When you decide to sell your business you will need to plan an exit strategy to get the best return.
There are several ways to improve your chances of a profitable sale. There are also obligations you must fulfil, such as taking care of your employees and notifications to governments.
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Before you decide to sellBuyer and seller perspectivesWhat price to set?Financials and paperworkEmployeesThe sales processPlanning is essential if you want to succeed in selling your business. You need to answer some key questions and make some specific decisions:
- Why are you selling? - your answer needs to convince a prospective buyer.
- What other options are there? - eg bring in outside management or become a silent partner.
- Will other family members support your decision?
- Who will the business be offered to? - eg management, staff or family.
- What will be sold? - eg assets, property, stock, obligations, debts and liabilities etc.
- Is the timing right? - eg the market conditions and sale price could be better if you wait.
- Will the sale benefit you financially?
- Will you be free to earn your living, or will you be restrained from trading as a condition of the sale?
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To get a successful sale of your business you need to view the process from the prospective buyer's point of view. The buyer will have different considerations from you and to maximise the chance of a successful sale you need to anticipate their concerns, issues and questions.
People buy businesses for different reasons. Most are looking for the ability to earn a good income and the freedom and challenges of owning a business. Alternatively, the buyer may be an investor primarily interested in the profitability and rate of return, or a competitor keen to expand market share.
If you know who the potential buyers are you will be better able to position the business for a successful sale.
Check the Buying a business section to get a better understanding of the potential buyer's concerns and issues, the sort of information they will want, and the types of questions they may ask.
As the seller, some of the key issues you need to consider are:
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Setting the selling price is one of the hardest things a business seller has to do.
The eventual selling price will need to balance the seller's desire to get some reward for many years of hard work and feel they have done well out of the deal against the buyer's desire to feel they have got a good bargain from the deal.
There are several ways to determine the selling price:
- set the price at the same level as similar types of businesses
- employ an independent business valuer or broker to help set the price
- use industry formulas that apply to some specific types of businesses
- simply set a price you want to achieve and see if there are buyers who will pay it
- establish the value of assets - these include tangible assets such as furniture and equipment, as well as intangible assets such as your business name, copyright, employees, customer and supplier contracts and lists
- apply the same method an intending buyer would use to assess the value and see if your expectation is realistic.
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Potential buyers will want to see financial information and records of how the business has performed - usually for at least the past two to three years.
You need to start documenting and preparing financial records and other information as soon as you decide to sell. The type of paperwork that most business owners tend to avoid - such as sales reports, operations manuals, organisation charts and forecasts - are the documents that buyers will want to see.
A balance sheet with low debt levels and an upward trend in sales and profits will lead to the best price for your business.
Vendor's statement
The sale of a small business is regulated under the Land and Business (Sale and Conveyancing) Act 1994. You are legally obliged to provide a prospective buyer a Vendor’s Statement - referred to as a Form 2 - for the sale of a small business if the business is to be sold for a price of up to $200,000. This price does not include:
- any land sold with the business
- any stock-in-trade, the value of which is determined according to the usual selling price of the stock.
You must disclose certain information in the Vendor’s Statement:
- name and address of the business and the vendor
- the purchaser's cooling-off rights
- the trading statement for the past three financial years - or since the business started if less than three years
- information about any land that is being purchased with the business
- if land is not being purchased, information about the lease or tenancy agreement for the business premises
- particulars related to the Environment Protection Act 1993 and the Livestock Act 1997 - regardless of whether land is being sold
- how the business operates - eg business structure, hours of operation, licences, permits, etc
- information on plant, equipment and stock related to the business
- current staffing details, including current entitlements.
The Vendor Statement must be endorsed by a qualified accountant - who is not the vendor - certifying that he or she has examined the accounts of the business and that the financial particulars disclosed in the statement appear to conform with the accounts.
Be prepared to provide all these details even if the price is above the $200,000 threshold because the prospective buyer is still likely to require them before making a decision to purchase.
Cease trading under a business name
If, as part of the sale, all business is to cease trading under the business name, you will need to de-register the business name - see Closing a business.
Tax matters
The Australian Tax Office provides information on what you need to consider, particularly from a tax perspective, when selling a business.
Stamp duty may be payable in South Australia when transferring a business, or transferring an interest in a business, transferring a partnership, or an interest in a partnership.
The transaction may also include the sale of goodwill, stock or a motor vehicle and, as such, these assets, as well as any other assets located in South Australia, form part of the consideration upon which stamp duty is paid.
Detailed information on stamp duty payable on the transfer of a business can be found on the Revenue SA website.
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Many small businesses are only as good as their management and staff. The value of well-trained and committed staff is often a major factor in the sale of a business. Do all you can to ensure that key staff are part of the business the purchaser is buying.
However, some purchasers will not require existing staff - eg they may want to bring family or other staff into the business. You should be honest with staff during the sale process - inform them of the sale as early as possible and keep them informed of developments during the process.
The prospective buyer will want to know all of the details of current employees, including their rights, entitlements, contracts and any other issues. You should ensure all records are up-to-date before selling your business. This includes:
- tax - PAYG, FBT
- leave - annual, long service, personal
- WorkCover
- superannuation
- apprenticeship or traineeship agreements
- probation or training records
- performance reviews
- personal contact details.
View more details in the Employment issues section.
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Present the business in the best possible way to maximise the price you get. This includes the physical presentation - eg a fresh coat of paint, restock, repair fixtures and fittings - and the income earning ability of the business.
Ensure you address any outstanding obligations or legal issues, such as warranty claims, employee claims, tax matters or legal actions. You should be honest in disclosing all material facts because the threat of being sued for misrepresentation is greater than any small advantages that may be gained.
Finding potential buyers
There are a number of ways of finding potential buyers for your business, including:
- existing networks - eg through family, friends or staff
- the business marketplace - eg competitors, suppliers, sub-contractors
- creating awareness by word-of-mouth, advertising, trade sources.
You can undertake the sales process yourself or engage a business broker to do it for you. A business broker acts like a real estate agent and will arrange advertising, screen potential buyers and facilitate negotiations between buyer and seller.
You also need to involve your accountant and legal adviser in the sale process.
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