Buying and Selling A Business: Here Are the Top 4 Things You Should Consider
Buying or selling a business is a significant decision in both a buyer’s and seller’s journey. It would help if you considered several things before taking such a huge step. Although each business’s buying and selling is different, this blog discusses the top 4 things to consider while buying and selling a business.
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Understanding the Reason for Buying or Selling A Business
Buying and Selling A Business is a complex process, and before making such a decision, you need to understand the motive behind selling or buying. The common reasons that motivate business owners to sell their businesses are retirement or to hand over succession to their successors, business partners, or management. For business buyers, buying a business is a way to become an entrepreneur and capitalize on the opportunity.
Whatever your reasons are, you need to be clear about selling or buying your business. It would be best if you asked these questions before buying or selling:
- Why are you selling/buying the business?
- Are you selling the entire business, which includes its assets as well?
- What is the business’s current financial health?
- Is the business tax-compliant?
- What is the business future?
- What are the business’s permits and licences?
All these questions ponder the intent of the business seller, which can help buyers understand whether buying the business is favourable or not. From the seller’s point of view, these questions can help them understand the motive of selling.
Completing the Basic Preparation
When buying or selling a business, careful preparation and due diligence are essential to ensure a smooth transaction.
For Buyers:
- Due Diligence: A prospective buyer should begin by conducting a thorough due diligence investigation. This involves requesting and reviewing essential documents such as the seller’s financial accounts, copies of material contracts with customers and suppliers, and intellectual property registrations.
- Identifying Issues: Due diligence helps buyers identify any legal or financial issues that could impact the value of the business and the transaction. It ensures that there are no hidden liabilities or risks.
For Sellers:
- Clear Objectives: Sellers need to be clear about their reasons for selling the business. Understanding these reasons can help in setting realistic expectations and goals.
- Business Health Check: Before initiating the sale process, sellers should conduct a comprehensive health check of their business. This involves addressing any legal gaps, such as undocumented material or inadequate property asset protections, to make the business more appealing to potential buyers.
- Preparation: Early and thorough preparation can save sellers a lot of hassle and ensure a smoother sale process.
Non-Disclosure Agreements (NDAs)
During due diligence, NDAs are crucial to protect the seller’s confidential information. They prevent potential buyers from using this information for their own benefit.
By following these steps, both buyers and sellers can navigate the complexities of a business transaction more effectively and avoid potential pitfalls.
Employee Arrangement
To ensure a smooth transition during the sale process, the seller must address employment arrangements both before and during the sale. The buyer, during due diligence, will verify that all employees are compensated correctly. Therefore, as a seller, you must:
- Provide an up-to-date employee record to the new owner.
- Notify the buyer of any contractual leave or financial and legal obligations with the employees.
- Communicate transparently with employees about the transition, acknowledging that a change in ownership can be stressful.
- Give proper notice to employees or provide payment instead of notice, as required.
These steps help facilitate a seamless transition and maintain trust with employees during the sale process.
Consult Expert Advice
When navigating the complex process of selling a business, it’s crucial to enlist the help of experts to avoid last-minute complications. Engaging professionals early in the sale or buying process ensures a smoother experience. Here are some key experts to consider:
Business Brokers:
A professional business brokerage can provide valuable insights into accurate business valuation and help identify your target market. They can pre-screen potential buyers, allowing you to focus on maintaining your operations. By hiring a business broker in advance, you’ll receive guidance at each step, from increasing your business’s value to closing the sale effectively.
Accounting Firms:
Consulting with an accounting firm ensures your bookkeeping is organised and professional. Potential buyers appreciate clear and accurate records, which can strengthen their decision to purchase. Accountants can help present your financials in the best light, making your business more attractive to buyers.
Lawyers:
Hiring lawyers is essential during negotiations to protect your intellectual property through nondisclosure agreements. Your legal team can prepare the contract for selling the business, clarify your legal obligations, and outline the timeline for fulfilling them, ensuring a legally sound and smooth transaction.
Financial Advisors:
Meeting with a financial advisor is beneficial both before and after the sale. Before selling, a financial advisor can provide an accurate business valuation, consider tax implications, and offer negotiation support. Post-sale, they can assist with capital management, estate planning, retirement planning, and charitable giving, helping you manage the funds from the sale effectively.
By engaging these experts, you can navigate the business sale process with confidence and maximize the value and success of the transaction.
Contact Ontario Commercial Group for Buying or Selling Your Business
Ontario Commercial Group is a leading brokerage firm that has experience in buying and selling businesses for more than 20 years. The team at Ontario Commercial Group has been providing entrepreneurs and business owners with impartial advice to help them expand their businesses and smoothly buy or sell them.
Ontario Commercial Group specializes in facilitating the transactions of privately held companies valued between $250,000 and $10 million. Business owners trust us when considering selling or buying a business and have questions about the process. Sellers may be uncertain about the right time to sell, identifying the ideal buyer, or maintaining confidentiality. Buyers may fear purchasing the wrong business. This is where the expertise of Ontario Commercial Group comes in. Our experienced team eases the concerns of both buyers and sellers, ensuring a smooth and successful transaction.
Conclusion
Buying and selling a business can be a challenging and uncertain journey. However, by considering the four key factors discussed in this blog, you can streamline the process and be better prepared. It’s highly recommended to hire professionals like the Ontario Commercial Group. Their team of experts will support you from start to finish, significantly easing your burden and ensuring a smoother experience.
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Are You Asking a Reasonable Price for Your Privately Held Company?
Placing a price on a privately-held company is usually more complex than placing a value, or a price, on a publicly-held company. There are many reasons for this fact, but one of the top reasons is that privately-held companies don’t have audited financial statements.
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Why are Audited Financial Statements Lacking in Privately-Held Companies?
Preparing an audited financial statement is expensive, and many companies that have not gone public simply forego the expense. On the other hand, publicly held companies reveal much more information about their finances and a range of other kinds of information.
Compared to a privately held company, a publicly held company can often seem like an “open book.” Buyers are left with the proposition of having to dig out a lot more information from a privately held company to assess whether or not a valuation or price is accurate.
What Can You Do to Overcome this Factor?
You, as the seller, can help streamline this process. By having as much information available as possible and having your accountant make sure that your numbers are presented in a manner that is easy to understand and follow, you will increase your chances of selling your business.
Experts agree that there are several steps a seller of a privately held company can make when he or she is establishing a price or a value. First, use an outside appraiser or expert to determine a value. Next, establish what your “go-to-market” price is. Third, know your “wish price.” A seller’s “wish price” is the price that he or she would ideally like to see. Finally, sellers must establish the lowest price that they are willing to take. You should know in advance how much you are willing to sell for as this can help a negotiation move along.
The Marketplace Will Ultimately Decide
It is common that the final sale price for the company be somewhere between the asking price and the bottom-dollar price established in advance by the seller. Yet, it is important to note, that on occasion a selling price may, in fact, be lower than any of the four we’ve outlined above. At the end of the day, the undeniable fact, is that the marketplace will establish the final sales price.
Here are a few of the areas that you can expect a buyer to review when establishing the price that he or she is willing to pay: stability of the market and stability of earnings, the potential of the market, product diversity, the size of the customer base, the number and seriousness of competitive threats, how broad the customer base is, the relationship with suppliers, the distribution network in place, needs for capital expenditures and other factors. The more favorable each of these points are, the more likely it is you’ll receive a higher price.
Copyright: Business Brokerage Press, Inc.
Read MoreFive Kinds of Buyers
Buyers are generally categorized as belonging to one of the following groups although, in reality, most buyers fit into more than one.
The Individual Buyer
This is typically an individual with substantial financial resources, and with the type of background or experience necessary for leading a particular operation.
The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both money and time.
The Strategic Buyer
This buyer is almost always a company with a specific goal in mind — entry into new markets, increasing market share, gaining new technology, or eliminating some element of competition.
The Synergistic Buyer
The synergistic category of buyer, like the strategic type, is usually a company. Synergy means that the joining of the two companies will produce more, or be worth more, than just the sum of their parts.
The Industry Buyer
Sometimes known as “the buyer of last resort,” this type is often a competitor or a highly similar operation. This buyer already knows the industry well, and therefore does not want to pay for the expertise and knowledge of the seller.
The Financial Buyer
Most in evidence of all the buyer types, financial buyers are influenced by a demonstrated return on investment, coupled with their ability to get financing on as large a portion of the purchase price as possible.
Almost all the purchasers of the smaller businesses fall into the individual buyer category. But most buyers, as mentioned above actually fit into more than just one category.
© Copyright 2013 Business Brokerage Press, Inc.
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