Thinking Of Selling Your Business?
Selling your business can be a lengthy and complex process. There are a number of steps in the sale process including negotiating the price and terms, drafting the contract, due diligence, contract review, financial settlement and handover.
The sale can include a variety of different assets such as goodwill, intellectual property (e.g. trademarks), real property interests (like a commercial lease), stock, furniture and fittings, contracts with suppliers and licences. Once you’ve agreed on the sale terms you still need to formalise the sale with a legal contract and at that point, a lot of issues can emerge that can stall or halt proceedings. With the contract, sometimes it’s the devil in the detail that can derail the sale. The contract should cover every possible scenario including issues that weren’t addressed at the negotiation stage.
A lot of entrepreneurs make rookie mistakes when selling their business that potentially cost them thousands, if not tens of thousands of dollars. Below are four common errors to avoid.
Error 1: Failing to Plan
Here’s some advice that also serves as a warning for business owners - all the years spent building and growing your business can amount to very little if you don’t plan your exit. Timing is everything and you never know when the perfect buyer might knock on your door. Holding out too long or holding on for the right price could mean you lose that ideal buyer.
You need to be investor ready that means making sure your bookkeeping and financials are up to date. The most valuable asset in some businesses is their customer database and CRM system so make sure they are current. Investor ready also means adopting the latest technology so don’t defer the implementation of new systems or leave the buyer to install the new technology. If you procrastinate it could impact on your sale price. Buyers want to invest in a business that is set up for success.
In planning the sale, you need to be crystal clear about why you are selling the business because prospective buyers will question your sale motive. If the business is flat lining or in decline, they will assume you are selling a distressed or failing business that gives them the edge in price negotiations.
Error 2: Price Expectations
As we all know, price is important! An unrealistic price tag can stall or kill the sale. If the business is treading water and producing no profit, then you might be overestimating the value. The price, in many industries, is based on a multiple of the profit or revenue so again you need to have accurate financial statements to ascertain the true market value.
Price can also be impacted by the trend in revenue and profits. As mentioned below, don’t wind down and take your foot off the pedal because buyers want a business that is growing not slowing. If you’ve lost motivation, then start the sale planning process immediately. When pricing the business consult with brokers and your industry bodies. Research industry benchmarks and examine other business sales in your industry.
Error 3: Keep Your Foot on the Pedal
Another big mistake vendors make when they decide to sell is taking their foot off the pedal. They relax, scale back their marketing spend, and the business slows. As you know, it can take months or even years to sell a business and buyers will gravitate away from a business in decline or they will look to negotiate the price down.
Error 4: The Wrong Buyer
The truth is a lot of business sales turn sour. Shortly after takeover, the buyer might elect to rebrand, increase the prices or change suppliers which could have a catastrophic effect on the business. When buying a business many people recommend that you ‘don’t rock the boat’ and make too many changes because so much can go wrong. The new owners might lack business and industry experience or could make poor management decisions like removing key staff or appointing unsuitable new staff.
The sale terms are obviously critical, and you might get only a small percentage of the sale price upfront. The balance of the funds might be withheld over several years subject to turnover and if the business crashes under the new management team, you could be left out of pocket. While it’s always tempting to accept the first offer for the business, make sure you do some due diligence on the buyer. Will they ‘rock the boat’ and make wholesale changes? Will they connect with your customers? Do they have the industry experience?
When making the sale decision, is the offer in line with your valuation? The first offer may not be the best offer, but it could be some time before another buyer makes an offer. The economy could dip, and the bottom could fall out of the market, so think carefully and talk to your advisory team. The right accountant, solicitor and business broker can make a big difference.
If you’re contemplating selling your business or looking to plan the sale, we invite you to contact us today. We
can help you navigate your way through the process and of course explain the tax implications of the sale including any exposure to capital
This article forms part of our Business Accelerator Magazine. Download the latest edition HERE or browse other articles from this edition below: