Step by Step Guide to Selling Your Business

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How to sell your business

The formula applied very much depends on the industry, but the most common method is a multiplier of profits. Alternatively, an asset-based valuation adds up the market value of tangible assets like premises and equipment along with intangible assets like customer goodwill and intellectual property.

Cash-flow analysis, meanwhile, projects future revenues and costs — usually for five years— and applies a discount to reflect risk. Your business-transfer agent should ask you lots of questions about your business to ascertain its strengths and weaknesses.

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This will help them put together a sales package that presents your business in the best possible light. They will advertise the business for sale on both their own site and classified listings sites. If your sale is confidential, then the broker will be more circumspect in what information they disclose in sales collateral. Once your business is on the market the enquiries will hopefully start rolling in. With this in mind you should vet buyers to assess their credibility and weed out time-wasters.

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What are their plans for the business? Do they have experience in your sector or of running businesses generally? And importantly, how do they intend to finance the purchase? Before you share any sensitive information however, it is wise to ask the buyer to sign a confidentiality agreement. When the buyer puts down a deposit you can take the business off the market. Based on your initial valuation, each party will then enter negotiations with a price in mind. They will probably meet somewhere in the middle, depending on how negotiations unfold. For instance, if due diligence uncovers any undeclared problems, the buyer will probably drive a harder bargain.

Negotiations are as much about how the deal is financed as the price itself. The buyer will usually put down some of their own cash plus a bank loan.

More Details on the Business Sale Process

However, you can also convince the buyer to agree to a higher price by accepting a portion of the funds in instalments. Naturally in a transaction of such magnitude — financially and emotionally — things could get fraught very quickly if buyers and sellers negotiated directly with each other. Usually lasting between 60 and 90 days, due diligence is the process by which the buyer checks whether claims made by the seller stand up to scrutiny. Trust can be fatally undermined if the buyer uncovers problems during due diligence that the seller obscured in their sales collateral and answers to enquiries.

It is therefore advisable to front up about any troublesome issues. Richards suggested getting an adviser. But working with an adviser who hasn't handled a similar situation before can hurt you more than it can help you.

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Richards said it's important that your adviser has experience with mergers and acquisitions, knows the accounting side of the transaction, and knows where the opportunities lie to structure the deal favorably. Don't rush through due diligence. Richards advised doing a pre-due diligence assessment to avoid not-so-pleasant surprises during the actual due diligence process.

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A pre-due diligence assessment will help keep you on the same page as your buyers, which is always important. Don't hide your weaknesses. Obviously you want to sell your business's strengths, but your weaknesses are important, too. Richards said that potential buyers may see your company as a better fit if they can pair their own strengths to a weakness on your end. Don't skip your story. It's not all about financials, Richards noted. Interested buyers want to know how your business got to where it is now, so be prepared to tell your story.

That includes answering questions like "Why did you build the business? Do know your value. You can't sell anything unless you know what it's worth, especially if you want to attract good buyers. And when it comes to your business, that's especially important.

If you have a great understanding of your business's operational performance, you can more effectively communicate its worth to your potential buyers, Richards said. Do match your sale to your plans. Signing the papers isn't the final step, Richards said; the real endgame is what you'll be doing after the deal is done. So think about it: When you leave this business, what are your future plans? Are you retiring or starting a new business venture?