Selling a business is a big decision and can be stressful for many business owners. We take a look at the steps to selling a business, from the initial thoughts of ‘I want to sell my business’ right through to marketing, settlement and exiting. If you are nervous about selling your business, it's totally understandable, many business owners have never sold a business before.
For your ease, this guide is categorised into 3 parts and a total of 16 steps.
PART ONE: Prepare your Business for Sale
1. Organise your Documents
2. Systemise your Business
3. Get an Appraisal of your Business
4. Assess your Tax Obligations
5. Establish your Sales Team
6. Decide When is the Best Time to Sell
7. Prepare Legal Documents
8. Business for Sale Memorandum
PART TWO: Advertise your Business For Sale
9. Choose the Best Marketing Channels
10. Create an Effective Advertisement
11. Filter Buyer Enquiries
PART THREE: Finalise the Sale
12. Negotiate with Potential Buyers
13. Accepting a Deposit
14. Undergo Due Diligence Process
15. Exchange Contracts
16. Exit your Business
In order to sell your business, you need to have everything organised. The more organised you are for the sales process, the easier it can be.
When you first have the thought to sell your business, you need to go through the process of organising all your paperwork. Before you approach your accountant or a business broker, you need to have your paperwork such as; all of your financial, equipment, lease agreements, contracts, client, distributor, supplier lists, and more ready.
A business that is well systemized is easier to sell. When you are going to exit your business or provide training to the new buyer, the more systems you have in place, the easier the transition will be. There are a few ways to systemise your business.
Allocate roles to your team to create training videos, build flow charts, set up checklists. The more systems you can create the easier it will be for the buyer and the easier it will be to sell your business. Set a goal to create X number of systems per week. Google Sites really does make this process so much easier.
Speak to 2-3 business brokers to get a business appraisal.
One of the biggest deciding factors when it comes to selling, is how much you will get for your business.
Often a business owner will think their business is worth more than the appraisal a business broker provides. This is why it is very important to obtain a number of opinions so you get an understanding of the market conditions and what can be done to improve the final outcome.
It’s a good idea to speak with 2-3 business brokers who have experience in your industry. If you are selling a cafe worth $300,000, there is no point approaching a business broker who specialises in the construction industry. The benefit of approaching a broker who works with your industry is they may already have a buyer on their books and they are able to help guide you through preparation and provide an accurate appraisal.
It’s important to understand the difference between an appraisal and a business valuation. A business valuation can only be performed by a licensed business valuer and usually costs $3,000+. You will see a RBV logo on AIBB brokers who are registered. For the purpose of selling a small business, a business appraisal is usually used, which is an estimate of what they think the business could sell for.
Tax is a big deciding factor when someone comes to sell their business and it's very important to understand your tax obligations from selling a business. The way the business sale is structured can be altered to minimise your tax obligations.
Tax Obligations and Concessions to Consider:
The next step is to speak with your accountant and ask them if they are comfortable giving tax advice specific to selling a business, or if they can bring in someone with specialised experience. Selling a business is different to general tax and a specialist is required. You want to ensure you are fully aware of tax obligations before you try to sell your business. It may influence whether you actually want to sell the business, sell shares, place it under management etc.
It's important to consult with a specialist accountant to ensure you get the right advice in regards to selling a business.
Surround yourself with a professional team who can assist you to sell your business.
Like every major transaction, it’s important to surround yourself with a knowledgeable team who can assist you to sell your business.
You will need to obtain legal advice and services to help prepare your NDA, Heads of Agreement, Contract of Sale and to assist with negotiations and structuring the business sale.
It's important you engage a solicitor or conveyancer with specialised experience in business sales - they are often referred to as commercial business lawyers. This is important to ensure the contract is prepared correctly and you are receiving the expertise knowledge. There are numerous clauses that can be added to a contract.
Your accountant can help you prepare the necessary documents for the sale. They can also assist with a financial-based appraisal of the business. An important part of the accountant is to assess your tax obligations and help to guide the sale to minimise your tax payable. As mentioned above, Tax Obligations are a huge driving factor in the way a business sale is structured. So always seek advice from an accountant or you could have a large tax bill due after your business is sold.
Licensed in every state business brokers are the professionals who specialize in preparing, advertising, negotiating and guiding the business sale to settlement. Whilst real estate agents can assist with your business sale, it is best to consult with a business broker who has experience in your industry. You can find a list of business brokers here.
If you’re deciding which business broker to assist with your sale, have a read of our guide on How to Choose a Business broker.
You can check the licensing of your business broker with your state licensing board. They are usually licensed as real estate agents or may hold a specific license depending on the state. Check Your Brokers License; NSW, QLD, VIC, SA, WA, NT, TAS, ACT.
When you decide it’s time to sell your business you will assess it from a number of angles. Typically, these are based on emotional or personal reasons to sell, such as 'moving', ‘having had enough' or ‘wanting to retire’. The main reason someone sells a business is usually due to personal circumstances.
If you are feeling nervous about selling your business because you have never done it before, don't worry, most business owners haven't.
What a lot of small business owners fail to do is think about when is the best time to sell the business, i.e. when the business will achieve its optimum price.
Business Brokers will always advise it is best to sell a business when it is on a high, and there is evidence of consistent year-on-year growth. A business that is struggling or experiencing a decline is a lot harder to sell for a good price. So thinking of your business in terms of its growth or stability will be a big driving factor for when is the right time to sell.
In terms of the time of year, business sales happen year-round. There is a slight dip over the Christmas and New Year period as most brokerages, lawyers and accountants close for a few weeks over the festive season. You will also see a slight drop around June and the end of the financial year. If it is an election year, business sales also tend to slow. But as mentioned earlier, business sales tend to take 6-9 months, so it is never a quick process. So whilst enquiries may decline over these periods, there are still buyers actively looking for opportunities.
Obtain Legal Advice from a specialised commercial business lawyer, solicitor or conveyancer.
You probably don’t want to sell your business without the correct legal documents in place. Obtaining legal advice and having these documents prepared is crucial to a successful sale, as a lot of the negotiations will centre around these documents.
There are 3 main legal documents used in a business sale. These may vary by state or business you are selling, so it is always important to obtain professional advice for your particular circumstances. Its important to remember that a small business could be a sole-trader, partnership or a company structure so the necessary documents will vary.
Most common legal documents used in a business sale are;
This is a confidentiality type agreement that is used to prevent information about the business from being shared or used for purposes other than buying the business. It is often provided to potential buyers when they first make contact with the seller or their agent.
When negotiating the terms of a business sale a HOA is often used. This agreement is not normally binding and is used more to negotiate and outline what each party wants from the sale. This agreement may be adjusted multiple times during the negotiations before a final decision is made and can be placed into the Contract of Sale.
This is the legally binding contract between the buyer and seller. It will outline what is included in the sale, when payment is expected and if there are any other terms such as a buy-out or vendor finance. The first step to enacting the contract is for both parties to sign and exchange. This will start the process and obligations that must be completed by both parties for the settlement to occur on a certain date.
We have worked with Legal Vision to help provide you with cost-effective legal services. Legal Vision are Australian Commercial Business Lawyers who have assisted thousands of business owners with legal services. In terms of business sales, they can provide you a range of services from simple contracts to full legal services. Please contact Legal Vision for a free quote.
This is one of the most important documents that are used whilst communicating with potential buyers. The main purpose of a Business Memorandum is to give more details to a potential buyer that isn't displayed in marketing materials. It is prepared for each specific business usually by consulting with an accountant or business broker. A business memo is usually supplied to a potential buyer after they have signed an NDA and the seller or agent is confident they are genuinely interested in the business.
A business memo usually includes, but is not limited to:
Remember, this is provided after an NDA is signed so it may be visible to non-genuine buyers. You may want to limit the details that are supplied and restrict to the Due Diligence process such as in-depth financial information. However, if you want a buyer to proceed with the business you need to provide adequate information to show your business is a genuine sale.
It is a decision to be made by the business owner and advisors, which is why it's important to have professional assistance when selling a business.
Once you have prepared all the necessary documents, established your team and are well versed on what to expect during the business sale process. The next step is to place your business for sale.
You have the option of selling your business privately or engaging a business broker, as mentioned above. This section outlines how your business sale can be marketed to generate leads. Whether these leads are going direct to the small business owner or via an agent depends on how you are deciding to sell.
To gain the most enquiries, it may require a combination of these options. It really depends on the type and location of your business. Selling a cafe in a country town is very different to selling a multi-million dollar construction company in Sydney. All decisions need to be made by the business owner and their professional advisors.
This is one of the most common ways of advertising a business for sale. This involves placing your business information on websites such as Bsale and receiving enquiries from potential buyers. It is basically creating interest in your business and then filtering out those enquiries to find a genuine buyer. You have the option of placing business-specific details such as the name and location or you may keep the information confidential to limit staff, clients and competitors learning about your sale. You can see the current packages for business owners here.
|Contact Buyer Databases||Business brokers and business for sale marketplaces like Bsale have databases of buyers who may be actively looking for a business and just waiting for an opportunity like yours. Approaching buyers via a database is very similar to the open marketplace. The main difference here is that professionals such as brokers are already aware of a suitable buyer, so the sale may progress faster as there is less need to filter out the ‘time wasters’. Approaching a database may also limit the exposure of the business sale to clients, staff and competitors.
|Approach Competitors||Competitors know your industry and your point of difference. It is often a merger or acquisition with a competitor that will result in a higher sale price. Competitors know how much it will take to acquire aspects of your business. They will evaluate the costs in purchasing your business vs trying to obtain the clients, your team's talent, establish supply chains etc. Selling to a competitor may be a more beneficial type of sale, once again it depends on your type of business.
|Approach Clients, Staff or Suppliers||The biggest group of people invested in your business are clients, team members and suppliers. Depending on the type of business and the risks associated with this approach you may look at this group of people as being a potential buyer. You may need to consider how and when you will make this approach. This style tends to work better for businesses in country towns.|
Selling a small business requires exposure to the right buyer's audience.
Creating an effective Ad will make a big difference to the number and quality of enquiries you receive. When you look to market your business for sale, be it privately or with a business broker, there are a few things you should consider.
Pictures can tell a thousand words and will help with your exposure and click through rates. It is common in business sales for the owner to want confidentiality during the process, so stock images may be used. With your images, ensure you have the rights to use any stock images as they may be copyrighted. Always check your lead photo to ensure it is appearing correctly, landscape images tend to work better.
What you are saying about your business matters. Ensure your ad is divided into subheadings and is addressing important aspects of your business. Well organised and structured information will show potential buyers you are serious about selling and your business is worth buying.
You need to tell the buyer what to do next. Don't just assume they will press the contact button. Tell the buyer what happens once they make contact. You want to guide them through the process. Suggested call to action;
It's important to learn how to filter genuine enquiries from 'tyre kickers'.
Unfortunately, the business for sale marketplace has a lot of ‘tyre kickers. The important part here is learning how to filter out the potential buyers from those just browsing for information. Business brokers spend a lot of time filtering these people and establishing who are actually potential buyers.
If you are marketing your own business for sale or using a business broker filtering these people will become a big part of the sale. You want to pursue genuine buyers and not waste time with tyre kickers.
Developing a list of questions you could ask about their experience and finances and having a phone conversion is a good place to start. Inviting the person to come and view the business and whether they will commit will show if they are genuinely interested.
Accept a deposit to progress with the business sale.
Once you have genuinely interested buyers, the next step is to enter negotiations. In a perfect world, you will have a number of people competing to buy the business. This can push up the sale price and as the seller, you can decide who is the best fit for your business.
Depending on the type of business you are selling and the number of potential buyers, you may enter negotiations before a Heads of Agreement or deposit is made. Before progressing into a HOA you need to make a decision on which buyer is best suited to your business.
Once you have made that decision, you can start to enact a HOA and start negotiations with the potential buyer.
Typically a deposit is accepted after the contracts have been exchanged. Sometimes, the seller may request a deposit before the HOA are signed. This is usually so more information about the business can be provided and the seller is confident that the buyer is genuine and not going to waste time or just be interested in confidential information.
Usually, the process of due diligence can commence once a deposit is received.
A deposit is usually about 10% of the purchase price but there are no set standards, it comes down to the agreement between the buyer and seller. The deposit is usually held in a trust account at the business brokerage or solicitors office.
There should always be a written agreement about the deposit, where it is held, what happens if the sale doesn’t proceed and a receipt is issued.
This is the process when the buyer assesses the business to ensure it meets their expectations. It is always advised that the buyer obtain professional advice during due diligence to ensure the business is properly reviewed. A buyer may engage a business broker, business consultant, accountant or lawyer to help them assess the business. You should ensure this is covered in your NDA.
Due diligence may occur during the negotiation phase once a HOA is signed, or may be after the contracts have been exchanged. It will depend on the type of business you are selling and the advice received from your business broker or solicitor.
Exchange contracts to start the clock to settlement.
Once the Heads of Agreements have been finalised by both parties the Contract of Sale is written. It is then signed by both parties and exchanged.
A Settlement date is set and there are a number of obligations required by both parties. Depending on how the business sale is structured.
Sellers requirements may include;
There are obligations for the buyer as well, such as; Obtaining finance, making scheduled payments, attending training etc.
The details of each parties obligations will be outlined in the specific contract of sale for your business, this is why it’s important to obtain professional legal advice.
The Settlement date arrives and your business is officially handed over to the new business owner at a specific time, such as Friday 14th June at 12:00pm.
As a business owner, you may feel a wave of emotions at this point. On one hand, your business is finally sold and you can move onto other ventures or life goals. On the other hand, there is often a feeling of loss as you let go of the business you have worked so hard to build. If you have found the right buyer for your business, you should feel confident in the handover and that your business and clients are being taken care of.
You will need to ensure you understand your Capital Gains Tax obligations and the options available to re-invest the money received into another business. The ATO outlines everything you need to be aware of when selling your business see full details here.
Disclaimer: This information is a guide only and not to be considered professional advice. Always consult with a licensed professional when selling your business.