When we start a small business we all dream of how much money we will make and at some point we hope to sell it and enjoy the high life. The process of selling can be overwhelming and time-consuming; this guide will explain the basics and help you decide how to move forward.
Selling your business is the process of putting your business up for sale by an owner or owners. Just as you needed a plan to get into business, you’ll need a plan to get out of it.
WHY are you selling your business?
Selling your business is a very emotional decision. It is very important that you have thought this through. Remember that the first question a prospective buyer is going to ask is why are you selling?
If you are selling because of financial stress an alternative may be to speak with your accountant or business advisor first.
When selling you must also decide exactly what are you selling?
- Do you want to sell everything?
- Do you want to walk away?
- Are you prepared to stay on for a period to help with the handover?
- Are there any assets you do not want to sell? for example, a car
- Does the sale include your registered business name?
- Will you agree not to compete?
- Do you have some business’ intellectual property (IP) that you want to sell?
- If you own property associated with the business will you keep that?
WHAT is the value of your business?
Just like selling a house you probably don’t really know its true value. To sell you will need to put a value to it which cannot include your emotional attachment, otherwise, you could easily price yourself out of the market. To value and sell a business you can attempt to do it yourself or you can get professional advice from the likes of your accountant, business advisor, or a business broker.
Beyond understanding the financials you will need to consider goodwill including intellectual property of the business, any plant and equipment including digital assets of the business, and any stock or inventory that the business owns.
There is no single business valuation method, instead a number that can be used singularly or combined. Some of the more popular include:
- Book value – Subtract liabilities from the assets. For example, if you have $100,000 in assets and $30,000 in liabilities, the value of your business is $70,000.
- Return on Investment (ROI) – uses the formula ROI = (net annual profit/selling price) x 100. If the selling price was $100,000 and your annual net profit was $10,000 your ROI would be 10%. Thus a buyer could expect to get 10% back on their money based on an investment of $100,000.
- Market value – This is how much someone is prepared to pay for your business. It is market and industry-specific so it is worth researching your industry.
- Goodwill – A business may only be worth the reputation of one employee and if that is you, and you leave, goodwill is what the business is now worth. Customer loyalty and brand reputation are usually factors that affect this.
- Cost of creating from scratch – current cost if you had to start the business today.
- Future profits – If you can predict what future profits may look like this can significantly increase the price of business if on an upward trajectory.
Note if you have not paid attention and not kept accurate records of your business this will impact the perceived value of your business.
HOW do I sell my small business?
There are several ways to sell businesses but the most common is through a broker. A broker will help with the whole process including valuations, marketing, negotiations, and final sales. Some internet solutions charge a set fee others charge a 7-10% commission on the sale price. Marketing costs are normally in addition. A directory of business brokers can be found here https://www.aibb.org.au/membership/member-directory/.
To sell your business you will need to provide the following information:
- Financials: Tax returns (3 years), bank statements (3 years), balance sheets (3 years), accounts receivable/payable lists, salary information, financial forecasts, stock inventory and cost price, valuation of equipment and fixtures.
- Legal: Business registration (ABN), contracts/agreements, insurance policies, building leases, licenses, patents/trademarks, employee agreements, and records of employment, franchise agreements current loans/agreements. If it is a freehold sale, the land title, and any agreements.
- Operational: Marketing plans, vendor and customer database, equipment servicing receipts, website details and statistics, business procedures, training manuals, and employee manuals.
Without a broker you would need to do the following:
- Value your business
- Prepare a marketing document on your business including history, what you sell, competition, growth prospects, why you are selling, and contact details.
- Advertise the business is for sale. Word of mouth and your existing networks may also help.
- Deal with interested parties
- Be prepared to make relevant financial, legal, and operational information available as per above so the prospective buyer can do their due diligence.
- Prepare a contract of sale. It is highly recommended you use the services of an accountant and lawyer at this point to help prepare the documents and transfers.
- Determine how and when settlement will occur.
Keep your employees up to date when appropriate.
Selling your business may result in additional obligations that need to be paid, such as employee entitlements or tax amounts from asset sales.
Normally the sale of a business is GST free.
Remember to account for asset depreciation when valuing an asset.
The Australian Tax Office offers the following Capital Gains Tax (CGT) concessions to small business owners.
- 15-year exemption – may exempt a capital gain from a business asset you have owned for at least 15 years
- 50% active asset reduction –allows you to reduce the capital gain arising from the sale of a business asset
- retirement exemption – allows you to receive relief from CGT if you sell active assets used in your business. Active assets include those used in the course of operating a business and intangible assets like goodwill.
- rollover – allows you to defer a capital gain from the disposal of a business asset for two years.
SUMMARY – Consider using a business broker
Make sure you are selling for the right reasons. Work out if you want to sell everything or just parts. Decide if you will get help from a business broker to sell your business or do it yourself. Be prepared to provide all your confidential information and try hard to keep emotion out of the process.