A guide to selling your business: the good, the bad, and the ugly
For many business founders, selling their firm will be the culmination of their hard work. Founders sell for different reasons. Some run out of cash, some find their business doing so well that buyers come knocking, while others realise they need help from an acquirer to take their business to the next stage of its journey.
Whether you’ve just started your business journey, or have been building your company for some time, our warts and all guide to selling a business will help you understand what goes into selling your ‘baby’.
Identify why you want to sell your business
Every founder will have their own reason for wanting to exit a business. Perhaps you’ve had a dispute with a co-founder, or sales are slowing. It’s important to remember the reason you’re selling your business throughout. This will make the process more focused as you will come back to the original purpose of the sale at every step of the way. Deals can take a long period of time, and buyers will want to know the reason for you selling, so identifying this is an important part of the process.
What types of exit strategies are there?
MBO or Management-Buy-Out is when the company is sold to its senior leadership team. An MBO makes sense if your management team is integral to the business and they have become essential to the fabric and DNA of the company.
MBOs come in two different forms. Buy-In Management Buyout (BIMBO) is when the management team brings in an outside manager to facilitate the acquisition, whereas a Vendor Initiated Management Buyout (VIMBO) is when the existing senior management team initiates the business purchase.
The opposite of an MBO is an MBI or Management-Buy-In. While an MBI involves a business’s internal management team purchasing the company, an MBI involves an external management team acquiring a company and replacing the existing management team.
MBIs usually take place within companies with a weak or undervalued management team. Despite this, an MBI has the advantage of having existing managers who understand the business while acquiring it.
Private buyer sale
Selling to a private buyer is the quickest way to sell a business as private equity investors don’t need to raise money for the purchase. As a result, founders might not receive the full value of the business.
Private equity investors won’t get involved in the running of the business, therefore founders will need to ensure buy-in from the senior management team or exist within the business for some time.
Horizontal trade sale
This sale involves selling the business to a competitor, either nationally or internationally. This can sometimes be a good move for small to medium-sized businesses because competitors are likely to value the business in a way that investors may not. Typically, this type of sale can add more value to your business.
Vertical trade sale
This type of sale involves selling to a customer or supplier and can be both international and national. Selling your business internationally can be lucrative due to favourable UK exchange rates. However, a vertical sale usually takes more time than other types of sales and the company’s senior management team may need an incentive to continue within the business.
Initial Public Offering
Otherwise known as an IPO, this is when a private company’s shares are offered to the public. IPOs can be very lucrative, making it appealing to founders. However, going through an IPO can be a long and expensive process, making it an unlikely opportunity for smaller businesses.
Preparing your business for sale
When it comes to selling your business, it’s good to have a structured approach. Here are some steps to follow to ensure your transaction runs smoothly:
Research tax you might need to pay
When you sell your business for a profit, you need to pay capital gains tax on any amount over your tax-free allowance. Despite this, there are a few tax reliefs that can lower this expense, including business asset disposal relief, business asset rollover relief, incorporation relief and gift-hold over relief.
You will also need to think about the VAT your company pays – this can usually be transferred to your buyer and should be thought about during the deal.
Get a business valuation
Next is the part you’ve been waiting for. It’s time to get your business valued. A business’s valuation is decided based on physical assets, projected profits, the industry and your business’s reputation. It helps to get an expert to come up with this valuation. A valuation isn’t necessarily what your business will sell for but will help set your expectations when selling.
Prepare for due diligence
If selling to a buyer, they will carry out extensive and comprehensive due diligence on your business to ensure they’re making the correct decision buying your company. It’s recommended to get a legal professional to help with this process as any holes in the business will surely put potential buyers off. Even though due diligence may seem tedious, it also brings any issues in your business to the surface, so can be tremendously beneficial to your firm.
Some of the things you may want to do in preparation for due diligence includes gathering financial documents and tax returns, paying off any liabilities, making it clear what the position of the shareholders is, and reviewing contracts with employees and clients.
Be ready to negotiate
An important part of your sale process will be the negotiation stage. If selling to a buyer, they will likely want to get your business for a lower price than you are asking for. In this case, you’ll want to remember what your business was valued at and don’t be afraid to put up a hard bargain.
Despite this, it’s worth having some space on your side of the bargain and be willing to settle for a little less than what you have said you want. Make sure your buyer has the necessary experience and capital to successfully buy your business without any setbacks.
Timing is key
Choosing the right time to sell your business can be the difference between a modest and eye-watering sale. Not all sellers will have the luxury to, but selling when your business has high profits and is in a good state is likely to attract more buyers and secure a good deal.
It’s also a good idea to sell when the economy and market conditions are doing well, and there’s an increased appetite for acquisitions.
After your sale is finalised, you will need to make clients, partners and employees know how the sale will impact them and the company. You should avoid doing this during the sale process to avoid any disruptions, or in case the sale falls through.
Essentially, the best exit strategy depends on many factors including the size of your business, your management team and whether they want to run the business, if you’re desperate to sell, and whether you want a fast or profitable sale. No matter how you decide to exit your business, it’s important to prepare your business for a sale effectively – hopefully, with this guide, you will be able to do just that.