Have you ever bought a second-hand car? What are the things that you have looked out for? The usual things that a buyer looks out for are that the car is looking good, it has been serviced, or the oil has been changed. The same thing happens while buying a business.
You have worked hard and spent a lot of time and money to build your business. The decision to sell it is not an easy process. Even experienced business owners find it a challenge to sell their business at the right value, with the right terms, and to the right person.
Selling a business is a complex process, but it has to be demystified. Your aim should be to get the maximum value or price for your business. It is very common for business owners to have their heads buried in growing a business. But if you are aware of certain key things before you sell your business, the rewards can be great.
Keep these things in mind before selling your small business
No time is too early to start preparing for the sale of your business if you know that you want to exit in the future. If experienced buyers see red flags in your business, they will just pass you over. In this article, we will tell you some things that you should do to get a higher price.
1. Organise your back office
The first thing that you need to do if you are selling immediately is to get your back office in order. Get your contracts and records complete and organised. It will be really helpful when you have to give information to the potential buyer.
Consider how your business would look to a cautious investor. If things are not in the proper order, the buyer can have a suspicion that everything is not hunky-dory.
If your business is very contract-driven make sure your contracts have your sign on every page. See that your corporate records, minutes of meetings, and resolutions are kept perfectly.
Have you documented the last Annual Shareholder’s Meeting? Are any areas in your key processes not clear? Ask yourself these questions. The actions that you will take on them will make the business sale process much easier later on. It will also ensure that the buyer doesn’t feel concerned about how you have run the business.
If there are undocumented deals or things like you have granted some equity to someone that is not mentioned in the books, get those stuff on paper. A careful review of important assets, business processes, and contracts will save you a lot of hassles and time when further negotiation with the buyer happens.
2. Do proper valuation
Find out the value of your business. This will help to determine a reasonable price for your company. You can use this to prepare an offering memorandum that will give a picture of your company.
A proper valuation will protect both you, the owner and the buyer.
3. Prepare for Due Diligence
Before purchasing a business the buyer usually produces a checklist of all the things they want to see. Usually, it happens after you have signed a letter of intent with one exclusive buyer. What the candidate wants to see is whether whatever you have mentioned in the offer document matches reality or not.
Check whether your financial statements are satisfactory for due diligence. If the investigation by the buyer turns out to be satisfactory, then the final negotiations are carried out.
4. Get your financials in order
In a lot of small businesses, the accounts are not maintained properly. You should sort out and improve your financial record-keeping like profit and loss statements. Your buyer might put your balance sheet under a microscope.
You can spend some time with your Chartered Accountant to see if everything is properly categorised. Look what are the things that will make your finances look better. Certain perks like gym memberships are sometimes listed as expenses. Now, maybe, it would be better if you deduct them from the books. Also, check that no two vendors have the same expenses.
Many business owners try to save money during the last few months of their ownership by cutting down what they feel to be an unnecessary expenditure. An example could be marketing expenses. But, remember that buyers are clever enough to see through this.
5. Eliminate Unknown Issues
Resolve any loose ends like risks, litigation, lawsuits, any open proceedings, or tax investigations. Buyers are very risk-averse and scared of the unknown. It will cost you as a seller if the buyer is scared away because he will then probably look at some other business. If you are not sure about any issue, it is better to eliminate it before you sell your business.
6. Check the terms of employment
After the sale, your staff would be going through great changes. Will your key employees stay back, once they learn that their company is sold off? What will keep them from leaving? Review their employment contracts and find ways of retaining them, so that the sale is not hampered.
7. Will you be involved after the sale?
Talk to the buyer about how involved you will be after the sale. Will you be allowed to sit on the Board and draw a salary? Or, will you hand over complete control after receiving your money? It is up to you what role you want to play post buyout, but it would be better if you can put those terms in the contract before the deal is signed.
8. Buyers won’t pay extra for potential
Many business owners feel that their business is a potential gold mine and expect to get a high price based on the perceived potential. But, in real life, it does not happen that way. If the business is simply a concept without any proven revenue stream, a buyer will be hesitant to part with a large sum of money.
Buyers want to be a part of something successful, not an unproven concept. If they want to build something from scratch, they would start their own company, not buy yours.
9. Delegate Responsibility
If you have never sold a business before, you can look for some expert help and guidance. Ideally, that person should have some knowledge about your company’s affairs or he can be an industry expert related to your line of business.
You can also hire a business broker to evaluate the company and monitor the market. They can also search for potential customers and offer advice during negotiations. A Chartered Accountant can advise you about the tax implications of the sale.
10. Get the payment terms clear
How will the payment be made? Will you receive a check upfront? If your business is not making money, you can expect a staggered payment. In any case, it will be better to ask the buyer beforehand about the payment.
11. Don’t be afraid to walk away
If you are unsure about anything don’t be afraid to ask questions. You have spent many years getting your business up and running. If you feel that you are not getting properly compensated for the hard work that you have put in, don’t hesitate to walk away from the deal.
Small things can make a huge difference in the success or failure of a deal, and the margin of sale of your business. Preparing for a successful sale can be a long drawn process. We hope that you would keep the above things in mind when you decide to sell a business.
1) Easy Steps to Sell Online with Cash-on-Delivery!
2) Things Indian SMEs Should Learn from SMEs of Developed Countries
3) Easy ways to maintain your wealth if you are a business owner
4) Technologies Every Small Business Should Use to Grow Faster
Stay updated with new business ideas & business tips with OkCredit blogs in English, Hindi, Malayalam, Marathi & more!
Download OkCredit now & get rid of your bookkeeping hassles.
OkCredit is 100% Made in India.
Q. What are buyers more interested in, profits or revenue?
Ans. A common misconception is that buyers are happy with good revenue numbers. But the only numbers that matter to them are the profits that your business is making.
Q. Can I talk about the impending sale of my company?
Ans. No, try to keep it quiet for as long as possible. Because, once the word gets out, your business might lose valuation.
Q. What is the tenure that the buyers generally check for finances in prospective companies?
Ans. At the time of sale, buyers generally see the last 12 month’s financial records.
Q. Why is it important to get a Non-Disclosure Agreement (NDA) signed by a prospective buyer?
Ans. The NDA will help maintain confidentiality and protect your business’s interests.
Q. What is an ‘offering memorandum’?
Ans. It is an informal document that gives a basic picture of the business.