Selling a business – where do I start including valuation?

Selling a business can seem like a daunting prospect. Even for someone with years of business experience, the sale process may come along once in a life-time and there is no reason why they should automatically know what to do and what is involved. The process can be time consuming, energy sapping, and can place great emotional demands on both seller and buyer. But if you understand what lies ahead, and choose experienced advisors, much of the stress and strain can be taken away.

What is my business worth?

A burning question for many owners will be what is their business worth? Your accountant, if they have experience selling businesses, may be comfortable providing a valuation. If they don’t have the experience, they may refer you to a specialist who does and with whom they have a working relationship. In some market sectors (e.g pharmacy) sales agents dominate the market and are well placed to provide excellent guidance on valuations as well as being able to market your business for sale.

Every business is different, and the true ‘value’ of a business will depend on a wide range of factors. What is and isn’t valuable is not always obvious. A highly profitable business with one customer or which is reliant on its owner may have little inherent value. Whereas a business with modest profits, but with a strong management team or a product or customer base which a competitor would sell their grandmother for could be rather valuable to the right buyer. In the end, the old adage that a business is worth what someone is prepared to pay for it is the only truth we can rely on. Measuring value by reference to the profit and loss account or balance sheet is an important part of the valuation, but ultimately only part of a wider range of considerations.

One starting point of any accounts based valuation is often to establish the ‘EBITDA’ or ‘earnings before interest tax depreciation and amortisation’ – to use the jargon! The actual figure may be adjusted for other reasons, but the crux of the calculation is to work out the ‘true’ profitability of the business. Having arrived at a credible EBITDA figure, a common approach is then to multiply that by a number (the multiplier) to reach a basic valuation. The multiplier will vary across industries, but anything between 3 to 5 is not uncommon, with much larger multipliers sometimes being demanded and paid. Other valuation methods are used depending on the particular business in question.

Needless to say, being realistic about the strengths and weaknesses of your business, and its corresponding value, is important to achieving a sale in a timely fashion. It is also important to accept that business sales are rarely as simple as being paid a fixed price in full on the day of completion. Prices are very often variable and subject to adjustment by reference to financial accounts being prepared (as at the day you complete). Price can be based in part on the future performance of the business, and the payments can be spread out over a period of time.

How will I find a Buyer?

A potential buyer could be a competitor, a supplier, a customer, or even much closer to home in the form of an employee, a broader management team, or even an employee ownership trust (‘EOT’). A specialist advisor will be able to use their contacts and resources to help find potential buyers for you. In limited circumstances, business owners will be comfortable advertising their business for sale which may be through a business sale agent. Having prepared a list of potential buyers, the next step is to approach one or more of them which can be quite a delicate process and a moment of exposing your business to risk. In many cases it can be unsettling to employees and customers to know that the business might be for sale, and for that reason many sellers will want to keep the process secretive for as long as possible. To begin with, your advisor can approach potential buyers without giving too much away, but discussions are usually impossible to progress very far without disclosing details of the business for sale. Before disclosing too much information, interested parties can be asked to sign confidentiality (or non-disclosure) agreements.

Securing a sale

Once the broad principles of a deal are agreed, the next thing is usually to prepare a summary of the deal in writing, commonly referred to as the ‘heads of terms’ or ‘heads of agreement’. The document is there to ensure that both buyer and seller share a common understanding of the main terms of the deal. Failing to tackle important issues at this early stage can be a mistake which can lead to avoidable disagreements down the track, and risks undermining trust and confidence in the whole process. This can be damaging especially for deals which require buyer and seller to continue working with each other long after the ink has dried on the contracts.

On the issue of who will prepare the heads of agreement, this will depend on who you have engaged to help you up to this point. A specialist accountant who is used to putting together transactions will very often prepare at least the first draft of any heads of agreement. The same would be true of any sales agent if one is being used. In some cases, a solicitor may be asked to help, either to prepare the heads of agreement and possibly to provide some assistance with the initial negotiations, or to comment on any drafts prepared by others.

There is no set formula for what the heads of agreement should say. And whilst for the most part they are not legally binding, they do set the stage for what is to come, and getting them right is important.

It is ill advised to pay deposits unless they are refundable without condition and are held by solicitors. The trouble with paying deposits is the near impossible task of defining the circumstances under which the seller gets to keep the deposit, if the transaction aborts, or has to return it. At the early stage, there is a long way to go in terms of the legal process and a buyer and seller can decide to withdraw for any number of reasons which each might say is the others fault.

The key to ensuring a sensible agreement (and a successful transaction) is taking advice from professionals who do this work-day-in day-out. It is a specialist area of practice where there is no substitute for experience.