Valuing and Selling Your Business

While most of the articles on this site are about building and marketing a business, there comes a time in any business owner’s life when they want to or need to retire.  Alternatively, the business may have reached a point where it needs a new owner to take it to the next level.

The business may be worth a lot more than you think, particularly if you have had the foresight to remove the business’ dependance on your personal involvement and have built a good management team capable of running the business in your absence …or you have added value in other ways.  One of the key factors to getting a good price when you sell the business is prior preparation. And there is much to be put in place before inviting buyers in or soliciting offers.

You would also need to decide whether you’re selling all the business or only a minority stake.  Selling just a portion of the business allows you to take a bite out of the apple without giving up control. You could also benefit from price advantages of selling at a valuation beyond where your company is now.

Prior to starting it may be worth reading up on the mistakes to avoid when selling a business.

How much will you get for the business?

This is the million dollar question. There are no hard and fast rules when it comes to valuation. You can hire a qualified valuer but they don’t necessarily provide a valuation based on what you are likely to obtain in the open market. Their valuation, however, may be necessary if the sale is subject to a court order and a court needs to be convinced the business was sold for a fair price.

It’s often the case that business brokers and M&A intermediaries provide valuation, but be aware that they have an incentive to over-value the business. It may be worth consulting multiple brokers, getting a range of figures and then disposing of the outliers.

The offers you get from investors are going to be largely dependent on
– the quality of the business you’ve built
– the security of the cash flows and the profits
– the team of staff you’ve put together and their ability to run and grow the business
– assets the business owns, your position in the market relative to your competitors
– intellectual property such as patents, copyright etc., especially if they’ll all been properly registered
– the state of the economy
– interest rates (as buyers often have to borrow money to make the acquisition)
– how the business is pitched to buyers
– the amount of competition generated among buyers to get competing offers and
– the terms of the deal (if you provide seller financing, for example, though risky, it could lead to higher price).

These are just a few of the factors that contribute to the price at which you finally complete a sale.

One mistake that many sellers make is starting from a point of “how much have I invested in this business” or “how much do I need to retire”. These are not considerations that impact on the value of the business as viewed through the lens of a buyer. Buyers don’t care about how much you invested or how much you need to retire. They look at the opportunity in terms of how much it is costing them and what percentage return they are going to see on the money they are investing. They are also deeply concerned about risk. The riskier these future cash flows, the less they’ll be willing to pay for the purchase.

How to sell a business

While some small business owners sell their firms without any third party assistance, larger businesses tend to use the service of business brokers or commercial real estate agentsChoose wisely as a good partner in this process can be of immense benefit both in finding you buyers and in maximizing the price you obtain.

If you are not using a broker, you need to appreciate that maintaining confidentiality can be a problem. If you do not want your staff and customers knowing that you’ve put the business up for sale it’ll involve much stealth on your part. For example, you’ll have to create disposable email accounts on which to receive enquiries from buyers. And while you may get prospective buyers to sign a non-disclosure agreement (NDA), you’ll need to put your name to the NDA as the party to whom they are making their non-disclosure promise.

You would also need to put together a prospectus to describe the “business opportunity”. It’s called by various names such as Sales Memorandum, Confidential Information Memorandum etc., but they are all essentially the same thing. In it you will disclose financials – typically entire balance sheets for the last three years. You will also describe the business, provide background information on how it operates, its strengths and weaknesses (weaknesses, yes!) together with an analysis of the competitive environment in which the business operates.

Where to advertise the business for sale

There are numerous online classified sites for listing businesses including BusinessesForSale, Bizquest and others.  The Craigslists, eBay and other classified sites for general bric-a-brak do also maintain sections where you can list a business, but these don’t generate a great number of prospective buyers. The typical buyer doesn’t head off to eBay when he wants to buy a business!

You could also approach competitors, customers and suppliers. It’s quite often that people who are already well disposed towards your business see an opportunity and raise the finance even if they weren’t actively considering investing in an acquisition.

Closing the sale

Once you’ve found a buyer and negotiated terms, you move to drawing up contracts. It’s well worth hiring the proper legal expertise here. These contracts can be complicated documents running to the size of a small book. Skimp on costs here and it could turn out to be very expensive indeed.

There is also the matter of tax. Selling a business normally leaves the owners liable to a large tax bill. Don’t forget to keep your accountant on-side through discussions with buyers and seek their advice on how you can construct the sale and the documents to minimize any tax liability.

Don’t forget to have plans for after the sale

Many business owners find themselves at a loose end after the sale has gone through and some have even claimed a sense of bereavement. No doubt you’ve been dreaming of the freedom of no longer being a business owner, or about all the things you could do with the money, but the reality turns out to be quite different for most vendors. It may also be worth consulting a good wealth manager to assist you make best use of this lumpsum.