Selling your business can be a fantastic opportunity to start a new adventure or reap the rewards of your hard work. However, before you take the plunge, there are a few things to understand.
In this blog, we’ll explore seven things you should consider before even thinking about selling your business. This is by no means an exhaustive list (in fact, we cover more points here). So, you should visit your friendly subject matter expert, such as an M&A lawyer, to make sure you’re covered.
1. You’ve thought about price, but not how it’s paid.
As a business owner, you probably have an idea of what your business is worth. You might have heard about some valuation formula for your industry.
But you may not realise that the price can vary significantly depending on the payment method.
For example, an upfront all-cash sale will fetch a different price than an instalment sale over several years or a payment based on the future revenues or profits. Sadly, most owners underestimate:
- the effective discount they give buyers when the terms don’t involve 100% cash upfront; and
- how to structure the payment mechanism, like we’ve discussed here, to maximum value.
2. You haven’t considered the buyer’s actions after the sale.
While optimism is crucial for business success, it can blind you to potential pitfalls in a sale scenario.
Despite your positive outlook, it’s essential to consider what could go wrong – the buyer defaulting on payments, mismanaging the business, and creating liabilities that you become responsible for.
Don’t let your optimism prevent you from recognising and addressing these risks.
3. Your sale structure is boring.
No two business transactions are alike, and there’s often room for creativity in generating value for both parties.
A classic win-win proposition is to remain an employee and guide the buyer in running the business, but there are many other possibilities.
For example, have you thought about retaining a small ownership stake if you anticipate success under new leadership? Or, by structuring the purchase price with performance-based payments, you can build confidence for the buyer and increase your deal’s overall value.
4. You’ve thought too simply about tax.
Some business owners make the mistake of only considering the time they’ve owned the business when calculating their capital gains taxes. However, numerous tax strategies can be utilised to minimise your tax liability and maximise your bottom line.
For example, have you thought about apportioning the purchase price between different income and capital assets? If you’re starting or purchasing a another business with the sale proceeds, have you spoken with your tax adviser about being able to defer your capital gain on the sale? What about paying the sale funds into super?
A well-designed tax strategy can be even more impactful than the actual sale price of the business. Pay attention to the importance of effective tax planning when selling your business.
5. You’ve fallen in love with your buyer.
It’s common to overlook red flags about a potential buyer for various reasons or to believe they aren’t important. However, red flags should always be addressed – they always matter.
No legal remedy can fully protect you from doing business with unethical individuals or companies, regardless of the down payment’s size or the contract’s strength.
Conduct thorough due diligence on your potential buyer, including their financial health and business history. It’s crucial to steer clear of individuals or companies involved in multiple legal disputes. You don’t want to become next on the list.
Even large companies differ in their reputation for fulfilling their business commitments, so it’s important not to assume that any company is “safe” or “fine”, regardless of size.
6. Skimping on advice.
Skimping on professional services may seem like a saving, but during the sale of a business, it’s counterproductive.
Seeking advice from a reputable commercial lawyer and accountant is invaluable for every business sale. While some transactions may be too small to justify the expense, it’s rare, and it’s best to assume that yours isn’t one of them.
A skilled support team doesn’t add to your costs – they save you money in the long run. In some cases, they can even prevent you from making costly mistakes.
7. You’ve missed the blindspots.
You only know what you know. It’s easy to overlook potential risks that may arise during the transaction.
We’ve had clients:
- agree to terms (without consulting us), resulting in our well-constructed earn-out mechanism being jeopardised;
- accept too many sale pre-conditions before consulting advisers, only to have their sale price renegotiated when pre-conditions fell through; and
- draft their own employment or transition agreements in connection with their sale, and then being booted out of their position.
By working with professionals, you can ensure you’re making informed decisions that will benefit your business in the long run.
Takeaways
Selling your business can be daunting, so it’s essential to be thorough and not take anything for granted. Whether it’s questioning your biases or scrutinising every detail, you want to ensure you’re not leaving any stone unturned. Question everything.
To ensure a smooth transaction, getting help from a professional who knows the ins and outs of selling a business, is a great idea. They can help you navigate the process’s complexities and ensure you get the most out of the sale.