For most entrepreneurs, starting a business means building something that will sustain them, and perhaps even pass on to the next generation. In rare cases, entrepreneurs start businesses with a vision for the end, and that is to sell it.
In some cases, selling the business is called exiting. An exit happens when an owner decides to end their involvement with a business. The exit comes with a sale of the owner’s stake in the business, but this is not a necessary condition.
For entrepreneurs looking to sell their business, you need to know how to prepare your business so that the sale is successful.
In this article, we look at how you can build your business with the intention of selling it.
Selling vs Exiting a Business
Before you can prepare for the sale of your business, let’s look at the differences between selling and exiting a business. Some of the differences between these two are:
Ownership Transfer
Sell: When you sell your business you transfer all ownership to a new owner. In exchange, the new owner pays you a fee called a purchase price.
Exit: When you exit your business, you can transfer your ownership to a partner, family member or employee. You will not receive any payment for exiting. Exiting is typically used by business owners with a succession plan.
Finances
Sell: When you sell, you will negotiate a purchase price and receive a lump sum payment for the business.
Exit: Exiting involves having a structured ownership transfer over a period of time. You collect payments in instalments or through other arrangements.
Timing
Sell: Selling can be a faster process than exiting. The sale is typically done in a short time frame.
Exit: Exiting requires more time for succession planning, leadership transfer and any other preparations required.
Business Involvement
Sell: After selling your business you will not have any involvement in the operations and decision-making of the business.
Exit: Typically in an exit, the previous owner is still involved in the business either as a consultant, advisor or passive owner.
Exit Strategy
Sell: Selling aims to maximise financial return on investment.
Exit: There are many elements when you exit a business. These include family succession, employee welfare and legacy preservation.
Negotiations
Sell: Negotiations involve talking to potential buyers to agree on the details of the sale.
Exit: The details of the ownership of the business transfer will be discussed with family members, partners or staff members.
Confidentiality
Sell: During the sale process, you are required to maintain strict confidentiality to protect the value of the business.
Exit: Open discussions with family members, partners or coworkers are part of the exit strategy.
Tax Implications
Sell: There will be tax implications that need to be managed when selling the business.
Exit: Tax implications are dependent on how ownership is transferred.
Legal and Financial Due Diligence
Sell: Selling requires thorough legal and financial due diligence by potential buyers.
Exit: Typically due diligence is done internally by partners, staff or family members to make the transition seamless.
Now that you know the differences between a sale and an exit, you will know which one you want to pursue. Sticking to selling, let’s look at how to prepare your business for a sale.
Preparing Your Business for Selling
Some things to consider when preparing to sell your business are:
1. Concentrate on Building the Business
Before you can think about selling your business, you need to focus on building it for success. Building your business for success means ensuring your business is compliant and that the financial records are on track.
This will increase the chances of finding a buyer for the business and getting the maximum profits from the sale.
2. Always Think about Scalability
You need to always keep in mind about how you would grow the business even if you are going to sell it. Potential buyers are mostly interested in businesses they can see are easily scalable. This means ensuring that the business is well-run, has up-to-date accounts, is integrated with technology and has an adaptable product or service.
3. Keep Everything Simple
Simplicity is key. If you have shareholders with different ideas on what the business should be doing, it could deter potential buyers. Keep all the financial arrangements simple and ensure that company and personal finances stay separate.
4. Profits and Revenues
Build a comprehensive revenue stream. Potential buyers are often attracted to recurring revenue because it offers them consistency and makes it easier to budget. You need to be able to show them growth, profitability and reliable returns. This will increase the interest in your business from potential buyers.
5. Build a Solid Brand
These days a business needs to do more than just make money. You need to have a good brand for your business which includes a good image and strong brand value. A solid brand will only increase your chances of selling especially in today’s business climate.
Lastly, remember you need to make sure that your business is not relying on just you for success. If that’s the case, most buyers will not be interested, and you might have to change from selling to exiting.
To talk to someone about selling your business, visit SME Advice to speak to one of our experts.
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