“Calling it a day” in your own business involves more than a grand party and the presentation of a gold watch. Here’s what’s involved when you want to retire from your own business
If you have been employed in a corporate for most of your working life, retirement is something that is fairly certain, and comes in a structured manner. The company stipulates the retirement date. Your payout from your pension fund is determined by the rules of the fund. For the fortunate few, the company may supplement your pension with a lump-sum gratuity. Normally the company arranges a farewell party, and if you have faithfully served your company for many years, you will probably receive the traditional gold watch.
Not so if you are the owner of your own business. Retirement, in this case, often involves the transfer of responsibilities (if not outright ownership) to your successors – usually family members who have “learnt the ropes” and are now ready to take the business into the next generation. However, if there is no-one who can take over the business from you, your only option if you want to retire is to sell the business.
There are certain principles involved when it comes to selling your business – particularly if you want a decent price. And selling a business is somewhat more complex than simply putting a “For Sale” sign on the front door, and waiting – probably in vain – for the buyers to arrive.
Valuing your business
The first question that you would probably ask is: “What is my business worth?” As is the case with selling a house, no-one will pay you more than it is worth. So there’s no point in trying to get R5 million for a business that is only worth R3 million.
Bear in mind that people who want to buy a business are doing so for various reasons, which can range from someone who has just been retrenched, to an existing business seeking to expand. One thing that all potential buyers have in common, however, is that they are all looking to make a decent return on their investment.
However, unlike the case with listed companies, where capital growth is usually the main driver, the buyer of a privately-owned business is looking for an income stream. The valuation of your particular business will therefore be determined by the amount of cash that it can generate.
In the case of franchises, there are often ‘rules-of-thumb’ that can be used as an initial guideline for valuing the business. For example, a well-known fast-food franchise typically sells for 60-75% of annual turnover. However, this can be influenced by other factors such as the condition of equipment and fittings, the surrounding area, or the arrival of new competition. Branding also often forms a major component of the value of a franchise.
Service businesses, such as professional practices, generally have no tangible asset value (apart from a few desks and chairs, and computer equipment). The main ‘asset’ of such a business is therefore the income stream generated from its client base. Bear in mind that a business of this nature is usually built on the relationships that have developed between the clients and the existing owners, and some clients may not wish to do business with the new owner. This will affect the valuation of such a business.
On the other hand, manufacturing and retail businesses have substantial investments in plant and machinery, fixtures and fittings, and stock. The value of such assets at the time of the sale will thus form the major part of the purchase price, with the value of the customer base or the brand (often referred to as ‘goodwill’) making up a smaller component of the overall value.
Of course, if your business is run-down, with years of losses, antiquated equipment, a declining client base, and a poor location, chances are that it will have no value at all, and it would be best to simply close down the business in this case.
‘Do-it-yourself’ or using a broker
The debate as to whether you should sell your business yourself, or make use of the services of a broker, is as fierce as the estate agent / private sale one in the property market.
However, bear in mind that when you sell your house, people can see what they are buying, and can generally make an informed decision based on its intrinsic value coupled with the average selling price within your particular area.
Not so when it comes to selling your business. There are far more intangible factors that come into play, such as the quality of the customer base, the reputation of the business, its previous profit history, and so forth. Even if one had to compare two seemingly identical businesses (for example, petrol stations), many of the abovementioned factors will make one of them a “diamond”, whilst the other may end up being a “dog”.
Business brokers, on the other hand, have vast experience in buying and selling businesses, and have often developed sophisticated valuation techniques to assist the seller in determining an appropriate selling price. The broker would also assist the seller in obtaining the necessary documentation that the buyer is likely to ask for.
Most importantly, the broker will market your business in a discreet and professional manner. Unlike the case when you sell your house, often the news that you are wanting to sell your business brings dismay to your employees, clients, and creditors, since they usually assume the worst.
Your employees may become fearful of a change in working conditions or continued employment under a new owner (labour legislation notwithstanding), and either seek greener pastures, or their work performance may diminish. Your clients may be concerned that the level of service to which they had become accustomed to will change for the worse, whilst creditors may become concerned that the ability of the business to meet its obligations may be threatened.
Whilst consultation at the appropriate time is important, using a broker will enable you to market your business without this necessarily becoming public knowledge – an important factor to consider if you bear in mind that it can take up to a year to find the right buyer who is willing to pay a price that is acceptable to you.
Unfortunately, as the saying goes, no job is finished until the paperwork is done, and selling a business involves volumes of paperwork. Typically, the type of paperwork that a buyer will require includes the following:
- At least three years (and preferably five) of financial statements. In the case of a company, these should be audited, whilst an accounting officer’s report should accompany the financial statements of a close corporation. If some months have elapsed since your most recent published financials, the buyer would probably ask for monthly management accounts covering the interim period.
- Copies of income tax returns and assessments that correspond to the financial statements under review. A prudent buyer would probably also require you to obtain a tax clearance certificate from the South African Revenue Service.
- Copies of any material agreements pertaining to the business, including property lease agreements, hire purchase agreements, and franchise agreements.
- A complete list of plant and machinery, furniture and fittings, and equipment. Where applicable, a list of stock (inventory) will also be required.
- If you are using outside advisors, such as accountants and attorneys, contact details of such persons would also be required.
Bear in mind that the above list is by no means exhaustive, and the buyer may request copies of other records. Obviously, you are under no compulsion to disclose trade secrets, client lists, and so forth – however, if a particular potential buyer is serious, it would make sense to provide any information that will assist the broker in closing the deal and obtaining your price.
A decent broker will have obtained a non-disclosure agreement from potential buyers in any event.
What you should do in the meantime
Whilst you are in the process of selling your business, your day-to-day activities should be “business as usual”. This means that you should continue to keep normal hours, and generally conduct your business as though you were never intending to sell.
Also, bear in mind that the unlikeliest things enhance value. A clean, pleasant working environment; good filing systems; well-maintained equipment; and a general air of professionalism will make your business more attractive to potential buyers.
Finally, be realistic. Finding the right buyer takes time, and once the buyer has been found, they may still have to obtain financing to purchase the business. Then there are all of the formalities that go hand in hand with transferring ownership, such as the transferring of lease agreements into the new owner’s name, re-drafting of employment contracts, registration of transfer of fixed property, and so forth.
Selling a business is not for the faint-hearted. Then again, since you have been in business for a number of years, you probably knew that already.