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Selling a business
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.
Before you decide to sell
Planning 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?
Buyer and seller perspectives
To get a successful sale, you need to view the process from the prospective buyer's point of view. Buyers have different considerations from sellers and you need to anticipate their 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 are the potential buyers you will be better able to position the business for a successful sale.
See Buying a business to get a better understanding of the potential buyers' concerns.
Setting a price
Setting the selling price is one of the hardest things a business seller has to do.
The eventual selling price needs 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.
Financials and paperwork
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.
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 with a Vendor's Statement - referred to as a Form 2 in the Act (located between page 67 and 109 of this document) - for the sale of a small business if the business is to be sold for a price of up to $300,000.
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.
The vendor’s statement includes:
- the purchaser’s cooling-off rights
- trading statements for the last three financial years
- information about the land being purchased, or the lease or tenancy agreement
- how the business operates - eg company, sole trader)
- information on plant, equipment and stock
- staffing requirements.
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 $300,000 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.
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.
If you are selling the business and employees are transferring with the business and will continue to be employed by the new owner, you will need to ensure that all employment records are accurate and up-to-date.
You will need to provide the buyer with all details, including employment agreements and conditions, financial obligations such as leave entitlements and any legal issues or obligations, eg a former employee about to sue for unfair dismissal.
As part of any sale agreement you will need to agree with the buyer exactly what obligations and liabilities you will be responsible for and what will transfer with the business.
When applicable, you will need to outline all of these details in the vendor statement that you provide to the buyer. You should also ensure that all of these employee matters are included in the sale agreement.
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
- apprenticeship or traineeship agreements
- probation or training records
- performance reviews
- personal contact details.
If employees are not transferring with the business, you will need to make all arrangements to terminate their employment and settle all entitlements as if you were closing the business.
The sales process
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.