Selling a business
Before putting your business up for sale, you should give careful consideration to your reasons for doing so. You will probably be asked about your reasons for selling a business by potential buyers, who will need to be comfortable with your motivation.
Selling a business, whether in part or wholly, 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.
However, there may be a range of other exit routes which better suit your needs. If, for example, you want to retire but already have enough money, you could pass the business on to your children. Alternately, you could look into selling a business to your employees.
How to sell a business
There are various ways that could see you selling a business. The options available depend on factors like the type of business, 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.
1. Partial or full sale
You may want to sell the entire business or keep a small stake in it. The buyer may prefer that you retain partial ownership and continue your involvement. This can give the business continuity and the buyer confidence that the business will do well.
2. Sale of assets
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3. Immediate or phased payment
You can ask for payment in full when the sale is completed, or you can 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'.
Other options available to you could include:
- Finding a private-equity buyer
- A management or employee buyout. Perhaps with the help of a venture capital firm or bank loan
- Attracting a private investor
Is a sale realistic?
You can only sell your business if someone is prepared to pay for it. If you can't identify strong, substantive reasons why your business would make a good acquisition, it's likely to be difficult to find a buyer.
It usually pays to start planning a sale well in advance. This gives you time to groom the business and learn how to sell a business professionally and swiftly, fixing any issues which could dramatically affect its value and making it as attractive as possible to potential buyers.
When to sell your business
Selling a business at the right time can have a significant impact on the price you get for it. 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.
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.
Show strong financial performance
Planning well ahead will help you to ensure that your business has a financial record that attracts buyers. The first step is to ensure that your finances are in good order. This should always be the case, but planning to sell your business can put a spotlight on this area.
You will want to present your accounts as attractively as possible, as buyers usually prefer businesses that show increasing profits year on year. If possible, keep your financial performance reasonably stable throughout the year. Good realistic sales forecasts that are supported by evidence, will help to increase prospective buyers' confidence in your business. A full order book is always a good sign.
To maximise short-term profits, you can reduce longer-term investment. You might want to 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 could suffer and drive the price down.
Streamline your business operations
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.
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.
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When starting a business, the creation of a shareholders agreement is often overlooked. Spirits are high and the business is going to be a raging success - so why bother talking about what may happen if the business fails?
Unfortunately, businesses do come under strain and fail. Anticipating these circumstances can save you significant time and money down the line. It's well worth the initial investment and provides valuable insurance for the future. A simple shareholder agreement is likely to cover the following points:
The agreement should include:
- The activities that the company will carry on and its intended rate of growth
- The intended exit route and the timescale for achieving it
- The company’s dividend policy i.e. the proportion of profits to be paid out as dividend and the proportion to be retained to fund the business
- The composition of the board of directors and senior management team, along with their remuneration and other terms of employment
- Levels of borrowing
- Future funding e.g. how much will be needed, the form it will take, how much each of the parties will put in, whether third parties will be allowed in and on what terms
Shareholders' rights of veto
Other parts of the agreement often provide that important decisions, whether or not they would ordinarily be taken by the directors or the shareholders, cannot be made unless all shareholders agree to them – so minority shareholders can veto them.
Typically, these include decisions to:
- Issue further share capital
- Change the company’s articles of association
- Buy or sell a business, or any asset of more than a certain value
- Buy any of the company’s shares back from a shareholder
- Incur capital or hire purchase commitments above a certain level
- Take out or vary insurance other than for full replacement value
- Award directors or employees more than a certain level of remuneration and/or dismiss a director or employee earning more than that remuneration
- Prevent favourable contracts or arrangements between the company and its directors or shareholders other than on agreed terms
- Acquire or dispose of any premises
- Appoint or remove a director
- Borrow above a certain level or grant security over the company’s assets
Issue and transfer of shares
Here, options include:
- Allowing minority shareholders a complete veto over any issue or transfer of shares
- Requiring the company (on an issue) and the owners of the shares (on a transfer) to offer the shares to existing shareholders, pro rata to their holdings, before they can be issued or transferred to anyone else, or in any other proportions.
If a pro rata offer must be made, the agreement must provide a means of valuing the shares. This may be by reference to an expert, arbitrator or according to some formula in the agreement.
Rights to appoint directors
Shareholders' rights protect outside investors by allowing them to appoint a director to the board of your company, protecting their interests.
A shareholders agreement may contain a mechanism for resolving disputes. It may refer to a third party expert or arbitrator or a buy-out mechanism whereby, if a dispute occurs, one side buys out the shares of the other at a price determined in accordance with the agreement. It can even provide that, in the event of an unresolved dispute, the parties agree to vote to wind the company up.
The issue of which party buys out the other, and at what price, can be extremely difficult to negotiate. A shareholders agreement can become quite complex.
One solution is to say that one shareholder can offer his shares to the others at a price of his choosing. If they accept, they pay the price he has set. To stop the seller from setting an unrealistic price, the agreement may also provide that if the other side does not accept his offer, they become obliged to sell their shares to him. The seller will then be forced to buy the shares at the price he set. He will not want to set too high a price for his shares because he may end up having to buy their shares at that price himself.
Performing due diligence
When buying, or investing in, a business, it is tempting to get caught up in the excitement and adrenaline of doing the deal.
Often referred to as "deal fever ", this feeling of elation can lead to mistakes, especially if you haven’t done your homework.
Carrying out the background work on the company and learning as much as you can about it is called “due diligence”. It is an essential part of completing a successful transaction.Get in touch
Managing cash flow
Cash flow management is an integral part of your day-to-day business operations.
Below is a list of tips that will show you how to manage finances in your business and prepare you for any cash shortages.
1. Know your customer
- Check out the exact name and legal status of the business you are supplying. If it’s a sole trader or partnership, the proprietor or partners are personally liable, so make sure you have their full details. Businesses can disappear much more quickly and easily than individuals.
- For limited companies, you can perform a free check on a limited company’s basic details using the Companies House WebCheck service.
- Invest in credit reference information – it could save you bad debt in future.
2. Payment terms
- Set out and agree on payment terms in advance and in writing. It’s better to know what to expect than to leave things to chance and wonder why the money hasn't arrived later.
- Whenever you write about payment terms or write on your invoices, include the words: “We will exercise our statutory right to claim interest (at 8% over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation if we are not paid according to our agreed credit terms." Even if you don’t intend to do so, it can be a useful deterrent against late payment.
- Raising a further invoice for interest and late payment charges is an excellent way of gaining your customer’s attention and raising the profile of your outstanding invoices.
- The sooner you ask, the sooner you can get paid; send invoices by first-class post or, better still, by email.
- Ask customers what they need on the invoice in order to approve it simply and quickly. Include at least the following:
- Your full name and address
- VAT registration number
- Invoice date
- Correct customer name and address
- Delivery address (if different)
- Delivery date and method
- Customer purchase order number
- A clear description of the goods or service supplied
- Accurate quantities, prices, discounts and total amount due
- Payment terms and due date
- How payment should be made with bank details (including sort code and account number from bank statement)
- Invoice number or other reference to be quoted by payer
- Payment terms and due date bank statement and the reference to be quoted if payment is by direct credit
4. Chasing payment
- Make immediate contact if payment has not arrived. Be assertive about what you expect and when you expect it and make the consequences of non-payment clear. Follow up promises to make sure they are met.
- Be polite, professional and persistent; do what you say you are going to do when you said you were going to do it.
- Try to get customers to pay by electronic transfer or direct debit to avoid waiting for the cheque to arrive.
5. When cash runs short
- Plan your cash flow requirements carefully, allowing for differences in the payment terms you receive from your suppliers and those you give to your customers. Regularly update cash flow forecasts to ensure you stay within your financing facilities.
- Remember, early communication is key – if you avoid talking to suppliers, your bank and other parties, you might find supplies or finance withdrawn or legal action commencing if cash runs short; things will escalate quickly.
6. When all else fails
- If you can’t get paid for the outstanding debt, don’t let it grow. Stop supplying any further goods or services. If your product or service is important to your customer, it might be just the lever you need to get payment.
- Always consider the commercial reality – if the customer is insolvent or has no available funds, further action is unlikely to help. Consider the costs of any action against the size of the debt.
- Consider taking legal action either yourself or using a solicitor to do so – commencing legal action yourself is relatively easy but takes time and effort. You can take action through the courts or consider issuing a statutory demand that you can follow up 21 days later with a bankruptcy order.
Surround yourself with great people and great things happen.
The right people can save you from making some really expensive mistakes; they tend to have good ideas for the business.
There are two forms of directorship that make for effective leadership at a company:
- Executive directors, who run the company
- Board of directors, made up of both executive and non-executive directors
Normally, the board itself has no day-to-day responsibilities, but will set the overall goals and strategy. They will also have influence over key appointments, including that of the Managing Director or CEO.
Young entrepreneurs and business owners make their biggest mistakes in their early years, before they have gained the wisdom and insights that come from experience. We suggest appointing one or two non-executive directors to your board.
- They could be paid a daily or hourly rate for their input into the business or you could incentivise them, either through a bonus scheme or with shares, on the increased performance of the business.
- They meet up with you and your own board of directors every quarter (at most), or annually (at the very least).
- They should have considerable business experience and be successful.
- You should have a good, honest working relationship with them.
- You should give them a fixed term assignment, ideally between two and five years.
Mentoring is one of the least used, but potentially most valuable, corporate services available. Mentoring, business coaching or executive coaching will help to make your decision-making more effective and will allow a company director to have a broader perspective on effective leadership.