Selling your business can often be exciting but also quite daunting. Just because you have the skills to run the business on a day to day basis, it doesn’t necessarily mean you naturally have the skills to negotiate the potential obstacles involved in selling your business without professional help. That isn’t to say that you can’t sell your business privately without the need to use a broker. This is especially true of smaller businesses and it is worth considering that a high percentage of businesses listed with a broker don’t actually sell. For any sale to proceed quickly, you will need to ensure all your paperwork is in order and that you are well organised and realistic about what is an achievable price for your business. In this article, how to sell a business privately, we take a look at the process involved and the options available to you.
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Why sell a business privately?
If you decide to try and sell your business privately, you will be responsible for the sales process from start to finish. Just because you have decided not to use a business broker, it doesn’t mean you shouldn’t use the services of an experienced solicitor and accountant. These professionals will be needed to ensure all the legal and financial aspects of any agreed deal will be carefully considered and agreed upon. Selling privately will negate the need to give away a percentage or flat fee to a broker but you will be far more involved with the minutiae of the sales mechanism and will be liable for advertising and marketing costs.
How long can it take to sell a business?
There are a number of factors that will affect the answer to this question. If the business is relatively straightforward in its set up and operations, it can take around 12 months. During this period, the seller and buyer will have to agree on a price, how the money is to be paid, what is to be included in the sale, the buyer will need to carry out their due diligence, accounts will need to be analysed, customers will need to be assessed in terms of the likelihood of them remaining as customers, and operational procedures and staffing will need to be scrutinised. The list of activities can be lengthy and there is no guarantee that the buyer will proceed to completion if they discover something in their investigations that they are not happy with. Consequently, although a figure of 12 months is often given, it can be considerably quicker or even longer depending upon the complexity of the situation.
How do you advertise your business for sale?
You will need to prepare two documents – the advertisement (teaser) and the Information Memorandum (also called the Confidential Information Memorandum or Sales Brochure).
The teaser should not give out too much information but should be designed to be of interest to prospective purchasers such that they make contact with you.
The Information Memorandum (IM) is an important document, its purpose is to share with the reader key information about your company, get them to engage and get them to make an offer or ask questions. The IM should be concise and full of information. It shouldn’t be designed to act as a sales pitch.
If you are trying to sell your business on the open market, there are a number of online sites that advertise businesses for sale.
In addition to listing your business for sale, consider reaching out to potential buyers. As selling your business to competition is one of the fastest ways to sell, it’s worth being proactive.
You could potentially ask your staff if they are interested in buying. If your business is financially stable and you have low staff turnover, this could be a win-win situation for all parties involved.
It might also be useful to offer to the new buyer a transition period where you can stay in the business for a period of time, offering training and a practical handover to the new buyer.
What Are The Various Valuation Methods That Can Be Used to value your business?
Multiple of Earnings: In this instance, a variable figure known as a price to earnings (PE) ratio is used. This PE ratio often varies from industry to industry. Using this technique, a valuation is derived by establishing what the income of the business is and then multiplying it by the PE figure. For example, if your business generates £100,000 post tax profit and is in an industry where a PE ratio of 5 is considered reasonable, the business would be valued at 5 x £100,000 = £500,000.
The key to this technique is how to find the PE figure. Business consultants often use figures between 4 and 10 dependent upon the industry and the specific circumstances of the particular business. In a small business, for example, the generating of profit can be quite precarious. Key staff could leave the business or a major customer may cancel a contract often leaving the business in a dire situation. As such, PE ratios are normally smaller for small businesses compared to larger concerns where they are often better placed to survive the often tumultuous nature of commerce.
It should also be remembered that businesses where profits are growing rapidly will also command a higher earnings multiple than firms where profit growth is low or there is no growth at all. Most incoming purchasers will want to see that there is potential for growth, not stagnation.
Valuing Assets: This technique involves valuing all the tangible assets of the company (stock, machinery, property etc). This method is often employed when valuing a company whose business model is based around holding these kind of assets such as property companies.
Cost To Duplicate: Often heard in the BBC TV program “Dragon’s Den”, the judges analyse a business looking for investment and dismiss the valuation based upon the cost to actually replicate a similar business from scratch. This would often include the cost of developing a customer base and reputation, recruiting and training staff, purchasing assets and developing products and services.
Discounted Cashflow: This technique involves forecasting how much cash flow the business will produce in the future and then, using an expected rate of investment return, calculating how much that cash flow is worth. A higher discount rate is typically applied to new business ventures, as there is a high risk that the company will inevitably fail to generate sustainable cash flows. The trouble with this method is that the quality of the DCF depends on the valuer’s ability to forecast future market conditions and make good assumptions about long-term growth rates. In many cases, projecting sales and earnings beyond a few years becomes something of a guessing game.
Industry Valuations: In certain industries, when businesses are bought and sold on a regular basis, industry accepted standards are sometimes used to value a company. Examples of such industries include recruitment agencies and accountancy practices.
Going Concern Valuation
This kind of valuation assumes that your business is going to keep on going under its new owners. When calculating the value of a going concern’s assets, you need to take into account the business’s intangible assets, because those assets are going to transfer to the new owner. You also need to take into account the goodwill that your company has. It can be viewed as an asset with a quantifiable value, and it can be bought and sold like any other asset.
How to prepare your business for sale
If you have decided to try and sell your business privately, there are ways to make the process as efficient as possible:
Financial Record Keeping
It is vital that all your financial records are neat and tidy and up to date. A buyer will want to look through your accounts, ensure you are up to date with legislation and check all necessary certificates and all other paperwork that is required for your industry. Prepare carefully and make sure all relevant documents are easily accessible including cash flow forecasts, budgeting and forecasting, business metrics and industry benchmarks.
Operations Documentation
A potential buyer will be looking at your business and thinking about how to actually run it once the sale has completed. Consequently, it is important to collate all the documentation associated with operational management. This should include employee contracts, supplier and customer contracts, procedural manuals and systems and an organisational chart outlining who does what within your business.
Marketing plans
It is essential that a buyer feels confident that your marketing activities can be continued after the business has been purchased. Consequently, a detailed marketing plan is an essential document for a buyer. A buyer will want to see your ongoing plans to increase brand awareness and a strategy that differentiates your products and services from those of your competitors. Set out your system for generating leads and generating sales, and the future growth opportunities in demographic segments and geographically.
The Offer
The “consideration” is what you get for what you are selling. In order for there to be a binding agreement there needs to be an offer, acceptance, consideration and intention to enter into a legal contract. You can take professional advice as to the valuation of your company but in any transaction, the seller has to be satisfied they are getting a good deal and the buyer has to believe they are getting value for their money.
It is important to consider the structure of any offer received. Is it a payment due on the day you hand over your business; is it related to the performance of the business after you leave; or is there a split payment of cash upfront in addition to delayed consideration?
The sale process
Once you have received your offer and you have decided to accept, you should instruct your lawyers and accountants, who will work closely during the sale process. Being in touch with your lawyers and accountants early on in the transaction helps to avoid unnecessary pressure later on.
Conclusion
If you are looking to sell your business privately, you need to be realistic about the process and the amount of work involved. Although it might seem a little daunting at first, small businesses are often better off being sold by their owner as opposed to using a broker. It should also be remembered that you will be saving money by not using a broker and are more likely to be more tenacious in finding a buyer than a business broker.
How we can help
We have a proven track-record of dealing with company sales and purchases. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of a business sale. However, expert legal support is crucial in terms of ensuring a positive outcome to your case…
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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