Preparing to Sell Your Business

Unfortunately, none of us have the luxury of making decisions with hindsight, but the decision could at least form part of an overall plan or “grand strategy”. If the only real purpose of running a business is to eventually sell it, then it makes sense for us to plan it.

So when is the right time to sell? There are of course many factors, but assuming the business is operating well, the best price can be obtained if profits are maximized at least two years prior to a sale, and that you can demonstrate current year and future profit growth.

It is also important to ensure that you have all your information systems up to date (including financial and management accounts), outstanding debts and queries on accounts resolved, legal and environmental issues finalized, etc. As soon as you have a potential purchaser, you can be assured that they will want to have all the information about your business – more than you ever imagined! It is useful to remember that a business sale can take 4 - 6 months leading up to due diligence, not to mention the 4 - 6 months to find a suitable buyer.

If there is any doubt about your business’s viability, decisions have to be made immediately, as a distress sale runs the risk of buyers stringing you into receivership. Businesses losing money in the year of the sale are not easy to sell, particularly as any initial offer can be downgraded or totally withdrawn following the due diligence exercise, which might uncover further trading losses. If possible, it is always best to turn a company profitable first, and then sell.

To achieve a successful sale, it is also good to identify the various exit routes available to you. A sole proprietor owned business should think about becoming an Incorporated Company, as it leads to a “cleaner” transaction and you have the option of selling the assets or shares of the Corporation. It also provides flexibility if the owner wishes to sell just part of the company leading to the possibility of a merger, acquisition or joint ventures.

Other exit routes include management buy-outs (MBO), management buy-ins (MBI), Employee Share Ownership Plans (ESOP), and institutional buy-outs with private equity funds. Each type has its own advantages or disadvantages. Management buy-outs, for instance, may sound fine, but be wary of de-motivating your management team if the deal is not completed or takes too long to complete, and be wary of the management team becoming distracted from the day-to-day running of your business.