The novel coronavirus (COVID-19) has taken everyone by surprise and for business owners, it struck like an uppercut aiming directly at their future sustainability. Some companies have found a way to balance out the effect of this outbreak and the global lockdowns that were initiated but others are battling really hard to see it through.
Given the current situation, it is even impractical for some to continue operating. Thus, business owners need to cut their losses and perhaps sell their business. If you are thinking about exiting your business but don't know how to execute the sale during this crisis, here is a detailed guide on how to do so.
Are you ready to make the sale?
The most crucial phase of selling a business is the preparation stage and there is a lot of things involved in this process. Determining whether you are ready to make the sale or not should be at the top of the list because of its importance.
When undertaking this process of determining whether you are ready to make the sale, try to eliminate all emotions and think clinically.
Is the business ready to be sold? Is there a slight possibility that it can pull through the crisis? What is the endgame of selling the business? These questions will help you determine whether the business sale should proceed to the following step.
The questions will also help business owners realize why they are selling the business before pondering on how it will be done. You will also have the opportunity to prepare for the following steps mentally, especially when proceeding with the sale.
Undoubtedly, you have become attached to your business like it was a baby, and letting go can be devastating. Understanding why it should be done will offer great consolation and clear objectives to go forward. It will also prepare you for the possible outcomes of selling the business during COVID-19 crisis.
Is there a need for a broker?
Once you have decided on selling your business, it is important to determine the need of using a broker, or lack thereof. Is it wise to use a broker or should you sell the business all by yourself? Here are the pros and cons of each route you may decide to take.
The most significant benefit of selling the business all by yourself is that you will avoid paying exorbitant brokerage fees. Business owners that decide on this route have their work cut out for them, which is the downside of selling the business without a broker. They should gather all their business documentation and invest a lot of effort and time during the entire sales process.
Whereas using a broker can eliminate all the stress and give you a better opportunity to get the best price. It is up to you as a business owner to decide on doing it yourself or requesting the services of a brokerage firm.
The decision might depend heavily on whether you trust your capabilities of negotiating and gathering all necessary details. You should also have the capabilities of vetting each potential buyer and determining whether it will be worthwhile for the business.
Going by what the experts suggest, you should always hire a professional firm to manage your business exit process. It’s not a usual sale of some small commodity so consulting with the best and avoiding the hassle of assembling a team of professionals is the wisest decision
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What other professionals are needed
If you dodged the broker bullet and decided to manage the sale yourself, you are not out of the woods yet. There are other professionals that you should hire to ensure that the sale process goes as smoothly as possible. The essential professionals each business sale needs include a good lawyer and your accountant.
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Without these professionals, the sales process could result in an unfair deal or even a total rip off. Ensure that you onboard a reputable lawyer to the business sale team who is familiar with transactions like this one. The lawyer's work includes drafting up all the legal paperwork, starting from the non-disclosure agreement for potential buyers to the final agreement.
The same applies to the accountant; he will help you gather and draft all the financial documentation needed for the sale. If you do decide on using a brokerage firm, it also makes the list of required professionals.
Choose the best broker that has dealt with business sales similar to yours to get the best value for the commission you will pay. Even if you are going to use a broker, a good lawyer and accountant are necessary for a fair business sale.
Formulating an exit strategy
Once you have done the prerequisites mentioned above, the next step should be formulating an exit strategy. The strategy should include how operations will continue right up until the business handover. For example, some businesses choose to undertake their daily operations remotely.
When managing a workforce like that, you should have a method of time tracking for a remote team. That is the most practical solution for most businesses ever since global lockdowns for COVID-19 were initiated.
Also, plan on making improvements to the business and that may include physical changes to the workspace. Adding fixtures to the office space, putting on a fresh coat of paint can appease buyers and improve the overall sale of the business.
Ensure that all business-related documents like financial records and legal documentation are in order. You should also include some forecasting documents like realistic projected cash flow and other forecasts related to the industry.
Having these documents all in order will fill the buyer with confidence and can help you claim value during the negotiation process. Ensure that when the buyer conducts due diligence, it indicates that this sale was well thought of and prepared for.
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Valuing the business
There are two ways to go about valuing your business and that is outsourcing a professional or doing it yourself. In either circumstance, the business should be valued on one of the following merits. A business can be valued by identifying marketplace trends and trying to identify the common value of businesses similar to the one being sold.
Related: Business Valuation Guide
Valuing a business on those merits and principles is called "marketplace value" and is sometimes used by the real estate industry when selling houses. You can also value the business using the return on investment of the company's operations. A lot of businesses are also sold by calculating its assets and goodwill, and this is the most common method of valuing business sales.
Another method of valuing a business is estimating future profits and determining a price based on this metric. And yet another common strategy you can use to value the business is calculating the total expenses that went into building it from the ground up. Regardless of what methodology you end up using, there should be documentation that will justify your price.
Buyers might also want to value the business themselves and having the documentation you used on hand can help expedite the process. Also, once you have reached a certain price, consider it from a buyer's perspective.
Ask yourself if you were going to buy your business at the price set, if not, it may be overpriced. If you were going to agree instantly, that means it is underpriced. The right price should be one that is acceptable with some consideration.
Related: How to Set a Realistic Asking Price
Prepare the paperwork
There is a lot of paperwork that should be prepared and signed to complete a business sale. Getting an attorney can simplify the process for you dramatically because they will handle all the legal paperwork for you. An accountant will gather all historical financial records and prepare forecasts to be available for the buyers’ perusal at any given time.
The most important document that also consumes a lot of time that needs to be prepared is the asset purchase agreement. It is the formal contract between the two parties and it is required to sell the business.
The asset purchase agreement caters both to the business’ intellectual property and physical assets. Attorneys familiar with business sales know how to draft this document in less time it would take you.
Also, attorneys will make it as comprehensive as possible, clearly stipulating the obligations of each party. Delegating these documents and others to professionals will help you keep the business afloat until it is time to hand it over.
Negotiating a price for the business
Once a buyer has become interested and conducted their due diligence, they will submit a letter of intent. Bear in mind that a letter of intent does not seal the deal between you and the buyer because it is non-binding.
The document will include the offer made by the business and it is up to you on whether it is agreeable or not. You can back out of an offer that is not worthwhile for the business and yourself as the owner.
Although that is true, you should not rush to decide to reject an offer because there may be room for negotiations. There is no specific rulebook of negotiating a sale because it happens on a case-by-case basis.
If you are not confident about undertaking this process, ask for advice from business consultants that know how to deal with situations like these. The important thing to remember about negotiations is that it is about claiming value, justifying why your price is fairer than the other party's offering amount.
Once everything has been said and done during the negotiation and signing phase, you should roll out the post-sale strategy. That includes changing the ownership of the company to be in the name of the new owner.
Also, you might have stated in the asset purchase agreement that you will be available for some hand-holding while the new owner tries to find his feet. Honor that promise and show him the ropes and the best strategies to implement for the greater good of the business.
Train him to the best of your ability and ensure that he fully comprehends what has to be done. Don’t cut corners and take the easy way out; remember that the business is still your pride and joy even though you don’t own it.
Once the buyer finds his feet, it is time to kiss and say goodbye to the business because all ties will be severed once the post-sale obligation is complete.
The bottom line
Selling a business can potentially become messy if it is done right, especially when pressured by disasters like COVID-19. Therefore, it is important to do it the right way and on-boarding all required professionals.
Remember, if you have the expertise and knowledge to sell the business on your own, it still makes business sense to hire a firm specializing in business sales. After all, you gave it everything and you deserve the best while exiting it.
Leon Collier is a UK-based writer who is skilled in resume writing, blogging and academic writing. Some of his resume examples and work for C-suite personnel have won praises from industry experts. His academic work for some of the best paper writing services makes him one of the best writers around. You can reach him via Twitter @LeonCollier12.