Your Guide to Selling a Business
Your Guide to Selling a Business
Selling a business is a big decision and can be stressful for many owners. We take a look at the 16 steps to selling a business, from the initial thoughts of ‘I want to sell a business’ right through to marketing, settlement and exiting. If you are nervous about selling a business, it's totally understandable, many owners have never sold before.
For your ease, this guide is categorised into 3 parts and a total of 16 steps.
PART ONE: Get Prepared When Selling a Business
PART TWO: Advertising and Marketing
PART THREE: Finalising and Selling a Business
PART ONE: Get Prepared When Selling a Business
You need to have everything organised when selling a business. The more organised you are for the sales process, the easier it can be.
1. Organise your Documents
When you first think about selling a business, you need to go through the process of organising all your paperwork. Before you approach your accountant or a broker, you need to have your paperwork such as; all of your financial, equipment, lease agreements, contracts, client, distributor, supplier lists, and more ready.
Selling a Business Checklist
An organisation that is well systemized is easier to exchange when it comes to selling a business. When you are going to exit your company 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;
- Internal website.
This is the best place to start. You need to have an internal training system that only your team members and the future buyer can access. A popular option for organisations is to create a Google Site. There are a number of benefits to Google sites. It's free, easy to edit and can link to your Google drive - making it easier to categorise the information. The Google Site can be broken down into categories such as Policies, Marketing, Sales, Admin, Accounts and Clients for example.
Are there things that require certain steps to be completed? Such as closing the shop each day? Create easy and simple to use checklists that can be printed and used by team members. The easier you make the system to follow the more successful the new owner will be. You can have these linked to your Google Site so they can easily be found and printed.
- Flow Chart
Are there common steps you follow to complete a certain task? Create flow charts for these processes. These can be things such as how to order supplies or how to update social media accounts. It removes any confusion and allows any new team member to complete these tasks.
- Training Videos
Gone are the days of lengthy training manuals. We live in a digital era, which means video tutorials and training. Every time you perform a task, be it updating your website or packing an order for delivery, create a video and place it on your Google Site. You can then have it transcribed into written text, to cater for different types of learners.
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 when selling a business. Set a goal to create X number of systems per week. Google Sites really does make this process so much easier.
3. Get an Appraisal
One of the biggest deciding factors when it comes to selling a business is how much you will get for your sale.
Often an owner will think their company is worth more than the appraisal a 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. Its good to find a business broker who has the experience.
It’s a good idea to speak with 2-3 brokers who have experience in your industry. If you are placing a cafe for sale worth $300,000, there is no point in approaching a 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 valuation.
A valuation can only be performed by a licensed business valuer and usually costs $3,000+. Valuations are typically used for:
- Sales and Acquisitions
- Banks and financial institutions to obtain loans.
- Disputes and resolutions with partners and company directors.
- Family Law
- Legal Disputes
- Stamp duty calculations and capital gains liabilities
- Government Authority requirements
- Disputes in the dissolution of the partnerships
You will see a RBV logo on AIBB brokers who are registered.
For the purpose of selling a small business, an appraisal is usually used, which is an estimate of what they think the business could be sold for.
4. Assess your Tax Obligations
Tax is a big deciding factor when it comes to selling a business and it's very important to understand your tax obligations. The way the sale is structured can be altered to minimise tax obligations.
Tax Obligations and Concessions to Consider:
- Capital Gains Tax
- GST payments
- Tax Input Credits
- Visit the ATO website for full details
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. It may influence whether you are ready for selling a 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.
5. Establish your Team
Like every major transaction, it’s important to surround yourself with a knowledgeable team who can assist you in selling a business.
Solicitor or Conveyancer
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 sale.
It's important you engage a solicitor or conveyancer with specialised experience in commercial sales - they are often referred to as commercial 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, they may even be licensed to perform valuations. 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 company sale is structured. So always obtain advice from an accountant or you could have a large tax bill due after you have sold.
Licensed in every state business brokers are the professionals who specialize in preparing, advertising, negotiating and guiding the sale to settlement. Whilst real estate agents can assist with your sale, it is best to consult with a broker who has experience in your industry.
If you’re deciding which broker to assist with your sale, have a read of our guide on How to Choose the Right Business broker.
You can check the licensing of your 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.
6. Decide When is the Best Time for Selling a Business
When you decide it’s time for selling a 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 is selling 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 owners haven't.
What a lot of owners fail to do is think about when is the best time for selling a business, i.e. when it will achieve its optimum price.
Brokers will always advise it is best to consider selling a business when it is on a high, and there is evidence of consistent year-on-year growth. A company that is struggling or experiencing a decline is a lot harder to achieve an optimum price. So thinking of your organisation in terms of its growth or stability will be a big driving factor for when is the right time for selling a business.
In terms of the time of year, 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, sales also tend to slow. But as mentioned earlier, selling a business tends 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.
7. Prepare Legal Documents
Its important to have the correct legal documents ready when selling a business. 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 commercial sale. These may vary by state when you are selling a business, so it is always important to obtain professional advice for your particular circumstances. Its important to remember that an organisation could be a sole-trader, partnership or a company structure so the necessary documents will vary.
Most common legal documents used when selling a business are;
- Non-Disclosure Agreement (NDA)
This is a confidentiality type agreement that is used to prevent information about the organisation from being shared or used for purposes other than buying. It is often provided to potential buyers when they first make contact with the seller or their agent.
- Heads of Agreement (HOA)
When negotiating the terms whilst selling a business sale a HOA is often used. This agreement is normally not 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. Though always obtain professional legal advice for your specific circumstance.
- Contract of Sale
This is the legally binding contract between the buyer and current owner. 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 Lawyers who have assisted thousands of owners with legal services. In terms of selling a business, they can provide you a range of services from simple contracts to full legal services.
8. Create a Memorandum
This is one of the most important documents that are used whilst communicating with potential buyers when selling a business. The main purpose of a Memorandum is to give more details to a potential buyer that isn't displayed in marketing materials. It is prepared for each specific organisation usually by consulting with an accountant or broker.
A Memo is usually supplied to a potential buyer after they have signed an NDA and the owner or agent is confident they are genuinely interested.
A Memo usually includes, but is not limited to:
- Industry and Market
- Employee Structure (including owner involvement)
- Products and Services
- Stock on Hand
- Equipment (including any lease details)
- Trademarks, IPs
- Financial Performance (e.g. Profit and Loss)
- Assets (vehicles, computers, property)
- Asking Price
- Reasons for Sale
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 sale you need to provide adequate information to show you are genuinely selling a business.
It is a decision to be made by the owner and advisors, which is why it's important to have professional assistance when selling a business.
PART TWO: Advertising and Marketing
Once you have prepared all the necessary documents, established your team and are well versed on what to expect during the sale process. The next step is to place your business for sale.
You have the option of selling a business privately or engaging a broker, as mentioned above. This section outlines how your sale can be marketed to generate leads. Whether these leads are going direct to the owner or via an agent depends on how you are selling a business.
9. Choose the Best Marketing Channels
To gain the most enquiries, it may require a combination of these options. It really depends on the type and location of your organisation. Selling a small business 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 and selling a business. This involves placing your sale information on websites such as Bsale.com.au and receiving enquiries from potential buyers. It allows you to generate leads and find potential buyers. You have the option of placing 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
|Brokers and business for sale marketplaces like Bsale.com.au have databases of buyers who are actively looking for the right opportunity. 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 potential 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 sale to clients, staff and 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 organisation. They will evaluate the costs in purchasing your company vs trying to obtain the clients, your team's talent, establish supply chains etc. Selling a business to a competitor may be a more beneficial type of sale, once again it depends on your industry and the size of the organisation.
|Approach Clients, Staff or Suppliers
|The biggest group of people invested in your opportunity are clients, team members and suppliers. Depending on the type of your organisation 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.
10. Create an Effective Advertisement
Creating an effective Ad will make a big difference to the number and quality of enquiries you receive. When you look at selling a business, be it privately or with a 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 when selling a business, that the owner may 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 sale matters. Ensure your ad is divided into subheadings and is addressing important aspects. Well organised and structured information will show potential buyers you are serious about selling a business.
Call to Action
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;
- Please contact Jim via the form. Buyers will be required to complete an NDA before more information is provided.
- To inspect, please complete the contact form.
- Please call Jim on 02 0000000 to discuss this opportunity and to obtain an NDA to proceed.
- To receive the Memorandum and more information about this opportunity, please complete the form.
11. Filter Buyer Enquiries
Unfortunately, the business sales 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. Brokers spend a lot of time filtering these people and establishing who are actually potential buyers.
- Have finances available and ready to commit.
- Have experience in your industry and understand what they are buying.
- Are relocating to your area and looking for an opportunity.
- Don’t have the money available.
- Want to obtain financial information for their own project.
- Are competitors or industry-related people wanting information for their own purposes.
If you are selling a business privately or with a broker filtering these people will become a big part of the process. You want to pursue genuine buyers and not waste time with tyre kickers.
Developing a list of questions you could ask when selling a business about their experience and finances and having a phone conversion is a good place to start. Inviting the person to come and view the shop or location will show whether they will commit and are genuinely interested.
PART THREE: Finalising and Selling a Business
Once you have genuinely interested buyers, the next step is to enter negotiations for selling a business. In a perfect world, you will have a number of people competing to buy a business. This can push up the sale price and as the owner, you can decide who is the best fit for your organisation.
12. Negotiate with Potential Buyers
Depending on what industry and how you are selling a business you may have a 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 when selling a business. A Term Sheet may be established between the buyer and seller so the process of due diligence can commence.
Once you have made that decision, you can start to enact a HOA and start negotiations with the potential buyer.
13. Accept a Deposit
Typically a deposit is accepted after the contracts have been exchanged when selling a business. Sometimes, the owner or broker may request a deposit before the HOA are signed. This is usually so more information 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 when selling a business 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 current owner. The deposit is usually held in a trust account at the brokerage or solicitors' office.
There should always be a written agreement about the deposit, where it is held, and what happens if the sale doesn’t proceed and a receipt is issued.
14. Undergo the Due Diligence Process
This is the process when the buyer assesses the selling business to ensure it meets their expectations. It is always advised that the buyer obtain professional advice during due diligence to ensure the opportunity is properly reviewed. A buyer may engage a broker, consultant, accountant or lawyer to help them assess the opportunity. 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. When selling a business, it will depend on the type and advice received from your broker or solicitor.
15. Exchange Contracts
Once the Heads of Agreements have been finalised by both parties the Contract of Sale is written. It is then signed and exchanged so the process of selling a business can be executed.
Settlement date is set and there are a number of obligations required by both parties. Depending on how the sale is structured.
The current owners requirements may include;
- Notifying Staff
- A stocktake of products, equipment, and assets.
- Paying any outstanding tax obligations and debts.
- Preparing the transfer
- Transferring various legal agreements such as property and equipment leases.
- Adhering to any terms such as; buy-out agreement or vendor financing.
There are obligations for the buyer as well, such as; Obtaining finance, making scheduled payments, attending training etc.
The details of each party's obligations will be outlined in the specific contract of sale, this is why it’s important to obtain professional legal advice.
16. Exit After Selling Business
The Settlement date arrives and your organisation is officially handed over to the buyer at a specific time, such as Friday 14th June at 12:00pm. You have now succeeded in selling a business and it's time for you to exit.
As the previous owner, you may feel a wave of emotions at this point. On one hand, you've sold and you're happy about selling a business on the other hand, there is a feeling of loss as you let go of that part of your life. If you have found the right buyer, you should feel confident in the handover and that your organisation 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 company or opportunity. The ATO outlines everything you need to be aware of when selling a business.
Disclaimer: This information is a guide only and not to be considered professional advice. Always consult with a licensed professional when selling a business.
About the author
CEO Bsale Australia
Vanessa is the current manager and CEO of Bsale Australia. Over the past 11 years as a business owner, she understands what it takes to grow a ...