By Colin Bates
Selling a business is a tricky process, but it’s one which is worthwhile – provided that you treat it as seriously as you did building the business in the first place. Before we deal with how to sell a small business, let’s first examine why you might decide to pass the baton.
You’ve put in the hours and turned a good idea into a successful small business. Only a minority enjoy this sort of success – so why quit now? Entrepreneurs elect to sell up and move on for a variety of reasons. Let’s explore a few.
If you’re leaving the workforce altogether, selling your business can provide a welcome pile of cash to see you through your retirement.
If your enthusiasm for the business was what drove you during the first few months and years, then you might find that a loss of enthusiasm results in a downturn in performance. You might have another, fresher idea in the pipeline – and you want to shift your focus accordingly.
3. Poor Health
On the other hand, you might be willing to contribute to the business, but not physically capable of doing so. Many small businesses thrive only thanks to the contribution of the owner. If yours is suffering because you’re unable to play an active role, it might be time to move on.
We might lump general fatigue into this category – owning and running a small business is more than many perfectly healthy people can cope with, and there’s no shame in wanting to take things easy after years of effort!
4. Growing Pains
Your business might have reached a point where, in order to fulfill its potential, it needs to expand. On the other hand, it might be bloated, and in need of a trim. If you don’t have the right skillset to deal with these problems, then it might be time to sell to an organization that does.
5. Poor Outlook
In some cases, the writing might be on the wall for your business. If you predict grim times ahead, then it’s often better to bite the bullet and sell rather than endure a protracted, painful decline in fortunes.
The prospect of obsolescence can play a major factor, here. For example, if you owned a video rental service in the mid-2000s, selling it might have been wise. Similar pressures can come from political and broader economic changes.
How Do You Sell a Small Business?
Now that we’ve explored a few of the motivating factors behind a decision to sell, let’s consider how we might go about actually going through with it.
1. Succession Planning
First, we should say that the more time you have to plan and execute the sale, the better. A year, or even two, is a sensible horizon. Rushing things will in most cases result in enormous stress, and, in all likelihood, limit the profitability of the sale. If you have plenty of time, you can ensure that all your records are in order, which will make demonstrating the value of the business easier, and simplify the transition from one owner to the next.
Succession planning is something that’s critically under-appreciated by most sellers. If the would-be owners can see that they’re able to hit the ground running, they’ll value the business that much higher. On the other hand, if the sale appears driven by a desperate need to offload a crumbling enterprise, it’s in greater danger of falling through.
How much is a business worth? It’s a tricky question. A small business is a far more complicated thing than a car, a washing-machine, or even a house. You can’t simply look on Gumtree to see what other small businesses are going for, because a business has many attributes that make it unique.
Here is where the opinion of a third party can be invaluable. A professional appraiser will be able to assess the business from the bottom to top, and present their findings in a detailed document, to which both seller and buyer can refer. This will put the weight of credibility behind your asking price.
As part of the valuation process, you’ll need to compile a list of the business’s assets, along with another list of valuable contacts. Tax returns, stretching back as far as possible, should be reviewed and summarized by your accountant. To secure the highest possible price, you’ll want to replace or repair every faulty piece of machinery, since if a buyer sees a potential expense on one page, the chances are that they’ll extrapolate and consider the rest of the sale suspect.
Before the sale goes through, your business will undergo an inspection process called due diligence. This involves the buyer extracting evidence of your accounts, valuation, any intellectual property protection, and a great deal else besides. If you have these things to hand, the sale is more likely to progress quickly, and renegotiation is less likely.
3. Finalizing the Sale
To sell your company, you’ll need a legally binding agreement which details the exact terms of the sale. At this stage, the right legal expertise really is essential – even if you’ve gotten this far without it. You’ll be sure that the contract of sale really is binding – and you’ll be able to enjoy a much-deserved payday when pen is finally put to paper!
Before you come to sell, you’ll need to inform your staff of the decision and offer some justification. You may be obliged to offer a redundancy package, which will affect the ultimate profitability of the deal. The same is true of capital gains tax, which you’ll be obliged to pay upon sale of the business.
With that said, you should be able to claim relief against the tax, the most obvious form of which is entrepreneur’s relief. A good accountant will keep you apprised of these obligations, while cancelling your class-2 national insurance contributions and helping you to transfer VAT registrations.
Do I Need a Broker to Sell My Business?
When you run your business, you’re deploying skills that you’ve spend long hours honing. Plasterers practice their trade for hours every day, as do bakers, electricians and aviation engineers. You wouldn’t board a plane whose pilot is a randomly-selected passenger, however earnestly they might wish to land in one piece.
Consider how much rests on the success or failure of your sale and the sense in introducing a specialist broker becomes obvious. With their help, you’ll be able to concentrate on the day-to-day running of the business. If they’re working on commission, they’ll have a strong incentive to secure the highest possible price.
If you’re selling to a trusted family member or friend, then you might be tempted to dispense with the services of a broker. Moreover, it’s worth bearing in mind that not all brokers are the same – and thus you’ll want to shop around!
Transparency is the key to a smooth and profitable sale. Your buyer will want the clearest possible image of what their money is getting, and this means amassing reliable balance sheets, tax returns and other paperwork, ideally through an impartial auditor. All of this, naturally, takes time – so wherever possible, plan your sale several years in advance.