; financial buyers
and strategic buyers. A third group of potential
buyers is composed of people you already
know well - your family, managers, or employees.
Alternatively, if your business has grown
quite large and/or you're in an industry
that's popular at the moment, you may be
able to sell out to the general public.
3.1 Financial buyers.
These types of buyers are primarily interested
in your company's cash flow. They are typically
individuals or companies with money to invest,
and are willing to look at many different
types of businesses or industries. In some
cases they are “corporate refugees”
— former executives of larger corporations
who want to buy themselves a job by finding
a company to actively manage. In other cases
they may be aquiring companies that are
simply looking for good returns on their
investments, and who would like your current
management to stay in place.
Financial buyers will scrutinize your financial
statements and your assets very closely.
Most are looking for a solid, well-managed
business that won't need a great deal of
immediate change, but there are some investors
who specialise in turnaround situations
and will be willing to look at companies
that are not currently profitable.
3.2 Strategic buyers.
Strategic buyers are those who are interested
in your business's fit into their own long-range
business plans. They may be one of your
competitors, or a similar company from another
region that wants to expand into your local
area. The classic strategic buyer would
be a larger company who does what you do
in a nearby region. However, another possibility
is a company in a related business, whose
management can see that your company has
strengths from which they can benefit —
for example, you may already produce a product
that they want to sell, or you may have
distribution channels that they want to
exploit. These types of buyers might also
be in related, but not completely parallel
businesses.
Whether synergistic or competitive, strategic
buyers are generally the ones who will pay
you the most for your company. The better
the fit, the more they will want your business
and the greater the premium they will pay.
3.3 Business insiders.
A third group of potential buyers for your
business is your family, friends, and key
employees. These people know your business
from the inside, and may already have a
personal stake in seeing that it survives
and prospers. They may be willing to pay
more for your company than a third party
financial buyer would, because their inside
knowledge lowers their risk.
However, our experience is that the main
problem with “business insiders”
is that they frequently lack cash. You may
have to finance a large part of the transaction
yourself, or arrange third-party financing
through a leveraged buy-out. Again, as both
parties are likely to know each other well,
they are generally more likely to be flexible
as to terms.
3.4 General Public
The last group is the general public. This
may include either financial buyers or strategic
buyers, but could just be someone who has
an interest in buying a good business to
work in, build up and one day be faced with
the decision himself – who should
he sell to?
4 Reaching your Buyers
Generally we would recommend against advertising
your business in the newspaper or industry
periodicals, etc. If your employees, customers,
and suppliers find out that the business
is for sale, key employees might start resigning,
and other employees might start putting
in less effort. Customers might search for
other sources, and suppliers might search
for other customers. You may also find that
credit is not being extended to you or people
don't want to sign long-term contracts with
you. Avoid all these problems and keep your
divestiture plans to yourself and your team
of advisors for as long as possible.
A better course of action is to let an advisor
intermediary or business broker look for
potential buyers for you. They should have
a long list of contacts, including brokers
in other areas of the country, to sift through
in search of the perfect match. They may
also advertise your business in local and
national publications, trade journals, etc.
under their name, not yours.
Your advisor should be able to approach
potential buyers confidentially, keeping
your name out of the discussion, until some
positive interest is shown. The advisor
will also screen the potential buyers to
weed out those who are merely window shopping,
and those with no visible means of coming
up with the purchase price.
4.1 Prepare a selling memorandum.
One of the best tools to promote the sale
of your business is a selling memorandum.
This will present all the important information
about your business, products, industry,
and market in an easy-to-grasp format that
presents your business in a very positive
light. The elements of a selling memorandum
are very similar to what you'd find in a
business plan that was prepared for a venture
capitalist or a banker.!
You'll need sections that describe the facts
about your history, structure, and operations;
the basic sale terms you're looking for;
your industry, market, and products; your
employees and physical assets; historical
and projected financial statements; and
any other information that will explain
who you are and why your business is such
a strong opportunity. Your selling memorandum
is essentially a marketing piece, and it's
likely that your advisor intermediary or
business broker will want a role in creating
it. ( We also recommend you do not reveal
your selling memorandum to anyone who hasn't
signed a confidentiality agreement. )
5 Structuring the deal
Sale terms will drive the sale price, and
we recommend that you should arrive at a
general agreement with the buyer about the
major terms before you start talking dollars.
You may even include a short list of your
absolute requirements as part of your selling
memorandum, so that buyers who can't meet
your minimum terms won't use up your time.
- We believe some of the terms you should
consider are:-
- What exactly are you selling, and what
are you keeping ?
- Are your key contracts transferable
to a buyer ?
- How much of the purchase price do you
need to receive at settlement ?
- Will you consider an instalment sale
?
- To what extent will you remain involved
in the business
- To what extent will income tax considerations
affect your net proceeds
Some advisors recommend that you should
let your intermediary or broker do all your
negotiating for you. Other advisors say,
you are the best representative of your
business and of your own expectations from
the sale, and buyers will respond better
to direct contact with you.
We recommend that you'll have to use your
judgment about how you want to handle this.
Some business owners are superb salespeople,
and might even close the deal better than
their advisor or broker. On the other hand,
some owners are not good "people persons"
and are better off leaving the negotiations
to a professional.
6 Seller financing
Our experience is that seller financing
is involved in the majority of small business
sales. Should you finance a buyer who is
purchasing your business, you'll retain
many of the risks that come from continued
ownership of the business while giving up
control of its management. However, holding
back a note for some or all of the purchase
price may be the only way to sell the business,
since banks have fairly strict lending criteria
for acquisition loans.
The simplest way to provide seller financing
is to have the buyer make a down payment
with you holding back a note or mortgage
for the rest of the purchase price. The
business itself, and/or the significant
business assets, provides the primary security
for the note. If the buyer defaults on the
note, you'll be the first in line to step
back in and take over the business.
Aside from its simplicity, this type of
deal can be very flexible — you can
adjust the payment schedule, interest rate,
loan period, or any other terms to reflect
your needs and the buyer's financial situation.
The buyer will generally obtain outside
financing to pay off the balance of the
loan. The idea is that at that point, the
business will have built up sufficient equity
and bank financing will be easier to find.
Hint - If you agree to finance part of
the deal, we recommend you get the buyer
to provide more security for the loan, besides
the business itself, eg, their personal
residence or other commercial real estate,
or investments that can provide more security.
You can also require the seller to personally
guarantee the loan, just as a commercial
lender would.
Further protection can be obtained by requiring
the buyer to take out a life insurance policy
with yourself as beneficiary, so that the
loan will be paid off should the buyer meet
an untimely demise.
7 Completing the transaction
The major steps involved in closing the
sale are:-
Letter of intent
The buyer outlines the terms and price you've
informally agreed to in a written, non-binding
letter, and promises confidentiality allowing
further investigation of your business.
Due diligence
The purchaser will wish to investigate among
other things:-
- The businesses legal status, and compliance
with statutory obligations.
- The managerial competence of the business.
- The businesses historical, current
and forecast financial data, business
and strategic plans, and revenue relationships.
- Whether systems are in place to ensure
that the business will continue as a going
concern with certain determined levels
of earnings.
- The governance structure, management
systems, financial systems and human resources
systems to assess appropriateness for
the reviewed business.
Purchase agreement
Once the purchaser is happy with the results
of the due diligence, the parties' respective
lawyers will finalise the details of the
purchase agreement, any mortgages or financing
between the parties, and any supplementary
contracts such as non-compete or consulting
contracts.
The purchase agreement for your business
is one of the most important legal documents
most business owners will ever sign, as
many years of hard work will culminate in
this single transaction, by which you will
put a dollar sign on the value of your entire
operation. Accordingly, you don't want to
have problems collecting the money due to
you or to have legal problems haunting you
into the future, and a carefully constructed
purchase agreement can be your best insurance
policy for preventing such catastrophes.
We also recommend that you make sure that
you maintain ongoing liability insurance
for any liabilities that will remain with
you. You may continue to be tied to your
former business for a few years, if you've
agreed to stay on as a consultant or employee,
or if the new owner still owes you money.
But chances are you'll be much less involved
in the day-to-day routine, and more concerned
with strategy and long-term direction, and
even this involvement is likely to be fairly
short-lived, as the new owner begins to
feel more comfortable and anxious to make
his or her mark on the business.The above
list is not exhaustive, but we hope it will
serve to provide you with an appreciation
of what is involved in selling your business.
This is one transaction that you do not
want to “learn as you go”, and
getting professional advice and involvement
will certainly save you money and give you
peace of mind.
We at Nexia ASR have a long history in
all aspects of buying or selling a business,
big or small, and can assist you in every
step of the process.
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