Selling a Business? Here's What You Need to Know

Selling a business is a bit like selling your home. You want to get the best price possible, with the least amount of effort and at the lowest cost to you. What you do need to be clear on are the reasons you want to sell, plus be 100% certain that a sale is the best option for you.

As accountants and business advisors, we regularly play a role in helping clients sell a business. We believe it is important to consult with professionals such as ourselves because selling a business is a specialist area. To demonstrate this, we are sharing some of the processes and knowledge required to achieve a successful, legal and profitable business sale.

What Are Your Reasons for Selling a Business?

There is most likely a lot of your blood, sweat and tears which have gone into your business. There is probably also a large amount of pride and emotional connections associated with it too. So, chances are that you have thought long and hard about whether or not selling your business is the right move for you.

The decision you have come to would have been based on one or more reasons, such as:

  • you are ready to retire
  • you don’t enjoy owning a business any more
  • there are health problems which are affecting your ability to manage your business
  • it is time for a change and you want to do something else
  • you want to release your equity locked within the business
  • there’s a financial downturn and you want to get out now
  • a partnership dispute is causing problems

It is always best though, to ensure that the one or more reasons for selling absolutely require the business to be sold by having a chat with us. For instance, a financial downturn can be beneficial for a business which can pivot and reach a new market. Or employees can be hired to assist when health problems force the owner to step back. If you are 100% clear about your decision, it’s time to move onto the next stage: collating all your paperwork!

Organising Your Paperwork When Selling a Business

It would be a fair assumption that one of the first things an owner considers when deciding to sell their business is what the purchase price should be. However, like with selling of anything, the purchase price cannot simply be plucked out of thin air. Instead it relies on having a solid understanding of and updated knowledge about the business first. This requires you to get all your paperwork in order, including:

  • up to date financial records for current and previous tax years, including profit and lost statements, personal drawings, balance sheets, and employee costs
  • list of assets
  • current business plan
  • supplier contracts are current
  • details about all leases
  • any debts the business has are paid in full or have a plan to be paid prior to the sale
  • any legal issues are resolved
  • all regulations and requirements are complete, including health and safety planning
  • full documentation of all business processes

Finally, you will need to prepare an information memorandum for potential buyers which include all the above items. It should also contain specific details about business growth opportunities and other pertinent information not included elsewhere.

If all of this sounds too challenging or you don’t have time or want to do it, we can help. Get in touch with us today and we can start planning the sale of your business. Next though, we’ll cover how to get a valuation for your business.

How Much is Your Business Worth?

Even if you chose to take the DIY option when selling your business, it is highly recommended that you have it valued professionally. After all, a business valuation completed incorrectly can cost you plenty of money!

When it comes to valuing a New Zealand business, there are three main methods:

  • asset valuation – when you calculate the total sum of assets on your balance sheet
  • market approach – the amount of earning potential your business has which is based upon the theoretical market demand
  • income valuation – projecting the future cashflows of your business

You’ll often find that there is a valuation calculation used too, known as EBITDA. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. Generally, it is used to identify a business’ operating profit, but can be unreliable when a business is close to break-even.

Now we need to have a chat about price and value. We can help you identify the value of your business, which is taking into consideration the EBITDA, to know how much to ask for your business. However, the price of your business is the amount someone is willing to pay to buy it. Like with calculating its value, there are factors which can affect the price of your business, including:

  • physical presentation of your business
  • current economic climate
  • lifestyle the business provides
  • a comprehensive operating manual ready for an easy takeover
  • condition of fixed assets
  • existing restraints of trade
  • business name and trademarking
  • additional clauses in the sale and purchase agreements

Once you have finished the valuation of your business, it’s time to start looking for a buyer and we’re going to share some tips on doing this with you next.

Where to Find a Buyer When Selling a Business

When selling a property, most people use a real estate agent to help them find a buyer. When selling a business though, you’ve got a few other options up your sleeve. These include:

  • hiring a business broker – a business broker helps connect buyers and sellers, and they usually have an area of expertise. A broker is likely to have a database of buyers, as well as have a solid understanding of how to attract other potential buyers to consider purchasing your business. A broker can help you with the valuing and marketing of your business and expects a commission upon completion of the sale.
  • talking with employees – you may have a current employee who is interested in purchasing the business from you. Already knowing how the business is run is a huge bonus for them, and with some help from you, they may be willing to take the next step.
  • approaching your competitors – instead of having to compete with you, your competitors could buy your business out instead!
  • customers – do you have some raving fans of your business? They may be ready to purchase and run the business themselves.
  • advertising – put ads on social media, radio and even print media asking for interested parties to get in touch.

With interest from buyers comes negotiations and contracts. This is another area where professional expertise is recommended. From business advisors to lawyers, it is best to have everything completed by those who know what they are doing. Yes, they will charge you for their services, but the financial price you can end up paying for mistakes at this time can be far greater.

We’d like to offer you our experience and knowledge as professional accountants and business advisors when selling your business. We can walk you through the process, ensuring you receive the best possible price with the lowest possible amount of stress and costs. Get in touch with the team here at MBP Advisors and Accountants today and let’s meet up for a chat.

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