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How to sell your business: preparing your business for sale and a smooth transition to new owners

Selling your business? Learn how to prepare your business for sale and set up for a smooth transition to its new owners.

As an entrepreneur, you should take time to consider how and when you’ll exit your business. Most business owners get caught up in the day to day of running their business and don’t take time to step back and plan for life without their ‘baby’.

Business succession planning is the process that we go through with entrepreneurs to develop a strategy to achieve the best result for the key stakeholders when they sell their business. However, even if you aren’t planning on selling your business in the short term, being prepared is important. Often businesses are sold following an approach by a potential buyer. The buyer may be a competitor, supplier, private equity type investor or international purchaser and you may need to get ready to sell quickly.

A third scenario when business transaction occurs and is outside the control of the owners is in times of business distress. A bank, a financier or other creditor could force the sale of your business.

When working with you to put together a business succession strategy, we consider the following:

1. Your business structure: how will it impact your business sale?

When it comes to your business structure, there’s no one-size-fits-all model. The best structure will depend on the type of business, the industry it operates in, the size of the business and the owners’ other assets.  

Your business structure will influence your sale structure, taxation and legal obligations. For instance, if your business is operated under a partnership or trust, then you may be entitled to certain Capital Gains Tax discounts under a share sale – a benefit not available to companies.

Once you’ve set up the structure, you should enter into some form of relationship documentation, such as a shareholder agreement or partnership deed, to set out the rules for selling, decision making and handling disputes.

2. Your exit strategy: do you have a business succession plan in place for a smooth transition?

Do you have an up-to-date business plan? This will help you identify your capital requirements to achieve your projections or indicate whether further investment is needed.

To achieve a smooth transition, consider your exit strategy as part of your business planning. What is your ideal time-frame and what are the key milestones? Options to exit your business include an initial public offering, a trade sale or a management buyout. Again, the best option for your business will depend on the nature of your business.

3: The key people in your business: what role will they play?

A key part of preparing to sell your business is considering what role the founder will play after its sale.

If you’re to remain in the business post-sale, you must consider what role you’ll play under the new ownership. The sale not only affects you, but your key staff will also be keen to secure their employment. It may also be a fundamental requirement of the buyer that the management team remains in place.

If you’re selling your business, a tricky consideration is deciding on a good time to let the key people know you’re thinking of selling the business.

  1. Your numbers: are you selling your business at the right price? Obviously, the more profitable the business, the easier it is to sell. However, are you fully across the key drivers of profitability in your business? What are the revenue trends? Is there more growth expected? How can you manage your costs better? Are there any business synergies that you could derive from a merger or joint venture before an ultimate sale?

Do you know what your business is worth today? There are various ways to value a business and you should be across the most common methodologies in your industry.

5. Your key contracts, licences and IP: are you confident handing over your key contracts?

What are your rights and obligations under the existing agreements and licences that your business operates under? We recommend that you undertake vendor due diligence before giving a potential purchaser access to your key contract. Things to consider are the process of assigning leases, business contracts, licences and intellectual property to the purchaser.

6. Your financials: do you know what your business is worth?

Ensure that you’re monitoring your customer concentration levels – stay on top of this and ensure that your business continues to generate revenue from a sustainable spread.

Do you have details on your customer-by-customer profitability, your industry segment margin or fixed/variable costs? You should ensure you’re using best-practice software and financial reporting tools before supplying financial data to a buyer.

7. The sale process: do you have the right people to successfully sell your business?

Who should be on your sale team? It may also be beneficial to hire a broker or corporate adviser. They provide benefits such as:

  • Access to prospective buyers
  • Specialisation in selling businesses
  • Experience in overcoming complications with purchasers

Who’s going to prepare the information memorandum and marketing materials? Ensure you have the right people in your business to promote it to the buyer.

8. The sale contracts: are you confident you’re protected?

So, you’ve found a buyer. Now it’s time to put the contracts in place. The sale of business contract or share sale agreement (depending on the most tax-effective structure for you) should be prepared by your lawyer to ensure that your interests are protected. It’s the lawyer’s job to manage the risks to you if something goes wrong, either during the process or when the buyer takes over.

How to prepare for the successful sale of your business

If you’re considering selling your business, careful planning and consideration of your business structure, key people, contracts and internal processes is critical for a smooth transition to a new owner. If you need help with your business succession planning, BlueRock can help. Get in touch for expert legal and business advice.

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