Selling your small business.
5 steps to selling your business.
- Identify a buyer / target market and prepare the business for sale.
- Understand the value of the business.
- Develop a sales strategy.
- Negotiate the sale.
- Finalising the sale.
When it’s time to exit your business, an exit strategy of selling allows you to realise the goodwill that you have built up in addition to the value of the physical assets of the business. There is a considerable amount of planning and preparation that needs to go into selling your business, but it helps you extract the greatest value as you move forward into the next phase of your life.
Steps to selling a business.
1. Identify a buyer / target market and prepare the business for sale.
One way to approach preparing your business for sale is to think about it as a product to sell to a customer. Who is the customer and what are the features and benefits they want from your product? Will your buyer be a competitor who is looking to expand their own operation or minimise the competition? Will it be an investor who is looking for a good solid return on investment? Is it someone looking for an escape from corporate life to a more independent, hands-on lifestyle? Whoever it’s likely to be, think about what they are looking for from the business, then work towards making the business attractive to them.
Some of the things that prospective buyers may be looking for are:
- continuing demand for your products or services or growing business opportunities.
- financial records that indicate future viability with good profits and a strong cash flow.
- efficient operations with well documented systems and procedures.
These elements are generally the nucleus of a successful, profitable business and should be aimed for at all times, not just when a sale is approaching. Consistently achieving these things means that your business should always be ‘sale ready’.
2. Understand the value of the business.
When you are ready to sell, a business valuation can help give you a realistic idea of what sale price you may be able to achieve and will help you in any pricing negotiations. Remember though that the real value of a business is what someone is prepared to pay for it. This may be higher or lower than a formal valuation. Look at similar businesses that are on the market and their asking price and consider how you can differentiate yourself from them to help achieve the best price for you.
Beyond the value of the stock and equipment, another key driver of value in a business is goodwill. One way to think of goodwill is “What is it that brings customers to my business and keeps them coming back to buy from me?” There are of course many answers to this question which means there are potentially lots of things you can do to enhance the goodwill and value of your business.
A key component of goodwill is your business name, reputation, or brand. What is it that your business is known for and how do you consistently deliver on that? In many cases that consistency is highly valued by your customers because they’re confident they’ll get what they expect when they buy from you. And the key to delivering consistently? Having robust systems and procedures, written down, and that are followed by your staff. This is also a value-add for a potential buyer as they’re able to then continue that dependability and retain customers.
There is more information on how to value a business in our article ‘Planning for the end game – your business exit strategy’.
3. Develop a sales strategy.
Your sale strategy will be very much dependent on who you target as buyers, how far afield you need to go to find them, and how much persuasion they need to buy. If your most likely buyer is a competitor looking to expand their business, you’ll market your business completely differently than if you were looking to sell to a new investor. If there isn’t an obvious local buyer, how are you going to connect with potential buyers elsewhere? There’s lots of moving parts when it comes to selling your business so it may be advisable to seek the services of an experienced business broker to help you outline and implement your sales process.
4. Negotiate the sale.
Negotiating the sale of your business is about more than just the purchase price. Other things to consider may be:
- what will happen to employees and other people associated with your business?
- do you need to make provision for potential warranty claims on goods and services?
- are there licences or intellectual property that need to be transferred, and is that possible?
- requiring the potential buyer needing to sign a confidentiality agreement before being allowed to sight any proprietary information for their due diligence checks.
- does the prospective buyer have any necessary skills or qualifications to provide your goods or services?
- doing a credit check on the potential buyer to gauge their ability to complete the sale.
- is there a need for vendor finance? And what terms could you offer?
- is a non-compete clause for a specific area or period of time needed?
This list is not exhaustive but provides a starting point for you to consider other things that may be relevant in your particular industry or location .
5. Finalising the sale.
Once the terms of the sale are agreed, you’ll need your lawyer to prepare the sale contract and arrange settlement. Talk to your accountant about any tax related issues and finalising business financial records and tax returns. Prepare for how your sale proceeds will be distributed. Are there any:
- debts to be repaid?
- accounts to be closed?
- investments to be established?
Depending on what your plans are once the sale is finalised you may also be thinking about the next business, the next holiday, or simply what to plant in the garden. Being organised and having a robust plan for extracting as much value as possible from your business gives you the best opportunity for the financial future you want.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation. © Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.