Selling a Business FAQs:

Q. When is selling my business the right option?

A. You might consider selling your business if you wish to achieve one or more of the following objectives as a business owner:

  1. Retirement, relocation or simply wanting a change of direction
  2. A more passive approach
  3. Reducing your level of personal financial risk associated with business ownership
  4. Divestment
  5. Attaining higher liquidity
  6. New investment for future projects and growth
  7. Recovery from a poor performance

Selling part or all of the business may be the best way to achieve your objectives. You might, for instance, want to sell your business outright, leaving you with no financial or management involvement. It’s worth considering the different ways by which businesses come on to the market and how you can maximize the value of your business.

Q. What is the right time to sell your business?

A. Selling at the right time can have a significant impact on the price you get for your business. Plan ahead so that you can pick the best moment rather than being rushed into a quick sale. The general state of the economy - and your sector in particular – can play an important rule. It may be easier for a trade buyer to fund a purchase when their own business is doing well, interest rates are low and banks are keen to lend. The state of your business is a more important factor. Aim to sell when profits are increasing and look likely to grow further. Consider the impact of sales cycles or seasonal fluctuations in your business - you might have fuller order books at a particular time of year, for example. Planning well in advance also allows you to groom other aspects of your operations to ensure your business is as attractive to buyers as possible. The amount of time it will take to sell your business may vary significantly- depending upon a number of factors. These factors include deal structure, the time of year, the true value of the business versus the asking price, the size of the business and the local market. The most important factors are usually price and the ability to effectively locate qualified buyers. .

Q. In what ways can I sell my business?

A. There are several different sale options:

  1. Partial or full sale - You may want to sell the entire business. Sometimes the purchaser prefers you to retain partial ownership and continue to run the business. This can give the purchaser confidence that the business will do well.
  2. Sale of assets - You can sell assets such as equipment, intellectual property or your customer list rather than selling the business itself. This may be attractive to a purchaser who does not want to take on liabilities and obligations. For example the purchaser might not want to take on your employees. You will be left with whatever assets and liabilities are not included in the sale.
  3. Immediate or phased payment-You can ask for payment in full when the sale is completed, or you may be prepared to accept payment in instalments. The purchaser may well prefer to pay in instalments. But you will be at risk, for example if the purchaser cannot make future payments.

Your choices can affect buyers’ interest and offers. They can also affect the tax treatment of the sale.

Q. What will buyers look for in my business?

A. A diligent buyer, once decided about your business, will seek to substantiate and confirm every phase of your business through a thorough examination known in the industry as due diligence. This may include a review of your marketing and operations -- product lines and services mix, management structure, customer and market base, and compatibility of operations. They will want to know how your company or business is classified -- manufacturer, retail store, wholesale distributor, service company, etc. They will review your financial condition including financial statements, tax returns, depreciation schedules, payroll records, etc. They will want to see your company's earnings (profit before taxes) for the past three to five years, as well as your net worth. They will review the assets of your business -- facilities, equipment/vehicles, inventories and leasehold improvements. And they will examine your legal status -- pending or potential litigation, title or lien searches, and lease agreements. They will want to know about employment contracts. If they are buying your stock, they will want to review your corporate minutes and corporate paperwork. If necessary for the business, they will want to know about your patents, licenses, permits and franchise agreements.

Q. What options do I have to market my business?

A. There are, in fact, a limited number of options available for marketing a business for sale. They are to advertise oneself, use a realtor or broker, liquidate, or use a professional marketing firm. In addition to the actual advertising and marketing of the business, when considering these few options, there are certain critical issues to evaluate with each when trying to determine the best option for your business:

  1. Maintaining confidentiality
  2. Keeping the business sale from employees, customers, competitors, vendors, and bankers
  3. Maintain the business’ stability and growth during the interim
  4. Getting Fair Market Value or even a premium
  5. Screening and qualifying prospective buyers to eliminate time-wasters, competitors, and the unqualified
  6. The cost of the process, including the initial investment and the final costs upon closing the transaction
  7. The ability to justify and defend the asking price and portray the financial future
  8. The availability and expertise of the person representing your business.
Q. What type of information do I need to disclose to a buyer?

A. Only very basic information about your business should be disclosed to a buyer prior to their signing a non-disclosure agreement ("NDA"). An NDA can help protect the confidentiality of any information given to a buyer. Once an NDA is signed, the buyer can be given additional financial and operational information about the company in order to make an informed offer for the business. After an offer is accepted, a significant amount of detailed information will be required during the due diligence process ranging from a review of incorporation papers and other legal documents to a thorough review of accounting work papers and meetings with key employees.

Q. How do I decide upon an asking price?

A. Unfortunately, setting the right asking price for your business is not easy. To determine a price that is fair and still entices potential buyers, most sellers leverage the expertise of a professional appraiser or business broker. However, there are several steps that will help you prepare documentation to help in the appraisal process and formulate a ballpark estimate of your own:

  1. Estimate the liquidation value of your business by assessing the value of its tangible assets- To start, make a list of all of your business's physical assets including furnishings, fixtures, equipment, and inventory. Then consider their acquisition cost, use, age and condition to estimate a realistic value. The summation of these values is one measure of the value of your business.
  2. Estimate the value of your business using earnings multiple- Multiples are ratios of business value to key financial indicators, usually revenue and cash flow.
  3. Assemble the necessary financial statements to enable an income based valuation- Depending on your bandwidth and accounting skills, you may need a bookkeeper to help you prepare the Income Statement, Cash flow Statement and the Balance sheet.
Q. What should the terms of sale specify?

A. You should think about the terms you are willing to accept in addition to the price. Factors that will influence this decision include your personal financial situation and the financial health of your business. You should also be thinking about choosing between specifying an all cash deal and offering seller financing. A question to be considered is -what, if any, level of involvement you want with the business after the sale. You need to be flexible and willing to negotiate to increase the chance of selling your business on mutually agreeable terms.

Q. What does it mean to "recast" my financial statements?

A. When selling or valuing a business, it's generally a good idea to recast your financial statements. This involves examining your financial statements to eliminate the effects of - having run your business to reduce taxes as much as possible; engaging in transactions with related companies on a non-arm's length basis; or otherwise shifting some expenses to the business which could also be classified as personal, if any of these actions differ from how the business would have been run if it were not closely held. The adjustments can increase or decrease the balance sheet, income statement, or other metrics upon which the business is valued.

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