1. Is my business capable of being sold?
All businesses can be sold, provided they are valued appropriately and are marketed well. This is true even where the business may not being doing too well.
The key is for the business to be ready to be put on the market. This means that the business should be well-functioning and, ideally, profitable.
You may therefore need to review all aspects of your business, consider the areas that need to be ‘fixed’ and go through the process of fixing all those issues before putting the business up for sale.
Use our checklist to get you started.
2. When is the best time to sell my business?
The time to sell would depend on your personal motivations and objectives. As a general rule of thumb, the best time to sell is when your business is doing well and you are not desperate for a sale.
The timing of when to sell is critical. You should plan prepare your business for a sale well in advance. This may require some form of ‘seller due diligence’ (to weed out any issues that could eventually cause an obstacle to a potential sale) or engage in a restructuring. Going to market when you are in ‘housekeeping’ mode is never a good idea. This could seriously undermine your chances of success.
3. Should I use a business broker?
Selling a business can be a complex and time consuming process. Using a broker means that you will benefit from an experienced professional who understands what it takes to make a deal happen, controlling the process from start to completion.
Business brokers will typically charge a fee for what they do; this can be anywhere between 5-10% of the deal value, depending on a number of factors, including the nature of the business, the sector and what is being sold.
Here are some tips for finding a business broker.
4. Do I need a lawyer and a financial advisor/accountant?
The short answer is ‘yes’.
You will need a lawyer to guide you through the entire sale process, including the procedure, the due diligence phase, the drafting of the purchase agreement, the disclosure phase and completion of the deal. It is vital that you work with a lawyer whose main field of expertise is corporate law – primarily the buying and selling of businesses. Choosing the wrong lawyer can cost you time, money and stress, and may even jeopardise your deal.
You will also need a good financial advisor/accountant who can assist with preparation of financial information and analysis for the sale.
While you may think of engaging professionals as a cost and not, at this stage, understand the value, remind yourself that selling a business is a complex, nuanced process. If you engage the right professionals, the process can become relatively easy and painless. If you don’t, you will be left navigating difficult deal-making waters, which may leave you with a deal that is actually detrimental to your and your business’ interests.
5. What is my business worth?
A number of factors would determine the value of a business. These include cashflow, profit, asset value, customer base, management, history, location, competition, revenue, industry standards and the economy.
The market decides the enterprise value of the business. Often a high valuation and unrealistic seller expectations are the primary reasons for a sales process failing.
In all circumstances, the business should be valued BEFORE putting it on the market. This would help you know the business’ true worth, and any issues/areas that need to be looked at and, ultimately, achieve a much higher price and a quicker sale.
You could engage a financial advisor/consultant to undertake a valuation exercise for you; this is the recommended approach.
6. How does one value a business?
The value of a business is determined using a number of different factors including cashflow, sector trends, profit, asset value, financial history, location, competition, customer base, management and the economy. Valuation methods vary and the best method depends on the circumstances.
There are a number of ways a business can be valued:
Discounted cashflow – is a value approach where an analyst forecasts the business’ free cash flow into the future and discounts it for today’s value.
Multiple of earnings – is a relative valuation method in which you compare the current value of a business to other similar businesses by looking at trading multiples. Multiples of EBITDA are the most common valuation method.
Asset value approaches – these business valuation methods aggregate all the investments in the business. Asset-based business valuations can be conducted on a going concern or on a liquidation basis.
Market value approaches – these valuation methods attempt to establish the value of your business by comparing your business to similar businesses that have recently sold.
Get in touch with a financial advisor to learn more.
7. Should I sell shares or assets? What is the best option?
There are a number of ways in which you could sell your business.
For shareholders of a limited liability company, there is a choice in how their business can be sold. The company (a separate legal entity) can sell its assets and goodwill, or the shareholders can sell their shares in a share transfer.
For an asset and goodwill sale, the sale proceeds are paid to the company. For a share transfer, the consideration will be paid to the shareholders.
There are pros and cons to each type of sale for both buyers and sellers. To learn more with some working examples, check this article out.
It is often best to keep an open mind, get professional advice from a corporate lawyer and discuss this openly with a potential buyer at the outset.
8. Can I sell a minority shareholding in a business?
Assuming that the company’s constitutive documents allow it, it is possible to sell a minority shareholding. However, with private companies there is often no ready market for minority shares.
This is one the principal reasons valuations of minority shareholdings usually are subject to massive discounting.
Read more about selling a minority stake here.
9. What is an executive summary or teaser document?
This is usually a short, one page, document which describes what your business is and the opportunity it represents. A broker will put this together, and it should give enough information to create interest while being anonymous and confidential.
10. I don’t want anyone (especially my employees and customers) to know that my business is being sold. What should I do?
Any serious buyer should be required to sign a non-disclosure agreement (NDA) to protect your interests and keep all information confidential.
An NDA, or non-disclosure agreement (or a confidentiality agreement) is a document that should be signed prior to the release or disclosure of any information about your business or the potential sale. An NDA would restrict a potential buyer from using the confidential information for any purpose other than the purpose of evaluating the business and the potential sale of the business.
This document is key to protecting your proprietary information at the outset. It should be carefully drafted to ensure that you are allowing sufficient access to your information but, at the same time, your interests are protected. Get professional advice from a corporate lawyer on how best to structure an NDA.
11. I’ve been approached about selling my business. What should I do?
You should first and foremost consider whether you have a serious buyer at the door. If it is serious, you will need advisors to guide you through the elements of the offer, whether it should be acceptable and whether you could get a better offer by bringing your business to the market.
The type of advisors and the extent to which you will need them depends on the size of the business, your objectives and the complexity of the transaction.
12. What are the main reasons that businesses don’t sell?
In our experience, businesses don’t sell because of unrealistic expectations on the side of the seller with regard to price, and not reading the market properly. This can be mitigated by obtaining proper advice at the outset.
For a quick list on broad things you could be doing now, check this post out.
13. What are ‘heads of terms’/‘letter of intent’/’MoU’?
The heads of terms, term sheet, letter of intent or Memorandum of Understanding (MoU) is a document that sets out the fundamental terms of a deal agreed between relevant parties.
The terms in this document typically set out the proposed structure of the transaction, the price and key conditions; they are typically non-binding except for confidentiality and/or exclusivity.
This document would eventually be superseded by the definitive transaction documentation (i.e. the purchase agreement/SPA).
14. What is due diligence?
The due diligence process is essentially the phase during which the buyer will ‘check under the hood’. The buyer will conduct a detailed review of your business, to ensure that the information they had based their offer on is indeed accurate.
Typically a due diligence process will cover the commercial, legal, operational, financial aspects of the business.
This process can last anywhere from a few days to a few weeks depending on the size/complexity of the business, the sector in which it operates and the volume of information the buyer wishes to review.
15. What is an SPA?
An SPA is an acronym for the share purchase agreement or the sale and purchase agreement. An SPA is a document which legally binds the buyer and seller to a transaction. The document covers all the aspects of the deal including what is being sold, the price, the conditions to the sale, the warranties being provided and the completion mechanics.
For business sales, it is usually, but not always, the buyer’s lawyer who will create the first draft of the agreement. You will review this closely with your lawyer as part of the process.
16. What are warranties?
Warranties are statements made by the seller in relation to each aspect of the business and are set out in the SPA.
The warranties are provided by the seller for the benefit of the buyer. If any warranty is deemed not to be true, it could lead to a claim for breach of warranty against the seller.
17. What is a disclosure letter?
A key document in any acquisition of the shares in, or the business and assets of, a company.
The disclosure letter is prepared by the seller and includes general and specific disclosure regarding the warranties in the SPA. The buyer will usually agree that the seller will not be liable for a breach of warranty where the matter giving rise to the breach was disclosed in the disclosure letter. A bundle of documents is usually attached to the disclosure letter to support the seller’s disclosures
You will need to work with your lawyer in order to produce the letter.
18. How do I get started?
Use this checklist and call us if you need help! We’ve helped numerous business owners, operating in multiple sectors, achieve their exit objectives.