To sell, or not to sell?

The most important financial deal you'll ever make

Selling your business could be the most important financial deal you'll ever make. For many owners, selling the business they've spent years building up can also be emotionally difficult. And unless you've sold another business previously, you'll have no experience to draw on.

Is selling the business the right option?

Before selling your business, you need to carefully assess your reasons for doing so.

You need to consider four key questions:

What are my objectives as the owner of the business?

For example, you might want to realise some or all of your investment in the business to fund your retirement.
What are my objectives as manager of the business? For example, you might want to retire as soon as possible or prefer to keep running the business.

What are my objectives for the business itself? For example, the business might need new investment in order to grow.

Who else will be affected and what will they want? For example, other shareholders, managers and employees, and even key customers and suppliers.

Selling part or all of the business may be the best way to achieve your objectives. You might, for instance, want to sell your business outright, leaving you with no financial or management involvement. But a sale may not always be the best solution. And, of course, it may not always be realistic either.

There are a range of other exit routes that may suit your needs better. If, for example, you want to retire but already have enough money, you could pass the business on to your children. Or a stock-market flotation could give you access to capital to develop your business while making it easier to sell part of or your entire stake in the business.

Ways to sell a business

Most businesses are sold in a trade sale to another business but an alternative is to find a private-equity buyer. Alternatively, a venture capital firm might be prepared to help your management buy the business.
There are several different sale options:

Partial or full sale

You may want to sell the entire business. Sometimes the purchaser prefers you to retain partial ownership and continue to run the business. This can give the purchaser confidence that the business will do well.

Sale of assets

You can sell assets such as equipment, intellectual property or your customer list rather than selling the business itself. This may be attractive to a purchaser who does not want to take on liabilities and obligations. For example the purchaser might not want to take on your employees. You will be left with whatever assets and liabilities are not included in the sale.

Immediate or phased payment

You can ask for payment in full when the sale is completed, or you may be prepared to accept payment in instalments. The purchaser may well prefer to pay in instalments. But you will be at risk, for example if the purchaser cannot make future payments. Some buyers will want to make a series of payments based on profits, in which case you may be contracted to stay with the business for a period of time. This is often known as an "earn out."

Your choices can affect whether buyers are interested and how much they are prepared to offer. They can also affect the tax treatment of the sale.

Is a sale realistic?

You can only sell your business if someone is prepared to pay for it. If you can't identify strong reasons, that can be easily substantiated, why your business would make a good acquisition, it's likely to be difficult to find a buyer.

Ask yourself the following questions:

Is the business healthy? A business in trouble is difficult to sell and potential buyers are likely to wait until they can get assets at a knockdown price.

Are the basics in place to make the business attractive? Buyers like well-organised businesses with strong management.

Does the business have a good financial record? Buyers prefer a record of smoothly increasing profits with good growth potential.

Can you identify potential trade purchasers and a good reason why they should want to buy your business?

Buying a business can be disruptive and expensive. Potential purchasers may prefer to concentrate on their existing operations.

Are the existing management team interested in buying the business? You may find that they are the only potential purchaser and that they only offer a modest price.

It usually pays to start planning a sale well in advance. This gives you time to groom the business, making it as attractive as possible to potential purchasers. You may also want to get a preliminary valuation before you offer it for sale.

When to sell a business?

Selling at the right time can have a significant impact on the price you get for your business.

If possible, plan ahead so that you can pick the best moment rather than being rushed into a quick sale. For example if you plan to retire in five years' time, it's a good idea to start planning the sale of your business now.
The general state of the economy and your sector in particular can have an effect. It's easier for a trade buyer to fund a purchase when their own business is doing well, interest rates are low and banks are keen to lend.
The state of your business is a more important factor. Aim to sell when profits are increasing and look likely to grow further. Consider the impact of sales cycles or seasonal fluctuations in your business you might have fuller order books at a particular time of year, for example.

Planning well in advance also allows you to groom other aspects of your operations to ensure your business is as attractive to buyers as possible. For example, you can ensure that equipment is well-maintained, key contracts are in order, and that you are complying with all legislation.

The detailed timing of a sale may also depend on the tax consequences, and any forthcoming changes to tax rules.

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