Selling a business
Selling a business will require planning to make sure you receive the best possible price.
You will need to understand your obligations before selling your business.
Generally, selling a business involves the following steps:
- Determining whether selling is the right option
- Preparing your business for sale
- Setting the right sale price
- Making the sale
Before deciding to sell check whether you:
- really want to sell or if you just need a break from your business
- have considered options such as bringing in outside management
- have the support of family and friends
- have considered if the market conditions are right for selling
- will make enough money from the sale to support yourself until a new income source is secured
- will be restricted from trading in a similar business once you have sold
- fully understand the implications of selling, by consulting your financial adviser, accountant or lawyer.
Ideally, you will begin preparing for sale well before you put your business on the market.
This could include:
- Making sure you document processes and policies, making it easier for the new buyer to operate the business.
- Ensuring employees have documented job descriptions.
- Obtaining written agreements from suppliers and review contracts to make sure they don’t expire during the sale.
- Selling obsolete or slow moving stock.
- Reviewing plant and equipment and selling anything not required.
- Making sure premises are well presented.
- Reviewing your lease agreement to ensure it doesn’t expire during the sale and includes provision to transfer the lease to a new owner.
- Collecting outstanding debts and paying your creditors.
- Obtaining audited financial statements for at least the previous three financial years.
- Reducing employee leave liabilities by encouraging them to take leave, if possible.
Potential buyers will want to undertake their own due diligence into your business. However, it is a good idea to prepare a buyer’s information pack outlining key information about the business and what is included in the sale.
As a general guide the pack should include:
- confidentiality agreement
- description of your business
- customer or client profile
- industry information including how your business performs against industry benchmarks
- detailed list of business assets and their value – these may include documented procedures and systems, plant and equipment, stock, intellectual property, client list, lease information, employees’ skills and qualifications, key business relationships and contracts.
- testimonials from suppliers and customers
- audited financial statements for at least the previous three financial years
- offer and acceptance form
- contract of sale.
Determining the value of your business can be very difficult. You may want to obtain advice from your financial adviser, accountant or a registered business broker with experience in selling similar businesses.
TIP: Only a business broker licensed under the Real Estate and Business Agents Act 1978 is permitted to act as an agent for a business owner in the sale of their business in Western Australia. Generally businesses are valued using one of the following methods.
Return on investment (ROI)
This is the most common method for valuing a business. The following formula is used to calculate the selling price:
Sale price = (net annual profit before tax x 100) ÷ ROI percentage
TIP: To find the ROI percentage for your industry, talk to your accountant or business broker.
This method adds all the assets of the business together to determine its value. Assets may include stock, plant and equipment, property, vehicles, furniture, intellectual property, established client list and goodwill. The following formula is used to determine the asset value:
Sale price = assets of the business + goodwill
TIP: Valuing goodwill can be difficult, seek advice from your financial adviser or accountant.
This is most commonly used to value professional practices such as legal, veterinarian or insurance brokers. It is rarely used to value retail businesses.
The following formula is used to determine the market value:
Sale price = turnover x industry multiple
TIP: Make sure you have a good understanding of the current market and are aware of industry standards. Research the market for businesses similar to yours, compare prices and set a price that is competitive.
Selling your own business requires specific skills and resources; a licensed business broker or commercial real estate agent can assist you.
If you decide to sell your own business, here are a few matters to consider:
Use your immediate networks of competitors, clients, employees, friends and family to promote the sale of your business; you never know who could be interested.
Your accountant may have clients looking to buy an established business.
Advertise the sale of your business using:
- websites dedicated to the sale of businesses
- local, state or national newspapers
- industry publications, trade journals, or specialist publications.
TIP: Use general terms to advertise your business and don’t disclose the business name.
Ensure potential buyers sign a confidentiality agreement
When selling a business it is common to receive applications from non genuine buyers. They could be competitors, suppliers, employees or clients trying to find out who is selling. Before giving your business information pack to potential buyers make sure they sign a confidentiality agreement first.
Negotiate the sale
Once a potential buyer has conducted due diligence, they may want to discuss terms before making a formal written offer. Prepare yourself for negotiation by considering:
- What conditions do you want from the sale?
- What are you prepared to compromise on?
- At what point would you stop negotiating and walk away from the sale?
Finalise the sale
It is a good idea to involve a professional business broker, settlement agent or lawyer in the sale of your business. This will prevent problems and make sure the sale is valid.
A contract for sale of a business as a going concern should include all the details, and terms and conditions, negotiated and agreed with the buyer.