Selling business - Preparing Your Business for Sale
For an entrepreneur who has set the business from its very first stepping stone, selling it is more of an emotional and personal decision rather than professional. As an entrepreneur you might have any of the reasons sighted below to sell your business:
- As a venture capitalist, you wish to move on and invest in new ventures time-and-again
- You have another business handled by you parallel, to which you want to give more time
- You wish to change the industry, or
- You wish to retire.
Once you have decided to sell your business prepare yourself and your business accordingly. You need to think both as an owner & manager. As an owner, you must fix an amount you wish to receive as a return on your capital invested. Behaving as a manager one needs to decide whether you wish to continue to be a part of the management even after sale or you wish to retire. Further, you should consider taking a view of other stakeholders as well while preparing to sell your business.
During this process the owner has to balance two most important aspects simultaneously, one is to realize the highest possible value for the business during this deal and other is to keep the day-to-day transactions unaffected during this process. Ensure to prepare your business for sale from day one by doing the following:
Creating a mindset
In order to avoid the situation of a failed transaction and give a good return to the investors and other stakeholders, the owner should start preparing his mind for the sale of the business at early stages itself. The first step towards creating the mindset is accepting that sale of the business is an important stage of any business’ life cycle. A stage that requires equally disciplined approach like any other stage.
This preparation involves activities like anticipating and managing many internal and external factors, considering market conditions. Only the fact that your, business is earning profits and is growing, are not the reason enough to divest its management.
Maintain credibility of the business in the market
On single unpleasant surprise can end prospective sale transaction at an early age itself. Goodwill plays a very crucial role in these transactions. Better and timely planning enables a seller to anticipate and control any expected unforeseen circumstance that might negatively influence a buyer’s decision to buy. A smart business owner will conduct self-review and prepare minutely to manage unforeseen events without losing business.
This preparation is a complete team work. The entire management and both internal and external teams must work in tandem with each other towards a successful sale transaction. Any kind of conflict in any form may prove to be harmful as it indicates weaker trust within the organization and might lead to loss of credibility. At this time, the owner must get the books in order too. Books should be updated and accurate. Along with being up-to-date make the financial statements presentable too. An estimate or a budget for next year will further boost your image of a responsible owner.
Once the owner has made up his mind to sell the business, he must seek tax advice well in advance. Seeking the tax advice at an early stage will give dual benefit to the business. One, it will prevent any last moment surprises that may prevent the deal closures. Second, it will help identify ways to lower the tax liability at the time of exit.
Owner must get all the necessary documents like, last three years balance sheets, and profit & loss statements, lease agreements (if any), any loans and their payment schedules, value of current inventory in hand etc. Use only an expert’s advice in these cases.
Business valuation & profitability
The price or value your business has is dependent on the current market & economic conditions. For example, in case you are selling business at a time when the graph of economic growth is moving upward, you might get more that your business’ worth whereas at time when business is sluggish it might be hard to find a buyer.
In a normal scenario, a buyer evaluates business basis its past earning trend and current net profits. An intelligent buyer will exercise complete due diligence to find out any abnormal income or expenditure reflecting your books. They might adjust inadequate provisions, depreciations and unrealized profits etc. Also, from a buyer’s perspective the business is worth the discounted (present) value of its future cash flows.
A face-lift of your business
Just like you do when selling any of your personal assets like a car or a computer, you must make sure that your business and its asset and infrastructure look equally good when you prepare for selling it. This enhances the perception of business in the market and potential buyers. A few things to be kept in mind for business image makeovers are: doing away with the obsolete inventory to avoid chaos of its valuation at the time of sale: Selling off the redundant plant and machinery, maintenance of the business premise and review of the lease agreements if any.
This includes a makeover of business financials too. Take overdue payments from debtors & ensure to clear all the payments to the creditors. This will create a positive impression about the financial stability of your business.
Be clear of what you are planning to sell
This part is very crucial. As an entrepreneur, you should be clear about what you are planning to sell: is it your entire business or just a part of it. In case of sale of the entire business, decide what assets to be sold and whether to sell off the working capital or not. Also, the business could be sold without debts and creditors. Each part will have separate tax implications.
Selling business is an art for sure. Make sure you make it look good from inside out. Every aspect of it should be pleasing to attract prospective buyers. But at the same time keep it a secret from staff, customers and vendors because not everybody will be ready for the change.