Preparing to sell your business

Before putting your business up for sale you must give careful consideration to your reasons for doing so. You will probably be asked about your reasons for selling by potential buyers, who will need to be comfortable with your motivation and answers.

You need to consider four key questions:

• What are my objectives as the owner of the business? For example, you might want to realise some or all of your investment in the business to fund your retirement.
• What are my objectives as manager of the business? For example, you might want to retire as soon as possible or prefer to have an ongoing involvement with the business.
• What are my objectives for the business itself? For example, the business might need new investment in order to grow.
• Who else will be affected and what will they want? For example, other shareholders, managers and employees, and even key customers and suppliers.

Selling part or all of the business may be the best way to achieve your objectives. You might, for instance, want to sell your business outright, leaving you with no financial or management involvement

But a sale may not always be the best solution. And, of course, it may not always be realistic either.

There's a range of other exit routes that may suit your needs better. If, for example, you want to retire but already have enough money, you could pass the business on to your children. You could sell to your employees. Or you could try a stock-market flotation - this could raise capital to develop your business, while making it easier to sell part of or your entire stake in the business.

There are various options available to sell your business, depending on factors like your business' type, size and sector. Most businesses are sold in a trade sale to another business - usually to one operating in the same or a related field.

Other options available to you could include:

• finding a private-equity buyer
• a management/employee buyout - perhaps with the help of a venture capital firm or bank loan
• attracting a private investor

The one best option for you will depend on your individual circumstances and the legal status of your business. The buyer will also have an opinion on deal structure, so you'll need to know what you want to achieve and how you would like to structure a sale early on. This will save time and money, and avoid unnecessary delays.

Partial or full sale

You may want to sell the entire business or keep a small stake in it. The buyer may prefer you to retain partial ownership and continue your involvement. This can give the business continuity and the buyer confidence that the business will do well.

Sale of assets

Instead of selling the business itself, you could sell assets like equipment, intellectual property or your customer list. This may be attractive to a buyer who doesn't want to take on liabilities and obligations.

For example, the buyer might not want to take on your employees. You will be left with whatever assets and liabilities are not included in the sale. In this case, tax and legal advice is an essential factor in deciding the most suitable deal structure.

Immediate or phased payment

You can ask for payment in full when the sale is completed, or you may be prepared to accept payment in instalments. The buyer may well prefer to pay in instalments. But you will be at risk, for example if the buyer cannot make future payments.

Some buyers will want to make a series of payments based on profits, in which case you may be contracted to stay with the business for a period of time. This is often known as an 'earn out'.

Your choices can affect whether buyers are interested and how much they are prepared to offer. They can also affect the tax treatment of the sale.

You can only sell your business if someone is prepared to pay for it. If you can't identify strong reasons - that can be easily substantiated - why your business would make a good acquisition, it's likely to be difficult to find a buyer.

Ask yourself the following questions:

• Is the business healthy? A business in trouble is difficult to sell and potential buyers are likely to wait until they can get assets at a knockdown price - although sometimes financial distress can be a motivating factor to a buyer who can see a turnaround opportunity.
• Are the basics in place to make the business attractive? Buyers like well-organised businesses with strong management.
• Does the business have a good financial record? Buyers prefer a record of smoothly increasing profits with good growth potential.
• Can you identify potential trade buyers and a good reason why they should want to buy your business? Buying a business can be disruptive and expensive. Potential buyers may prefer to concentrate on their existing operations.
• Is the existing management team interested in buying the business? You may find that they are the only potential buyer and that they only offer a modest price.

It usually pays to start planning a sale well in advance. This gives you time to groom the business - fixing any issues which could dramatically affect its value and making it as attractive as possible to potential buyers.

You may also want to get a preliminary valuation before you offer it for sale.

Selling at the right time can have a significant impact on the price you get for your business.

If possible, plan ahead so that you can pick the best moment rather than being rushed into a quick sale.

It's also wise to keep your plans confidential until the sale is imminent. This will prevent a negative reaction from customers and suppliers, and eliminate unnecessary worry for your employees.

Economic and financial considerations

The general state of the economy - and your sector in particular - can have an effect. It's easier for a trade buyer to fund a purchase when their own business is doing well, interest rates are low and banks are keen to lend.

The state of your business is a more important factor. Aim to sell when profits are increasing and look likely to grow further. Consider the impact of sales cycles or seasonal fluctuations in your business - you might have fuller order books at a particular time of year.

Tidy up your business

Planning well in advance also allows you to tidy up other aspects of your operations to ensure your business is as attractive to buyers as possible. It can also highlight any issues which might have an impact on a sale. For example, you should ensure that:

• equipment is well-maintained
• key contracts are in order
• there is no outstanding litigation or unresolved disputes
• you are complying with all legislation

Tax considerations

The detailed timing of a sale may also depend on the tax consequences, and any forthcoming changes to tax rules.

Experienced advisers can have a big impact on the success of your sale and the amount you receive.

Accountants, solicitors and tax advisers

You will need an accountant and a solicitor. The accountant concentrates on the financial aspects of the sale - like preparing accounts for the business. The solicitor focuses on legal issues - like drafting a sale agreement.

You also need to use a specialist tax adviser to handle business and personal tax planning. Your accountant may be a tax specialist, or may be able to introduce you to one.

Brokers and corporate finance specialists

Most businesses use a specialist business broker or corporate finance adviser from an early stage to help with:

• producing credible sales documents
• researching, finding and vetting potential buyers
• pre-sale grooming
• negotiating a sale on your behalf

To find a suitable corporate finance adviser, look for recommendations and check that a broker has the necessary experience and proven track record. You can start by asking your accountant, solicitor, business acquaintances or friends if they can recommend someone who specialises in your sector.

Making your choice and agreeing fees

Always examine advisers' skills and expertise carefully, including:

• what experience they have of selling similar businesses and how successful they have been
• how they can help you to market the business
• what contacts they have among potential buyers
• what references they can provide
• what the fees involved are and what they cover
• how they will keep a sale confidential

Make sure you feel comfortable with the people you'll be dealing with and that the firm you choose is suitable for your business.

You will have to pay your advisers. Many advisers charge an hourly rate or up-front fees. You may be able to negotiate a fixed rate for a particular piece of work. Some advisers, particularly corporate finance specialists and business brokers, are prepared to negotiate a success fee as part of their payment. For example, you might pay lower fees if you don't get your target price.

Planning well ahead helps you ensure that your business has a financial record that attracts buyers. A first step is to ensure that your finances are in good order. Although this should be the case at any time, planning to sell your business can push you to focus on this area.

One major area is control of working capital, through reducing stock levels and controlling creditors. There may also be opportunities to cut costs, such as renegotiating supply contracts and eliminating unnecessary perks. You can also sell underused equipment to reduce debt.

You will want to present your accounts as attractively as possible. Buyers usually prefer businesses that show increasing profits year on year. If possible, your financial performance should be reasonably stable throughout the year. You may be able to bring forward or delay purchases and sales to help with this. You may also want to change some of your accounting policies.

Good sales forecasts will help to increase prospective buyers' confidence in your business - but you must ensure they're realistic and can be supported with evidence. A full order book is a good sign.

It's important that buyers believe your accounts. For example, you should make realistic provisions for bad debts. Buyers and their advisers will usually see through any quick fixes you try to use to boost profits.

Accounts management and bookkeeping guidance.

To maximise short-term profits you can reduce longer-term investment. For example, you might avoid expenses like advertising heavily or taking on new staff. But avoid excessive cost-cutting - you need to maintain spending in essential areas, otherwise the business suffers and so does the price buyers will be prepared to offer.

For advice on these and other options, consult your accountant and your corporate finance adviser.

Read guidance on how to choose and work with an accountant.

The more confidence a buyer has in your business, the more attractive your business will become and the higher the price they are likely to offer. It's essential to set out a clearly defined strategy in your business plan.

You also need to show that you have got a strong management team in place. If your business is too dependent on your own skills, it might damage the price it can fetch - and could even make it impossible to sell. Appointing deputy or departmental managers can enhance a company's value by alleviating that risk. You may also want to encourage key employees to stay by considering appropriate incentive schemes.

Aim to reduce your dependence on too few customers or on one or two key suppliers. Show how your customer base is expanding and formalise any informal deals you have with customers and suppliers.

You should also:

• ensure you're complying with health and safety, employment and other legislation - consider asking your legal advisers to review the business
• settle any legal disputes
• make sure you have clear ownership of any intellectual property
• ensure property contracts are sorted out
• put in place suitable management information systems
• ensure your finances are in good order

The sooner you start planning, the more effectively you can do all this. There is a strong case for setting out your exit strategy in your original business plan. This will prevent sudden or misguided decisions about leaving the business which could leave you financially worse off or make the business less attractive to potential buyers.

Throughout the sale process, continue to demonstrate that you will be flexible and co-operative. Show that you would also be willing to spend some time after the sale helping the buyer get acclimatised to the business. If you think it will help the sale, be prepared to work for the company for a fixed period after the sale is completed.

Read our guide Selling or closing your business: the basics.