The decision to sell or transfer your business is never easy. Most business owners have put their blood, sweat and tears into the business and have an emotional connection that makes it difficult to cut ties. If however, you give the matter deeper consideration and decide to move forward with the sale process, it is important to be completely prepared.
Is Selling the Only Choice?
First and foremost, you want to ensure that a sale is the right choice for you. Why are you considering selling a business? Are you tired of the business? Ready to retire? You want to move on to bigger and better things? Is it financial in nature? Once you consider why you are selling you are better prepared to say it is the right choice. However, keep in mind it is not the only choice. You can also consider transferring your business.
What is the Difference Between Selling and Transferring a Business?
Basically, the difference is that when you transfer a business there is no exchange of money, while selling is just that; you sell all your assets to a purchaser. A good example of transferring a business is passing it down to your children, or to an existing business partner, or even long term employees. Some of our clients have even set up their own private charities to benefit the wealth created through their business. Not always, but sometimes this has been motivated by taxation strategies.
Once you decide you are ready to sell or transfer your business, consider the professionals who can help. This includes business brokers, accountants, and solicitors. Business brokers work much like real estate agents in that they help those either buying or selling a business. They are well informed as to the legal requirements and can also provide valuable insight into the objective profitability and business investment case of the business. Unfortunately many business owners do not pay themselves an adequate management salary, so be aware that unless your sale is a “bolt-on” to an acquiring entity, profitability may be adjusted for additional management adjustments in establishing a valuation.
You may also work with an accountant as they can assist in many aspects of the process such as preparing a business for sale and preparation of documents for financial reviews. A solicitor is a must to address all the contractual details and ensure your rights are protected during the transaction.
What Exactly Are You Selling?
While you are probably thinking, “I’m selling a business” there is more to consider than that. There are many aspects of the business to sell and knowing exactly what you wish to include is important. Some good questions to ask include:
- Are you selling it outright with all assets?
- If no, what assets do you wish to keep?
- Are you including your registered business name?
- Are you just selling particular parts of your intellectual property?
- Is there property included in the sale?
- The value-perception to the acquirer may differ to differ from yours. Flexibility in appreciating the purchaser’s perspective is key.
These are important questions assisting the sale in order to determine the value of the business.
Establishing Your Business Value
As mentioned above you want to understand how much your business is worth. This ensures you set a price that is fair and will attract buyers while ensuring you maximise your profit. To value your business you can consider three things:
- Market analysis: Look to see if competitors or like companies have recently sold and for how much. This is a good starting point.
- Net worth: Looking at what you own and what you owe shows you your net worth. An accountant comes in handy for this step. They will look at both your tangible assets and intangible assets to come up with an accurate number.
- Return of Investment (ROI): You can also work with your account to consider your business’ maintainable net profit to come up with a value for your business.
- If you are in a growth industry, a premium may be put on the future potential for the business.
These considerations are key to coming up with a fair market value when selling a business. Business valuation certainly does go a lot deeper than this, and your accountant should be able to help you establish a greater appreciation of fair market value by employing various ‘theoretical’ valuation techniques, such as a discounted cash flow analysis and the present value of future net cash flows.
How will you find a buyer for your business? As mentioned, a broker is a good place to start. However, if you choose to go it alone, advertising is an option. Some common tactics when selling a business include:
- A mix of digital and traditional media
- Networking with competitors and industry peers
- Speaking to your employees to see who may be interested
- Word of mouth
- Your customer base
- Your suppliers
Depending on the type of business you are selling, you will have better luck with specific selling tactics. As well, working with a solicitor or broker can ensure you are following the requirements of your state or territory.
Before selling you need to ensure all documents are in order including:
- Financial records
- Commercial information such as contracts, licenses, leases etc
- Operation documents such as business procedures, employee records
- Legal details such as entity structures and ownership
- Forecasting documents, marketing intelligence and strategy
Providing documents that show the growth and potential your business offers is the best way to help you find a buyer.
Many business owners forget to consider how the sale will impact their employees. While it is possible to find a buyer willing to take on the existing team, others might have their own team in mind. What can you do to make it easier on loyal employees? As well, what are you legally required to do when selling the business? If it seems that ending their employment is necessary, you are required to give your employees notice or provide payment in lieu of notice.
Transferring the Business to a Family Member
If you plan to transfer the business to family members or even a selection of longtime employees, how can you be certain you are choosing the right successors? Are the potential successors aware of the strategic planning requirements? Have they any experience in budgeting? Are they equipped with the skills to resolve conflict or negotiate contract terms? Do they understand the nature of the business to maintain its success? As well, which approach will work best for the transfer? Some choices include:
- Transferring the business as a gift, while continuing to draw income
- Selling the business to your heirs instead of transferring the business
- Lending the buyers money through a note sale, so you continue to get a steady income
- Choose a partial sale so you can retain a portion of business assets and enjoy continued income, keeping a position on the board.
Transferring to family or employees, or choosing some form of sale helps keep the legacy of your business alive. Depending on the method chosen, it can also achieve ongoing income for you.
Whether you choose to sell, transfer or sell to family or employees, understanding why you want to sell and that you are ready to give up control of your business is the best way to decide if it’s time to take the next steps. We would be happy to guide you through this process as we have done for many family businesses over the years.
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