The Sale of Your Business

At some point in their business careers, most business owners will transact a sale of their business. The implications of this event are significant for the individuals involved. Businesspeople are generally inexperienced and uncomfortable conducting the sale of their business and their approach to the task may differ dramatically.

Commitment is a vital factor in the sale of any business. If the business owner is only interested in 'testing the water' or in securing an exceptional price for the business, the sale process will be a frustrating exercise for all concerned and probably a waste of everyone's time. However, if the businessperson is committed to the sale of the business, important decisions such as pricing will be reasonable. External factors such as poor health, financial problems, and personal matters sometimes force a businessperson to transact a sale of his or her business.

Once a level of commitment has been established for the sale of the business, the businessperson must determine a price for the business. Pricing decisions tend to be difficult for a vendor. Business owners do not wish to leave a of money 'on the table', nor should legitimate buyers be discouraged by an excessive asking price.

Vendors should establish a price range beginning with a minimum price below which the vendor will not sell, and culminating in a maximum price that represents the highest possible price for the business in an excellent market where demand is brisk. Between these two extremes, a reasonable price range that the seller can realistically anticipate should be agreed upon. Frequently, owners of small and medium-size businesses nurture an inflated value for their businesses. Earnings performance and market values of assets are critical factors in the determination of a selling price of any business.

Most purchasers expect vendors to "take some paper back" as part of the consideration as compared to 100% up-front cash. Business people should expect to receive part of the sale proceeds paid over a reasonable time period.

Should the business own redundant or non-operating assets, it may be advisable to segregate these non-operating assets to exclude them from negotiations for an operating business. For example, real estate assets could be transferred into a separate company and leased to the purchaser of the operating business. The operating business will retain the right to use these assets; however, ownership remains with the vendor.

The method by which a business is sold is an important consideration. Should businesspersons concentrate their efforts on those prospects with the highest probability of success or should as many potential buyers as possible be approached? The choice is a critical one. Disclosure of one's intention to sell can have damaging effects on the existing business in terms of employee morale, customer loyalty, and supplier relationships. A targeted sales approach reduces the risks, but it may also eliminate eligible buyers willing to pay a higher price for your business. It is a difficult decision, which only the owner of the business and his advisors should explore.

Many businesspersons who have an intimate knowledge of their industry can identify potential buyers for their business. Such potential buyers may include the competition, suppliers, or employees. Potential buyers should be ranked on a separate list considering various factors such as financial resources, knowledge of the business, and ability to operate the business. Most businesspeople prefer to avoid approaching prospective purchasers and tend to favor initial contact through a third party such as a trusted advisor.

Prospective purchasers will request information regarding the business that is for sale. Two packages of information should be assembled for prospective purchasers. The initial package should contain non-confidential information such as products, facilities, summary financial information, and a history of the business. A second information package should be made available only to those purchasers who have expressed a serious interest in transacting a purchase of the business within a price range that is acceptable to the vendor. This second package would contain confidential information regarding customers, markets, operations, and financial results. Disclosure of confidential information is a serious matter and any prospective purchaser should be requested to sign a confidentiality agreement to emphasize the confidential nature of the information and to impress upon the prospective purchaser his or her obligation to maintain the confidentiality of this information.

Businesspersons seeking to sell their business are well advised to consult with their chartered accountant and their lawyer. Their advice on tax and legal matters is crucial; however, the business owner, not his or her advisors, is ultimately responsible for the sale of the business. You instruct your advisors and you consider their counsel, but the ultimate decision regarding the divestiture of your business rests with you and with you alone.