How to plan for the sale of your SME: 5 key elements
Before announcing the sale of the business, every owner must ask himself the important question of whether he is ready to take action. Once the decision is made, he must then move ahead and start preparing for the transaction. Here are the five key elements to plan before announcing the sale of your business.
1. Analyze the context of the sale
Most SMEs are not well organized to allow potential buyers to value their business. The context of the sale should therefore be carefully analyzed at the beginning of the preparation phase. This will help enhance the company’s value, prepare sales pitches and better inform buyers. In that respect, the following points need to be assessed:
- Industry (size, growth, trends, regulations, etc.);
- Competition and competitive environment;
- Current and future needs of the clientele;
- Organization (history, property, management team and key executives);
- Operations (capital and human resource requirements, intellectual property, etc.);
- Strategic plan;
- Historical, current and future financial situation;
- Personal and family situation of the sellers.
As a result of this analysis, sellers may decide to delay the sale of the business because of future events that would increase its value. If management, for example, believes that sales of a new product will "explode" in the years to come, it may be best to wait before proceeding with a transaction.
2. Perform a diagnosis of your business
To increase the value of your business, you need to identify its strengths and weaknesses. You will consequently take advantage of these strengths while taking appropriate measures to correct the weaknesses. In the context of a planned sale, the challenge is to address weaknesses by implementing measures within a period that can sometimes be very short. Hereinafter are some examples:
- Preventive management related to the impact following the departure of shareholders/executives;
- Analysis of potential post-transaction impact for key employees;
- Implementation of a governance structure;
- Elimination of unprofitable product lines and/or customers;
- Liquidation of surplus and/or obsolete and unprofitable assets
- Elimination of unnecessary expenses related to operations;
- Reorganization and simplification of term debts;
- Production of audited financial statements;
- Tax and estate analysis in order to minimize tax impact;
- Redemption of a minority shareholder.
3. Determine the terms of the transaction to be carried out
Although some of the elements outlined below may evolve depending on the flow of discussions between sellers and buyers, it is still essential to ensure that these items have been discussed and analyzed with your advisors and that they are in agreement with the conclusions.
The type of sale
At the very beginning of your preparation phase, you must ask yourself the following question: Do you sell assets or shares? Below is a summary of the advantages and disadvantages of these two types of sales.
The selling price and payment terms
The valuation of the business is very useful in setting a reasonable range within which the selling price will be fixed. There are several approaches and methods to determine that price range. The best known is the profitability approach, which is based on the ability to generate revenues, the risks associated with these sources of revenue and the related costs. In addition, defining the payment terms at the time of the sale is also important. The following are some key questions you need to ask yourself:
- What are the desired selling price and the floor price?
- Is there an interest in providing financing (commonly referred to as the selling price scale) to the buyer and under what conditions?
- What security will be required to guarantee the financing offered to the buyer?
- What is the level of indebtedness possible in the company for the buyer in case of a leverage buyout?
- Could we accept a payment in whole or in part in the form of negotiable securities?
- Should there be a deduction from the sale price for adjustments following the production of the final financial statements?
The timetable for completing the sale
Setting out a timetable will allow you to move forward with confidence towards closing the transaction:
- Time required to negotiate the letter of intent;
- Deadline for due diligence;
- Time given for submitting a purchase agreement;
- Period of exclusivity given to the buyer;
- Date of taking possession before or after the closing date;
- Deadline for closing the transaction;
- Moment when the process stops.
Specific ancillary agreements
The list can vary greatly depending on the situation, but the most common ancillary agreements to be negotiated later are:
- The lease, if the seller's building is not part of the transaction;
- Employment and/or consulting contracts with the seller and/or key employees;
- Dispute resolution, if any.
4. Prepare the information material to provide (to the buyer)
Various preliminary information documents will be required before starting the marketing phase of selling your business. Brief descriptions of these documents are presented below.
5. Call upon the services of a transaction support team
Selling a business is a long and complex project that requires great preparation and multiple knowledge and expertise. Given the importance of the project and the need to protect its assets, the entrepreneur should not embark in this alone. Of course, being surrounded by professionals means extra expenses, but the benefits are too numerous and important not to at least think about this alternative.
The seller should therefore be well supported by a team of specialists for the following reasons:
- He is not a specialist in managing such transaction, as it could be his first and last;
- The high level of emotions to which he will be subjected could affect his judgment;
- In case of deadlock, it will be impossible for him to retreat with his troops and try to unravel the problem and find solutions;
- The size and complexity of the transaction and the work involved may require a high level of specialization that the seller does not have.
Preparing for the sale of your SME is an important step in achieving an optimal transaction. Avoid hasty decisions and take the time to consider all the essentials that will help you better position your business in the marketplace and increase its value to potential buyers.
Patrick Whalen, MBA, Vice President – Financial Advisory Services
Note: The masculine form is used throughout this article solely in order to simplify the text.
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