Selling a business is a significant decision that requires careful planning and preparation. To ensure a smooth and successful sale process, it’s essential to take the necessary steps to present your business in the best possible light to potential buyers.
This article outlines five crucial tips to help you prepare for the sale of your business, covering aspects like financial organisation, legal document review, and seeking professional advice. By following these tips, you can increase your chances of attracting suitable buyers, securing a favourable sale price, and achieving a seamless transition of ownership when selling your business.
Get Your Financials in Order When Selling Your Business
When selling a business, having your financials in order is crucial. This not only helps you understand the value of your business, but also instils confidence in potential buyers during the due diligence process.
Prepare at Least 3 Years of Financial Statements
Having at least three years of financial statements readily available is essential when selling a business. These statements, including profit and loss statements and balance sheets, provide potential buyers with a clear picture of your business’s financial performance over time.
Consider Getting Your Financials Audited by an Accountant
While not always mandatory, consider getting your financials audited by a qualified accountant. Audited financials carry more weight and provide a higher level of assurance to a potential buyer. This can lead to a smoother due diligence process and potentially increase the sale price.
Understand What You’re Selling
When selling your business, it’s crucial to clearly define what assets are included in the sale. This clarity helps avoid disputes with potential buyers and ensures a smooth transaction.
Create a Detailed Asset Schedule
Start by creating a comprehensive list of all assets included in the sale of the business. This list, often called an asset schedule, should encompass both tangible and intangible assets.
- Tangible assets are physical items like equipment, inventory, and business premises.
- Intangible assets include things like the business name, trademarks, customer lists, and goodwill.
For example, if you’re selling a restaurant, your asset schedule might include ovens, refrigerators, tables, chairs, the restaurant’s logo, and its established customer base.
Identify Any Excluded Assets
Just as important as listing what’s included is specifying any assets that are not part of the sale. This could include personal items, specific pieces of equipment, or intellectual property you plan to retain.
For instance, if you’re selling a graphic design business but plan to continue freelancing, you might exclude your personal design software licenses from the acquisition. Clearly stating these exclusions in the asset schedule prevents misunderstandings and potential legal issues later.
Address Encumbered Assets
Encumbered assets are those with existing financial obligations, such as equipment leases or loans secured against them. When selling a business with encumbered assets, you need to address these obligations transparently.
You have a few options:
- Pay off the debt: You can settle the outstanding debt before the sale, transferring the asset free and clear to the buyer.
- Transfer the debt: With the lender’s consent, you might transfer the remaining debt obligation to the purchaser as part of the sale agreement.
- Exclude the asset: You could choose to exclude the encumbered asset from the sale of your business altogether.
For example, if you’re selling a retail store with a point-of-sale system financed through a lease, you could pay off the lease, transfer the lease to the buyer, or exclude the system from the sale and use a different system after the sale.
Clearly outlining how you’ll handle encumbered assets in the sale agreement is essential for a smooth transaction and to maintain a positive relationship with the buyer.
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Review and Organise Your Legal Documents
When selling your business, having all your legal documents organised and readily available is crucial. This not only streamlines the sale process but also demonstrates to potential buyers that your business is well-managed and transparent. Organised
Review Your Lease Arrangements
If your business operates from a leased premise, carefully review your lease agreement. Pay close attention to the following:
- Expiration Date: Determine when your lease expires. A lease with a short remaining term may be less attractive to buyers. Consider negotiating a lease extension with your landlord to provide greater certainty for potential buyers.
- Assignment Conditions: Understand the conditions under which the lease can be assigned to a new tenant. Some leases require landlord consent for assignment, which could impact the sale process.
Organise Key Contracts
Ensure that all key contracts related to your business are properly organised and accessible. This includes:
- Supplier Agreements: Review agreements with key suppliers, noting terms, conditions, and any potential impact the sale might have on these relationships.
- Customer Contracts: Organise contracts with major customers, ensuring they are current and transferable to a new owner.
- Employment Agreements: Review employment agreements with key employees, paying attention to terms, conditions, and any potential implications for employees during the sale of the business.
Prepare for Due Diligence
Due diligence is a critical part of the business sale process, where potential buyers thoroughly examine your business’s financial, legal, and operational aspects. To facilitate a smooth due diligence process:
- Gather Financial Records: Prepare at least three years of financial statements, including profit and loss statements, balance sheets, and tax returns.
- Compile Legal Documents: Organise all relevant legal documents, such as leases, contracts, permits, and licenses.
- Create a Data Room: Consider using an electronic data room to securely store and share documents with potential buyers. This allows for controlled access and efficient document management.
By meticulously reviewing and organising your legal documents, you can present a well-structured and transparent business to potential buyers, increasing confidence and potentially maximising your sale price.
Consider Your Exit Strategy
Selling your business is a major decision, and it’s important to plan for life after the sale. This involves considering your post-sale involvement and understanding the tax implications.
Determine Your Post-Sale Involvement
When selling your business, consider whether you want to stay involved after the sale. Some buyers may want the current owner to stay on for a transition period to ensure a smooth handover to the new owner. This could involve training the new owner, introducing them to key clients, or helping them understand the business operations.
If you’re considering staying involved, think about the length of time you’re willing to commit and the specific role you’d like to play. It’s important to negotiate these terms with the buyer upfront and include them in the sale agreement.
On the other hand, you might be ready for a clean break and have no desire to be involved in the business after the sale. This is perfectly fine, but it’s essential to communicate this to potential buyers early on.
Plan for Tax Implications with an Accountant
Selling a business can have significant tax implications, so it’s crucial to plan ahead and seek professional advice from an accountant. The tax implications will vary depending on factors such as the structure of your business, the sale price, and any capital gains tax (CGT) liabilities.
Your accountant can help you understand the potential tax consequences of the sale and develop strategies to minimise your tax burden. They can also advise on the best way to structure the sale to optimise your tax position.
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Seek Professional Advice
Selling a business is a complex process with significant legal and financial implications. To ensure a smooth and successful sale, it’s essential to seek professional advice from a team of experienced advisors.
Engage a Business Broker
A business broker can be a valuable asset when selling your business. They can help you:
- Determine the value of your business
- Identify potential buyers
- Market your business confidentially
- Negotiate the sale price and terms
- Manage the due diligence process
Consult with a Business Lawyer
A business lawyer is essential for navigating the legal aspects of the sale. They can:
- Review and negotiate the sale contract
- Advise on legal compliance
- Ensure the transfer of assets is handled correctly
- Protect your interests throughout the process of selling a business
Work with an Accountant
An accountant can assist with the financial aspects of the sale, including:
- Preparing financial statements
- Advising on tax implications
- Structuring the sale to minimise tax liabilities
- Ensuring compliance with accounting standards
Conclusion
Selling a business is a significant decision that requires careful planning and execution. By following the five tips outlined in this article – getting your financials in order, understanding what you’re selling, reviewing and organising your legal documents, considering your succession plan, and seeking professional advice – you can increase your chances of a successful sale.
Remember, preparation is key. A well-prepared business is more attractive to buyers and can command a higher sale price. By taking the time to address these crucial aspects, you’ll be well-positioned to navigate the sale process smoothly and achieve your desired outcome when selling your business.
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