Preparation Needed for Selling a Business
Posted on January 24, 2012 by Leo SunSo you’ve decided it’s time to sell your business. You may want to retire, or you simply want to unload the company before the market turns against you. How do you go about finding someone to actually buy your business?
Determine Your Business’ Valuation
Before you can sell anything, you have to determine its market price. If your business is privately held, you can value the company based on annual revenue and earnings, combined with physical assets – such as real estate and equipment, and then deducting debt. Patents and existing partnerships should also figure into this total. If your company is already publicly traded, then its value has already been determined for you by its market capitalization, and you won’t be able to sell right away unless you are in possession of the majority of outstanding shares.
Either way, as a seller you should ask for a healthy premium over its current valuation, citing future earnings and growth potential. It’s not unusual for larger companies to pay over 50% of the current “market value” in an acquisition. If in doubt, hire a business broker or mergers and acquisitions professional to help you get the best deal for your company.
Prepare a Selling Memorandum
Before you reach out to any of these prospective buyers, you need to prepare a selling memorandum, or “business plan in reverse”. This is intended to clearly outline all the main details that buyers would request.
These would include, but are not limited to -
- Your company’s history, structure, products and operations
- Your business’s valuation and asking price
- Your industry peers and competitors
- Your employees and leadership structure
- Past financial statements
- Future guidance and projected revenue and income
- Potential problems within the company (this is very important, as any attempt to cover these up could be viewed as fraud)
The selling memorandum is an extremely sensitive piece of information, and you would be wise to have prospective buyers sign a non-disclosure agreement before reviewing it.
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Financial, Strategic and Inside Buyers
There are three main kinds of buyers on the market – financial, strategic and inside ones.
Financial Buyers
Financial buyers tend to be large investors looking to buy your business while keeping the management in place, using your company as an investment to generate income. Financial buyers are not interested in integrating your company into a larger web of companies, and will generally pay less for it.
Strategic Buyers
Strategic buyers are competitors who will purchase your company for vertical or horizontal integration, who want to either shut you down to eliminate competition, or to take advantage of your patents, products and distribution channels to further their own empire. These buyers will pay top dollar for your company, sometimes only to keep your business out of a competitor’s hands. Dealing with these buyers is dangerous, and you should be on guard with airtight, carefully drafted non-disclosure agreements to insure that a business meeting is not simply a guise for a “buyer” to steal your trade secrets.
Company Insiders
Company insiders could also purchase your company. These could be executive employees, family or friends, who have a personal stake invested in the company and would benefit from its continued survival. While this is a more assuring situation than handing your business over to a strategic buyer, most company insiders lack the cash to take over the entire company. After all, if they were working for you to begin with, it’s unlikely that they could amass the fortune necessary to overtake the entire company. However, since you know these parties well, you could work out third-party financing to allow them to buy out the company in portions, and you could stay on as an advisor. You could also sell the entire company to all of your employees via an Employee Share Ownership Plan (ESOP) if you have such a provision in place.
