Brief Look at buying or selling a small business

The process of buying or selling a business can be as stressful as moving house and requires good preparation and due diligence. The first thing to establish is what is being sold.

Where a business is operated by a sole trader or partnership, the sale will be one of assets ie goodwill, future contracts/ bookings, property, fixtures, fittings, equipment, furnishings, websites and so on. In the case of a company, the sale can be of shares in that company or the assets of the company. A share sale will normally give the seller a complete break, with all assets and liabilities passing to the new shareholders and the purchase price going directly to the seller. A sale of assets will mean the seller also has to deal with winding up the company. There are different tax and stamp duty implications for both parties in each type of sale for which early consultation with an accountant is advised.

Ideally preparation for selling a business should start two to three years before going to the market by getting the business into a fit state for sale and in particular sustaining or increasing the level of trade, margins and profitability. If enthusiasm for the business is waining it is better to sell before trade is affected.

Before marketing commences, a seller will need to set a price, prepare information for potential buyers and select an agent or broker - unless the seller decides to market it themselves. An agent or broker will provide access to outlets which may not be available to individual sellers and they will act as an intermediary in dealing with inquiries and negotiations. However, beware some agents and brokers give advice which is entirely self-serving and sellers are advised to select an agent or broker with expertise and experience who can give an honest opinion on value and the prospects of a sale.

As with any other product, the value of a business depends on supply and demand and what a willing buyer is prepared to pay for the business. Buyers will consider the return on their investment looking at past and projected cash flows to arrive at a value, which often comes down to a multiple of earnings. They will also consider the value of the individual assets of the business, how much of trade is down to the personal goodwill of the seller, the opportunity cost of setting up a similar business and any comparable market transactions. Businesses with high asset value, usually in property, and low earnings are often sold on the basis of a lifestyle choice. Asking prices are a balance between maximising value and achieving that initial interest to attract potential buyers to look further. If the asking price is too high, buyers will quickly pass on to the next opportunity.

A seller should be prepared to give seriously interested parties as much information as possible, although, where that information is sensitive, on a confidential basis. This will include trading accounts, information about employees, customers, suppliers, the property, inventory, stock etc. Preparation of particulars of sale and a separate information pack for the sensitive information is the best way forward. Achieving a sale within a reasonable period of time depends on the type of business, the state of the market and pricing but plenty of marketing time should be allowed.

Buyers are able to search for business opportunities on the internet these days, although word of mouth, contacts and direct approaches remain important conduits for business transfers. Buyers should consult with their own advisers (financial adviser, accountant and solicitor) at an early stage to establish whether the purchase of a business is a viable proposition. Financing the purchase of a business has become more difficult since the crash of 2008/09 as lenders have tightened up lending criteria. 

Once a sale is agreed, heads of terms will be used to outline the agreement and the buyer and their advisers will undertake necessary due diligence on the business and any property involved.

Buying and selling a small business is often as much a heart as a head decision and one which requires a lot of careful deliberation.

For further advice and information please contact us here at Mere Commercial.

Duncan Young
Mere Commercial Ltd