If your business is profitable, growing, has a good brand and reputation, you may well find that suitable buyers start to find you. Many small business owners make mistakes when selling their companies and lose thousands of pounds because they are not ready to start the process. In this blog, you will find the top tips for selling your business and have a successful business exit avoiding pitfalls, lose of money, stress and difficulties that small companies face.
Top five tips for selling your business
- Choose the right buyer: Is this a trade sale, a sale to a player who wants to get into your sector or a sale to a private equity institution?
- Talk to at least two interested parties at the same time: Doing so keeps a little fear in the deal for potential buyers and stops them dragging their heels or messing you around on price.
- Prepare thoroughly for due diligence: Make sure that you have no holes in your business boat.
- Understand different methods of valuing your business: You don’t want anyone pulling the wool over your eyes as to what it’s worth.
- Get out as cleanly as you can: Keep earn-out periods and warranties to a minimum.
What else do you need to know?
Due diligence
Any potential buyer of your business wants to conduct due diligence to check out what they're getting. Due diligence is equally relevant if you take on extra-institutional funding and is also required if you’re thinking of acquiring another company. Whoever’s carrying out the due diligence sends a due diligence questionnaire to you. The questionnaire lists all the information and accompanying documentation that the potential buyer of your business needs to conduct its due diligence review.
What is covered in a due diligence review?
- Company details and structure
- Share capital
- Financial accounts
- Current contracts
- Assets
- Intellectual Property
- Employment
- Litigation and disputes
What is a virtual data room?
As the seller, you will normally set up a virtual data room and add all requested documents into it. You choose the provider and foot the cost of the service. Thanks to technological advances, this process is now done almost exclusively electronically, instead of sending hundreds of paper documents. A well-arranged data room with easy to locate files helps the buyer conduct a smoother review and gives reassurance about the professional state of your company. When the documentation in the data room has been reviewed, the buyer’s advisors compile a due diligence report. The goal of the review is to locate any issues that can put a halt to the deal or cause problems for the buyer if not attended to and to ensure the buyer if the purchase goes ahead, isn’t paying over the odds for your business.
Agreeing on a price
The due diligence report initially impacts on the negotiation of the price for your company. If the report reveals some problems or risks, you can expect the buyer to want to knock the price down, whether as a result of missing contracts, lack of regulatory approvals, outstanding claims against you or holes in your numbers.
How is the price of your company assessed?
At the early stage of your company’s development, valuations are often a question of guesswork, but as the company matures this can change. If you’re selling shares, three common methods are used to value your company: discounted cash flows, market multiples and net asset value.
- Discounting cash flows: This method works by estimating future cash flows and discounting them to come up with a value in today’s terms because the value of money changes over time. Instead of taking your forecast of future cash at face value, the DCF method applies a discount to reflect what could’ve been earned with that money over the same period. To work out discounted cash flows, you look at the estimated amount of cash made by your company each year in the future for a certain number of years and apply a discounted value to come up with the value of that cash in today’s market.
- Multiplying earnings: The market multiple approaches takes an estimated value for future earnings of the company over a specified period of time and multiplies it by a certain number. A number of different types of multiples can be used when valuing a company. One of the most common is the price-earnings ratio. Other multiples used for this purpose include those derived from the enterprise value of your company, which is based on your EBIT (profit Earnings Before Interest and Tax).
- Valuing net assets: You determine it by valuing all your business's assets and deducting the value of all its liabilities. This method is more relevant where a company is being broken up and sold off (as part of a liquidation) rather than when you’re selling the business as a going concern.
Getting the money
After shaking on the price, you need to agree how it’s paid. This involves how benefits to you on the sale are going to be taxed and whether you get paid all the money straight away.
What does earn-out mean?
An earn-out is a deferral of some part of the purchase price, with the exact amount that’s paid subsequently determined by the performance of your company after its acquisition. The most common reference point for the earn-out is the profits made by the target business in the two to three years following the purchase.
Providing warranties and indemnities
Apart from giving you a good kicking on price, the buyer tries to limit its risk by making you agree to warranties - promises you make in the purchase agreement about the state of the company.
What are indemnities?
The purchase contract may also contain indemnities - a promise to reimburse the buyer for all costs associated with claims in relation to warranties. Typically, an indemnity also applies in relation to liability for tax payments. This issue is usually dealt with in a tax indemnity, which is contained in the purchase agreement or set out in a separate deed of tax.
In summary
If you are in the fortunate position that you have a potential buyer for the business you and your team have worked so hard to build, then the best tip of all is to ensure that you receive good professional advice rather than try and ‘wing-it’ yourself. Obviously, the suggestions above are no substitute for professional legal advice from experienced lawyers, accountants or corporate finance professionals – depending on the size and scale of the business you are selling. Getting the right input early in the process will help ensure that you agree the best price, de-risk the sale and ensure that the sale process happens in a timely fashion. At LawBite we successfully conduct business sales and purchases on a regular basis and have a depth of experience advising our clients on transactions worth everything from a few thousand to multi-millions. Good advice doesn’t have to be expensive so feel free to enter an enquiry for a free 15-minute legal consultation. Alternatively, our friendly Client Care Team are ready to help you with your business sale or any other legal issue by calling us today on 020 7148 1066.
The article has been adapted from ‘Law For Small Business for Dummies’, by Clive Rich, LawBite Founder.
Download our TIP SHEET FOR NEGOTIATION
Download our BUSINESS SALE AGREEMENT
The article has been adapted from ‘Law For Small Business for Dummies’, by Clive Rich, LawBite Founder.
Download our TIP SHEET FOR NEGOTIATION
Download our BUSINESS SALE AGREEMENT
