Sell your Business E-Book Extract Part 4 – Sellers

Posted on Jul 21, 2015

Sell your Business – 4- SELLERS

Outlines several ways to sell your business

Types of Exits

There are several ways of exiting a business, including:

  • Private sale
  • Management buyout
  • Remote Management
  • Investor part or whole
  • Succession to family member
  • Float (IPO)

The majority of business owners that wish to exit their business will either sell the business to third party or allow a family member or part of the management team to buy into the business

In some cases an entrepreneur may wish to exit a business but cannot find a buyer prepared to offer a commercially realistic price. Rather than reduce the sale price, an owner may decide to pull back from the day to day running of the business and appoint outside management.

Sometimes a buyer is not in a position to purchase the entire business but can afford to become a part owner.  In this situation it is important that the original owner thinks carefully about offering someone a majority stake in the business, as this effectively means he or she will lose control of all strategic and operational decision making.

 

In some instances the best investors are already a part of the organisation.  In a management buy-out, an owner offers employees the opportunity to buy into the company, often funded over time, out of the growth of the business.  There is risk attached to this arrangement because if the business’s profitability declines, it may be difficult to make payments.  For this reason it is recommended that management buy-outs only take place if the owner is a secured creditor and appropriate guarantees are in place.

The large portion of small businesses are family businesses and in many cases it is the wish of the owner to keep the business in the family.  Currently around 10 per cent of business owners took over their current business from the family.  Of the family businesses with employees, three quarters employ at least one family member.  Research also shows that 92 per cent of family business owners are prepared to pass the business on to children and 57 per cent are prepared to sell it to them.

Sometimes emotive factors come into play in family businesses, which change the family dynamics and can negatively impact the business.  An example of this may be intergenerational conflict.

In a family business, it is essential that a Succession Plan is created and well documented, and that family members are aware of its contents. Some family members may automatically expect to be given first right of refusal for purchase of the business.

A Succession Plan often has two stages.  The first is the transfer of managerial control and the second is the transfer of assets or ownership.

Commonly, the shareholders of a business are a husband and wife.  Where divorce or separation has interrupted a good relationship, selling the business and transferring shares becomes difficult. It is best to consider this possibility when a business is started and structure it accordingly.

An Initial Public Offering (IPO) is the process by which a company is listed on the Stock Exchange and it is usually a way for a medium sized business to obtain the capital needed to grow into a large business.  It requires a sizeable financial investment to prepare for listing and there are significant demands on the business owner’s time in the lead up to the float.  An IPO is usually not an option for a small business.

 

Personal Expectations

 

Before deciding on the best way to exit a business, it is important to consider the reasons for selling.  Some people will retire, some will take an extended holiday and some will re-enter the workforce as an employee.  Others will buy another business or establish a new venture. Research shows that 52 per cent of small business owners planning to exit their business intend to retire, and 14 per cent intend to start another business.

Industries and businesses are subject to economic cycles and at certain times businesses will perform better or worse, depending on the business cycle. Ideally a vendor should sell when industry conditions are good but it is sometimes difficult to pick the top of the market.  In many cases industry cycles will be less important than the personal reasons for selling.

In some cases, an entrepreneur becomes burnt out, faces illness or is forced to exit a business for personal reasons.  This can result in a sale needing to be completed by a certain date and/or at a reduced price, which is obviously not desirable.  Like so many facets of business, the key to a successful sale lies in careful planning.

 

Screenshot from the MAUS “SellBiz Pro” software that demonstrates the amount of cash you will need to retire.

The above illustration assumes a scenario where a Business Owner aged 50 years sells his/her business for $877,000 after expenses and tax. If he/she earns 5% interest per annum and spends $84,000 on lifestyle every year afterward. The cash will run out when the business owner is aged 65. Therefore the business owner needs to consider spending less each year, selling his/her business for more or make the money work harder in an investment fund.

 

Financial Considerations

Before selling, a vendor needs to calculate how much money is needed from the sale to sustain a desirable quality of life.

This is particularly true of owners planning to retire, as they need to consider the likelihood of increased medical expenses and the future possibility of needing assisted living. At 62 per cent, the proportion of small business owners with superannuation is below the national average for wage earners.

Many younger people sell a business with the intention of buying or starting another enterprise.  Here it is still important that the proceeds from the sale are sufficient to fund a new business, maintain a lifestyle and possibly to have an extended break before starting a new venture

Business owners also need to take into consideration whether the sale will leave them free to earn a living.  Many buyers will insist on a restraint of trade clause in the contract, which restricts the vendor for a period of time and within a geographical area.  This can also restrict the vendor’s ability to work for a competitor, disclose confidential information or poach clients and employees.   These restrictions need to be compensated for in the sale price.

 

Ongoing Involvement In the Business

Most buyers will require the seller to have some involvement in the business after the sale, to ensure the intellectual property, staff and customer loyalty are smoothly transitioned. If a buyer considers a handover period too narrow, the perceived risk increases and this will be reflected in the price on offer.

In some instances the new proprietor will want the seller to work in the business as an employee for an agreed period of time.  The transition from owner to employee is not always an easy one.  Relationships with other staff members need to be redefined and the seller is required to accept the changes made by the new proprietor.

It is often better to act as an advisor or consultant to the business, where the seller is able to draw on a thorough knowledge of the business and the industry within which it operates, to provide strategic advice to the new proprietor.  The advantage of this option is that it provides a regular stream of income for a period of time after the sale, without the restrictions of full time employment.  This provides the seller with time to develop new hobbies or business ventures.

If the seller has specific skills that the business will need to retain, the seller can continue working with the company as a trainer.  As part of the exit strategy, a business owner should identify staff members who have the potential to be trained to take on additional responsibilities.

Sellers also need to consider their vision for the business.  Most owners have an emotional attachment to a business that has been their “baby” for many years and has become part of their identity.  They want the brand and the business to thrive after their departure, which means a certain type of buyer and structuring of the business will hold more appeal.

When considering a seller’s involvement after the sale, it should be noted that sometimes there are significant cultural differences between a large and small business.  If a small business is bought by a bigger entity, tension often arises when a former owner needs to conform to the practices of a larger corporation following the sale.  For the former owner this can create a considerable emotional burden during the transitional phase.

 

Valuation Goals & Expectations

Before going to market, it is important that a business owner understands the value of the business and if he or she is prepared to sell for that price.  If the business owner is not prepared to sell for a realistic price, the value of the business needs to be improved before it is put on the market. If it is not possible to increase the value of the business, the business owner can consider not selling but managing the business for lifestyle.

It is important to take into account a realistic timeframe for the sale.  If the value of the business is acceptable to the seller, the timeframe for the divestment can be quite short.  However, if the value of business falls below the seller’s expectations, a realistic time frame needs to be applied to the process of building value.

In order to successfully negotiate the sale of a business, the seller needs to understand the needs and drivers of potential purchasers. The seller must also understand what types of elements lead to a high valuation or a lower one.

Shareholder Considerations

Most businesses have multiple shareholders and when preparing to sell the business, all shareholders need to be consulted.  There needs to be agreement between the shareholders about if the business should, in fact, be sold; when; for what price; and whether it should be a cash sale, shares or vendor finance.  It is also important to check if the sale conditions are in line with any Partnership or Shareholders Agreements.

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