Steps involved in Selling a Business
Just as you needed a plan to start a new business, you will also need a plan to get out of it. Business is set-up not thinking of an exit and there is lot of emotions and feelings attached with it, but there are times when one needs to think strategically and realistically to move ahead rather than sitting on fire. For instance, while there's really only one way to start a company, there are at least three primary methods for entrepreneurs to leave the businesses they founded: i.eSelling, Merging or Closing Down.
- Process To Sell Business
Whether or not your profit will depend on the reason for the sale, the timing of the sale, the strength of the business operation and its structure. The business sale process would also require much of your time and energy. Deciding to sell the business you have worked so hard to grow is rarely an easy decision. However, it may be the right one under some common circumstances.
I. Preparing your Sale
Selling the business is as difficult and complex as starting a new business. So you must be fully prepared to support and justify your statements in the selling process. It should be accurate and justified.
Now the question arises how you get yourself ready?
a) Get your books in order
All the books must be complete with information displaying true and fair results. There must not be any ambiguity in any manner so as to create a smooth passage towards right sale.
b) Gather financial information, present financials
Review your incorporation papers, permits, licensing agreements, leases, customer and vendor contracts, all bank and debt sanctions etc. Make sure you have them readily available, current and in order.Financial statements and all forms of Tax Returns dating back three to four years and review them with an accountant.
c) Operating Manual
Your information packet should also provide a summary describing how the business is conducted and/or an up-to-date operating manual.
d) List of Assets
A consolidated list of Plant and Machinery, Equipment and other assets that are being sold with the business needs to be prepared giving the year of purchase and the condition of the same.
II. Reason for sale
When you one decides to sell the business the first question comes in the mind of potential buyer that what is the reason behind sale.Owners commonly sell their businesses for any of the following reasons:
- Dissolving Partnership & Family disputes.
- Illness and death.
- Change his business line and want to do something more challenging.
- Becoming overworked.
- Over-leveraging from banks and financial institutions.
- Forced acquisition by a buyer.
- No succession plan in place.
- Relocation and transfer.
- The business performance is low.
- Lack of funds for working capital to keep going.
It would be advisable to be transparent with the buyer as it would give confidence to him to work out a plan to take up the business. The buyer needs to get the right information from you rather than from others during the course of transfer of ownership, which sometimes does not go well with the closing of the transaction.
III. Timing of the Sale
As soon as you take an internal decision to sell your business do not lose time to start the process of preparation for sale. Prepare for the sale as early as possible, preferably a year or two ahead of time. The preparation will help you to improve your financial records, business structure and customer base to make the business more profitable. You need to put a succession plan in place and all departments in your organisation need to be manned and not miss your presence in the company.These improvements will also ease the transition for the buyer and keep the business running smoothly. Some owners consider selling the business when it is not profitable, but this can make it harder to attract buyers. Consider the business's ability to sell, its readiness and your timing. There are many attributes that can make your business appear more attractive, including:
- a) Increasing profits
- b) Consistent income figures
- c) A strong customer base
- d) A major contract that spans several years
IV. Appoint a Business Broker
Selling a business can be a long, daunting experience even for experienced business owners who while having a lot of experience ‘in business’, do not have the same experience in selling (or buying) businesses. Appointing the right business broker brings someone on board who can help guide you through the sales process.The role of the broker is to qualify prospective purchasers and act on your behalf in speaking to interested parties. This is often extremely time-consuming and involved, particularly during a due diligence phase, and is one of the key reasons to appoint someone who is qualified and knows what they are doing. Appointing a broker actually SAVES you time and money because you can continue to work IN the business, while your broker works with you ON selling your business.
They help in the following ways:-
- a) Provide in-depth insights on valuation, marketing, negotiations and other fundamental sales elements
- b) Understand the art of getting multiple qualified buyers to the table
- c) They know how to overcome all the obstacles that often prevent a sale from closing
- d) They preserve confidentiality during the sale and marketing process
- e) You advertise with them in social media, websites and Newspapers
- f) Insist on the Business Broker’s team needs to pay a visit to the business and get to first- hand information of the business. Once he has a feel of the business he would be in a better position to pitch for your sale.
- Business Documents
I. Information Memorandum (IM)/ Business Presentation
This is a document which showcases your business to potential buyers. The buyer has his first encounter with this all important document and makes the overview of his judgement based on it. Business Presentation is not limited to specifics but is for all.
Some business owners and financial advisors look at an IM as a marketing document which provides a selective overview of the attractive features of a company.The following detailing needs to be included in a Business Presentation
- a) Business Overview
- b) Infrastructure Details
- c) Product & Services
- d) Sales & Distribution Network
- e) Financials for 3 years and projections
II. Business Valuations
A business valuation is a process of determining the economic value of a whole business or company unit. Business valuation is used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. Owners will often turn to professional business evaluators for an objective estimate of the value of the business.
It can be done through several methods but the common methods are:-
- 1. DCF valuation method
- 2. Realtive valuation method
- 3. Asset based valuation method
- Buyer Search
A business sale may take between six months and twenty four months as this is a standard time required to sell a business and finding the right buyer can be a challenge. Do not limit your advertising since you would be getting new leads with each advertisement and you'll attract more potential buyers. Your Business Broker is your guide in this process and you need to have trust in him and his ability to get you the right buyer. Buyers will start contacting us asking about the business and looking for more information. This is a critical stage where a lot of time can be wasted if the buyers aren’t qualified. By that we mean a lot of buyers don’t really know what they want, they are ‘lookers’ and comparing opportunities.
The experienced business broker will pick this up quickly by the way the buyer speaks and acts. While buyers are judging our business opportunity, we, as your broker, are also judging them on their commitment and capacity to actually buy the business.
So much time and effort is wasted if your business broker does not have the skills and training to handling buyer enquiry properly and efficiently.
Once you have prospective buyers, keep the processes moving along:
- a) Get two to three potential buyers just in case the initial deal falters.
- b) Ask the broker to stay in contact with the potential buyers.
- c) Find out whether the potential buyer prequalifies for financing before giving out information about your business. If you plan to finance the sale, work out the details with an accountant or lawyer so you can reach an agreement with the buyer.
- d) Allow some room to negotiate, but stand firm on the price that is reasonable and considers the company's future worth.
- e) The potential buyers should sign a nondisclosure/confidentiality agreement to protect your information.
- f) On completion of the negotiation sign a Term Sheet which forms a base for drafting a Share transfer Agreement.
- g) Confidentiality- Confidentiality needs to be maintained as it is the key to the sale process and is necessary that the information of your sale does not leak out to your employees, customers, vendors and other associates including banks and financial institutions. Your entire Business Information should typically be provided to interested parties once they have signed a non-disclosure agreement.
- Deal Closure
Negotiation is a process where two or more parties with different needs and goals discuss an issue to find a mutually acceptable solution. Negotiating requires give and take. You should aim to create a courteous and constructive interaction that is a win-win for both parties This is a very challenging step to deal with the expectations of the seller and match with that of the buyer so as to complete the negotiation process. Here the intermediary helps in creating that positive atmosphere and let both seller and buyers understand the implications of the sale.
This is the step dealing with numbers so it is imperative to deal with it carefully as the sale of a business has many financial and professional considerations for the management team and owner. The purchase price is only one component of the overall result.
I. Term sheet
A term sheet is a nonbinding agreement setting forth the basic terms and conditions under which an investment will be made. It serves as a template to develop more detailed legally binding documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up. It is one of the important document the parties exchange containing the important terms and conditions of the deal. The term sheet is called as Non Binding agreement because it reflects only the key and broad points between parties under which the investment will be made.
II. Due Diligence
Due diligence is a process of an investigation or audit of a potential investment or product to confirm all facts, that might include the review of financial records. Due diligence refers to the research done before entering into an agreement or a financial transaction with another party. This phase has a key role in the M&A process, and the result there often determines the character of decisions made at the consecutive stages of the process. The result and quality of the examination have an enormous impact on decisions made by people responsible for the course of the transaction in that they make it possible for both parties to the transaction to make sure that they have the same perceptions of the object of the transaction, its financial results, as well as the way it operates.
III. Share purchase agreement
A share purchase agreement is a legal contract between a seller and a buyer. They may be referred to as the vendor and purchaser in the contract. The specific number of shares are listed in the contract at the stated price. This agreement proves that the sale and the terms of it were agreed upon mutually.This is the final stage in the process of selling a business. Your Business Intermediary will again manage all aspects to expedite this process. Lawyers and accountants co-ordinate from both sides to ensure a timely and successful conclusion. All the owner has left to do is sign a few papers and meet their obligations under the terms.
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