Selling Tutorial

 

Is it time to sell?

Selling your business is a major decision! You have devoted your time, money and energy into building, running, and operating your business. It may well represent your life’s work or you may be an investor looking to exit. If you have already decided that now is the right time to sell, you want the very best professional guidance you can get. Working in tandem with a professional M&A advisor can make the difference between just getting rid of the business and selling it for the very best price and terms!
A M&A advisor is the central point of contact for the sales process. The advisor will initially collate all necessary documentation to value the business, prepare an Information Memorandum, co-ordinate with the team of professionals: Accountants, Bankers, Lawyers and will source, identify and negotiate with buyers.

What’s my business worth?

This is inevitably the first question that most shareholders/directors ask. The answer unfortunately isn’t a simple one. Whilst businesses have similarities no two are alike and consequently the likely valuation of a business will be unique to the business itself. Other factors such as macro and micro economics at the time of the sale, the size of the business, the length of time the business has been in operation, the market it serves, its uniqueness, its ability to survive post sale are also very important.
The core function of a M&A advisor is to apply a valuation to a business and this is done having weighed up all the factors above and carried out extensive research. Our Advisors are active in the market and will have knowledge of recent transactions, consequently they will be able to provide you with an expert guide to a most likely sale price. Ultimately, it’s the market itself that decides how much the business is worth.

The Initial First Steps

Assuming you have decided to sell your business and it’s vital you are a motivated and committed seller there are a number of things you can do yourself to commence the process. The first thing you have to do is to gather information about the business.

Here’s a checklist of the items you should get together:

  • 3 years of Audited Accounts
  • Year to Date Management Accounts
  • Copy of Memorandum and Articles of Association
  • Copy of Shareholder Agreements
  • List of fixtures and equipment
  • The lease and lease-related documents
  • A list of all loans (amounts and payment schedule)
  • Copies of any equipment leases
  • An approximate amount of the inventory on hand, if applicable
  • Contact details of Financial and legal advisors
  • A historical account of the business from formation to current day

An M&A advisor will require the above information in order to commence the sale process.

Who are the Buyers?

Generally buyers will fall into 3 categories.

  1. Trade
  2. Owner/Operator
  3. Investor

Trade Buyer: A trade buyer will most likely be a competitor within your own market or could be from an external geographic location looking to enter your market. It could also be a complimentary company looking to diversify its product offerings.

Owner Operators:Owner Operators can take the form of a Management Buy Out (MBO) or a Management Buy In. Essentially, they are looking to invest in the business and run it themselves.

Investors: Investors take many shapes and forms and can be Individuals, Private Equity Houses or Pension Funds. They wish to purchase a business as an investment, instil their own management team and obtain a return over a period of time. Investors can be one or more individuals, venture capitalists or Private Equity houses.

What do Buyers Want?

This may be a bit premature if you have not decided to sell but it may help in your decision-making process to understand not only who the buyer is, but also what he or she will want to know in order to buy your business. Here are some questions that you might be asked and should be prepared to answer:

  • How has the business been valued?
  • What is the annual increase in sales?
  • How are inventory levels calculated?
  • What is the level of debt?
  • Will the seller remain post sale?
  • What makes the business different/special/unique?
  • What further defines the product or service? Bid work? Repeat business?
  • What can be done to grow the business?
  • What can the buyer do to add value?
  • What is the profit picture in bad times as well as good?

Buyers Want Cash Flow & Growth

The first thing to keep in mind is buyers want to buy cash flow. Sit down with your accountant or M&A Advisor and begin to review your financial statements with cash flow in mind. Cash flow is not the same thing as profit. Buyers look at the profit and loss statement as well as owner compensation to assess any excess. They will consider any excess compensation to employees and family. Buyers will also look at large, one-time expenses such as a new computer system or renovations. They will consider non-cash items like depreciation and amortization. Interest expenses will be reviewed, as will owner prerequisites. These are items that a professional M&A Advisor considers when advising a selling client on a sale price.

What Can You Do?

Appearances Do Count.

The time to replace that old worn-out piece of equipment is before you decide to sell. Don’t assume that a new owner will want to do it or that the price will just be slightly lower because you haven’t replaced it. The time to “spruce up” the business is now, even if you aren’t selling. Fix the sign, replace the flooring, paint the place, make it look good. Even if you’re not selling, it’s just plain good for business, and you never know when the time to sell will occur. Keep in mind that anything that increases sales also increases profits and the all-important cash flow!

Everything Has Value.

There are other things that add value to your business. Don’t discount the value of customer lists, proprietary products and/or techniques, well-maintained equipment, secret recipes, customised software programs, or good employees. These are termed “off-balance sheet items,” and although not used in most pricing models, they add to value. Look at your business very carefully so you don’t overlook those items that make your business more attractive to the buyer.

Eliminate the Surprises.

Long before you put your business on the market, eliminate the surprises! Review every facet of the business and remedy any problems that could appear during the sale process. No one likes surprises most of all potential buyers. Whether legal, accounting, environmental, or anything else solve it now.
We look forward to working with you in finding a suitable buyer for your business. You, as the seller, are an integral part of the total marketing program. Below you will find a few friendly recommendations that will help in our marketing efforts when you decide you are ready to sell.

  • Keep normal operating hours. There may be a tendency to “let down” when you put your business up for sale. However, it’s important that prospective buyers see your business at its best.
  • Repair signs, replace outside lights, etc. You don’t want your business to look as if it has been neglected.
  • Maintain inventory at a constant level. If you let your inventory slide, your business will look neglected. If anything, increase it so your business will look busy.
  • Remove items that are not included in the sale and unnecessary items, especially if inoperative
  • Repair non-operating equipment or remove it if you are not using it.
  • Tidy-up outside premises.
  • Spruce-up the inside of the business.

It might also be helpful if you took a good look at your business from the perspective of a buyer. Try to put yourself in the place of a prospective purchaser of the business. What would you do to make it more attractive or more saleable? Obviously, the financial records of your business are critical to the sale of your business, but how it looks is also important. First impressions really count! If a potential buyer doesn’t like the appearance of your business, the rest of it may never get a chance. If you have any questions, please don’t hesitate to call us.

 

The following is a brief account of the Sales Process

  • Sign Letter of Engagement with your M&A Advisor
  • Compile Business Information and Value the Business
  • M&A Advisor produces an Information Memorandum on the business.
  • Buyer Target List Compiled
  • Agreement of the basic structure of the deal:- parties involved, Share Purchase or Asset Purchase, Price and Term
  • Offer Solicited,Sign Heads of Agreement and Agree Exclusivity Period
  • Due Diligence: Tax, Financial, Legal. Commercial
  • Share Purchase Agreement or Asset Purchase Agreement Negotiation (Warranties, Disclosure Letter, Tax Deed of Indemnity)
  • Close