And often the reason isn’t so much a poor market or an unprofitable business; it’s the selling process itself that went wrong. With such important outcomes riding on the sale it makes no sense to jeopardize the price you’ll get by treating the process in a cavalier fashion. To maximize your return there’s only one way to handle the sale - understand the steps in selling a business, formulate a plan for the selling process, and build in allowance for the time necessary to negotiate a price and terms that satisfy your needs from the sale.

Valuing Your Business

There’s more than one way to value a business…and the valuation method can depend on the type of buyer you are looking to interest.

Only an overall view of your business and the market you operate in can determine which is likely to bring you the best price.

The process starts with deciding on what the business is likely to sell for – and for many business owners the disappointment originates here. A home grown valuation figure that is unrealistically high will turn off potential buyers; one that's unnecessarily low will ultimately deprive you of the best cash out value that could have been obtained.

Business valuation may be a mix of art and science but it’s a job for the trained artist/scientist and that means using a business valuer. Using a trained business valuer isn’t a waste of time and money – it’s the only way to set the most realistic price for a business.

Without the advice of a valuer you are left, basically, to guess at a value. You can guess on the basis of what similar businesses are selling for in your area (if there are any); or you can guess using net assets, or cash generation, or a multiple of profits or some combination of these. But you’re still guessing.

Advisers have established a number of ways to quantify the value of key aspects of a business, and roll them up into an overall figure. And as part of the process they will write up a valuation report which explains in detail how they arrived at their final value. Since it is not unusual for a buyer to ask for the logic behind an asking price having a valuation document prepared by an outside expert adds a great deal of credibility to the figure - the buyer will be able to see exactly how it was arrived at.  

That’s important. If potential buyers come armed with advisers of their own you are going to be questioned in detail about how the price was arrived at. It will probably be challenged and maybe even valued by them using their own method. If you don’t know how that method works or don’t have an adviser who can respond to the challenges on their own grounds, then you are at a disadvantage.

Another reason for taking professional advice is that any buyer is going to want to know why the business is for sale. Regardless of your real underlying reasons your adviser can firm up a rationale with you and provide prospective purchasers with a logical answer to this question.

Preparing Your Negotiating Position

There are numerous details connected with the sale of a business that require the owner to have a preferred position in mind before negotiations get under way so as not to be wasting time mulling over them when they arise during negotiations. This only slows things up and may prove to be an insurmountable stumbling block for the buyer.

These issues need to be anticipated and a position on them prepared in advance so questions from prospective buyers can be answered definitively and authoritatively.

• Stock valuation will have to be done by an independent source if the business’ own records aren’t accurate or if the inventory doesn’t balance with those records. All assets on the register should be covered by documentation about their origins and proof of ownership.
• Restraint of trade is often a sticking point if the seller hasn’t anticipated the request from the buyer and considered what period, or over what geographic area, they are prepared to remain locked out of the industry after the sale
• The owner’s departure may be viewed as a ‘devaluation’ of the business, as would the departure of any key employee. Unless there is some form of guarantee that the requisite technical and management skills remain inside the business after sale potential buyers can be discouraged. You may need to consider how you would deal with a request by the buyer to stay on in some capacity for a period after the sale and work with them to transfer your special knowledge of the business. This can include introductions to key suppliers and major customers and generally showing them the details of the business’ operations.
• Employees may also be a concern, especially if they are long-serving and important to the business. A change in ownership might be the point at which a key employee also decides to move on – and that’s something the buyer is going to want to assess the impact of. It’s also likely that the businesses’ liabilities to the employees, such as leave entitlements, will be transferred to the purchaser and will need to be taken into account.
• Suppliers can be a pivotal negotiating point since continuity of supply is essential. The purchaser must be confident they will be able to carry on the business with the same sources as the former owner if they want. It is sometimes possible to arrange contracts with suppliers – it would be essential if the business relies on a single source for its requirements.
• Customers too will be concerned about the business changing hands. It may be possible in some cases to get them to sign contracts to guarantee continuity of custom but in most cases the purchasers will be ‘starting over’ with existing customers. If your business is reliant on a small number of accounts for its profitability any way in which you can get them to agree to stay with a new owner will improve the chances of a sale.

Not until you have a clear understanding and position on these and many other issues should you move to actually putting your business up for sale.

Prepare For Due Diligence

Weathering a thorough and robust due diligence process is critical to the successful outcome of sale negotiations. Anything that is important to the business can be the subject of due diligence. Things like contracts, patents, the employees and legal issues will most likely be examined.

Documentation must be prepared in advance to ensure it is available and so that time isn’t taken up locating it and keeping the purchaser waiting unduly when the time comes.

The due diligence process is always time consuming and often involves meetings with several parties. You will need to ensure that all the required tax returns, accounts, ledgers and supporting documentation reconcile with one another and are consistent with what you state throughout your Sales Memorandum.

It should be possible to show how items of equipment have been acquired and paid for. Records of items like sales and expenditures need to reconcile with tax returns to establish their accuracy.

Prospects may also be interested in doing some industry due diligence so time spent assessing where your industry is up to and likely future scenarios is useful information to have in mind.

The key to speeding the due diligence process is anticipation – you must expect that everything about the business, both good and bad, will be uncovered. Be ready with answers and proof for whatever questions are likely to be asked.

Marketing The Business

Once an appropriate asking price has been established and the sort of arrangements you’d prefer for the deal outlined, the next step is to start marketing the business to potential buyers. At this stage the advice and assistance of a business broker is useful.

1. Identify Possible Buyers

A broker will work with you to identify potential buyers for your type of business and then to reach them and let them know your business is for sale.

Identifying possible buyers may not be as obvious as it sounds. You may think there is only one reason someone would buy your business – they are looking for an income flow, the same reason you used it for.

But there are actually a lot of reasons why particular businesses are sought after and that means different people/businesses that need to be considered as potential buyers. Your business might be of interest to another one for reasons having to do with their longer term business strategy, or instance to a competitor wanting to remove a player; or who is seeking a distribution channel in your geographic area; or the product you make would round out their offering. Maybe even your current employees would be interested in taking over.

In other words, different prospects will attach very different values to the same business. The professional advisers role is to work with you to identify the range of possible buyers including from among suppliers, customers, employees, and local, regional, and national competitors, who might be interested in your business and who will place the highest value on it.

The end result should be a list of possible buyers. Depending on the number and how you rate them, you could divide it into two groups – the hot and cool. Only go to the cool list once you have worked through the people on the hot list.

2. Prepare A Sales Memorandum

You provide your prospects with information about the business in the form of a Sales Memorandum. This is a profile of the company that showcases your business by presenting the most attractive details about its successes and strengths. The Sales Memorandum is, in most cases, the primary marketing document and to work needs visual appeal, factual data and an enthusiastic presentation style.

It should provide prospects with information on earning potential, value of assets, proof of efficient management and good relationships with suppliers and customers, healthy employee relations and so on. This information will enable them to make a reasonable assessment of the business and to formulate the price they would be willing to pay.

That means being careful to exclude any misleading figures or assertions about the business that could undermine a buyer’s trust in you, their interest in the transaction and, ultimately, the price.

On the other hand, this document is public and you need to make sensible judgements about what not to include as well. For instance, commercially sensitive information on customers and margins and pricing structure should generally be withheld until later stages of the sale process when you are dealing with a firm offer. This avoids the potential for damage to the goodwill of the business.

3. Approach Potential Buyers

The question of whether you approach prospective buyers directly or use an adviser as an intermediary basically depends on how you assess your own negotiating skills. The process is going to test them and if you don’t feel secure about being able to handle the questions openly, but without giving too much away or conceding too much, or taking the pressure, then you should let an adviser do all the front running and come in nearer settlement time.

After having made phone or letter contact and received an expression of interest the prospect is supplied with a copy of the Sales Memorandum. The critical point here is to have them sign a confidentiality agreement before it is sent to them.

4. Maintain Confidentiality

As a general rule, the sale of a business should be treated as a confidential matter. There’s a time to talk and a time to be silent and just how well you play your hand here can have important repercussions in a number of areas and ultimately on the price that can be obtained.

Massachusetts-based Global Business Exchange sums up the main reasons:

“For many businesses, it is important that the wrong people do not find out the business is for sale. It can greatly damage your business if your customers, employees, suppliers, competitors or even your bankers find out the business is for sale.

It can make your customers wonder if their orders will be filled, if you will stand behind your work, if you will honor the warranty.

It can make your employees question their job security.

It can make your suppliers wonder if they will be paid, if they should extend you credit, or if they will be losing the account.

It can make your competitors call on your best accounts, telling them you are for sale, and since they will be doing business with someone new in the future anyway, why not give them a shot.

It can make your bankers wonder if you will meet your obligation, whether they should renew your line of credit or call your outstanding loans.”

Meetings related to the sale should be held off-site or outside of business hours. All prospective purchasers and their advisers should have signed confidentiality agreements before you talk business with them.

5. Dictate The Timetable

The Sales Memorandum should include a section that sets a timetable for the sale that’s suitable to you - the uncertainty of a drawn-out sale could be damaging to your business.

Meeting with prospects and performing the due diligence operations they require can disrupt your business at just the time you want it to be performing well. And of course some prospects will have their own agenda for stalling progress. So you should lay the ground rules by setting dates wherever you can, for instance for receipt of offers, even if you might be prepared to stretch some deadlines for likely buyers as you go along.

Weighing Offers

Also be sure you understand all the ramifications of the different payout methods you may be offered. A one-off cash payment may be the most appealing option, but it may not be the most tax advantageous for you.

Combination cash and shares (in the purchaser's business) arrangements are really only worth accepting if they're in a quoted company. And be wary of deals that require you agreeing not to sell those shares for a predetermined time.

With deferred payments of any kind you need to set up some sort of guarantee against the risks involved. Buyers may want to lessen their risk by making future payments based on the business' future performance - known as an earn-out. Or they may ask for seller financing.

In both instances there is the inherent risk that the business may not perform as well under the new management as under yours, which puts your return at risk.

You may also have to provide the buyer with reassurance about what they've bought and protection against future liabilities in the form of warranties and indemnities.

But for any such agreements ensure you have full advice on what they commit you to, or make you liable for, and that all details are legally documented – the last thing you want is for any of these issues to come back and haunt you after the sale.

Selecting A Buyer

Having evaluated all the offers and what you would need to do to comply with any requests they have made contingent to final agreement, you choose the preferred prospect. From this stage on, deal only with this candidate and don’t try changing your terms – you’ll destroy their trust straight off and probably lose the sale.

The agreement is formalized in principle in a letter known as Heads Of Agreement or Heads Of Terms, to be entered into by both sides.

It will include an exclusivity period during which the vendor cannot negotiate with anyone else.

The other bidders are then informed that a Heads Of Agreement has been signed with a buyer.

Completing The Deal

With those formalities completed the only major thing to be undertaken before coming to a detailed sales agreement is the full scale due diligence investigation. The buyer will instruct their accountants and legal representation to undertake this in-depth investigation of the business that may go as wide as including property, environmental, IT and HR issues.

To the extent that you have previously prepared as much as you can it may not be too time consuming or turn up any surprises. However, you are going to need expert advice and assistance to take you through this process and protect your rights – issues that do come up during due diligence can sometimes be used by the buyer to try and leverage better terms for themselves so some renegotiating may be in order.

The legal representatives on both sides will then draft and negotiate the formal legal documents to effect the transaction, primarily the Sale and Purchase Agreements but also any financing documentation required and service contracts for directors.

It is important that you use a corporate finance adviser to co-ordinate the whole process during this period as there are often a large number of parties and other advisers involved and you will have to cope with the provision of information for the due diligence process. Your corporate finance adviser will also be able to identify issues in advance, ensure that any resulting negative effects are minimized and conduct negotiations to deliver the best result for you.

In the next instalment we cover what you can do to improve the value of your business in the lead in period to the sale – grooming your business.