"I have a medium sized company which I have owned for about 20 years. We specialize in the manufacture and distribution of chemical products and have built a good business over the years. However, none of my children is involved or interested in the business so I am considering selling it. The problem is that I have no idea how to begin the process."

Since most people only sell a company once in their lives, the dialog above is not unusual and represents a of our initial contact with most business owners.



While I will attempt to answer the question as fully as I can, bear in mind the following points when considering the answer.


• If you decide to commence a sales process, you must engage financial advisors experienced in the process to assist you from the beginning of the process

• There are whole books written on selling a business so this article only highlights the main points

• I have not discussed tax issues.



Valuation


The starting point is a valuation of the business. The value of the business is usually determined on either an assets or earnings valuation.

The assets valuation is the balance sheet of your company plus any revaluation reserves (in most cases the company’s property has to be revalued)

The earnings basis is a multiple of maintainable earnings less a discount for a private company. I would need to see your company accounts to give any proper guidance but I would guess six to eight times earnings and a discount of 30 per cent to 40 per cent would apply. Maintainable earnings can be calculated from your audited and management accounts. If you had cash in excess of working capital requirements, this should be added to the earnings valuation.

Sales process

The sales process is initiated by doing two things:

Preparing a list of potential purchasers based on your and your financial advisors’ knowledge of the industry

Preparing a short note that sets out summary details of the company and its business without actually disclosing the identity of the company. This is often described as a “teaser” document.

The teaser document is then sent out to the list of prospective purchasers. Purchasers are required to respond with a signed confidentially agreement

The next stage is to send a full information memorandum (IM) to the purchasers who expressed an interest and signed confidentially agreements. This IM will include full details of the company and, even with confidentiality agreements, you have to be prepared for the possibility of the sale of the company becoming more widely known than you would have hoped as purchasers will engage their own legal and business advisors.

At this stage purchasers will be expected to make indicative offers subject to legal contract and due diligence. On the assumption that at least one of the offers is in the region of the original estimated market value, you would agree to enter into exclusive negotiation with that purchaser. Generally, you would put an end date on the exclusivity to ensure that you still had the opportunity to talk to another bidder if the preferred bidder did not proceed.

At this stage the lawyers and financial advisors for both parties would enter into negotiation of the legal contracts and due diligence. This can be a lengthy process and is designed to do two things from the perspective of the purchaser:

The purchaser will be attempting to ensure that everything is as represented and if it isn’t then the purchaser will seek a price reduction

The purchaser will want recourse to you through warranties and indemnities in the event that a matter comes up down the line that was not disclosed to him/her.

Your lawyers will be attempting to limit this recourse to matters that are fair and reasonable and not already disclosed. Significant costs and time will be spent on concluding this matter.

When all is agreed, you will sign a share purchase agreement transferring the shares to the purchaser which document will contain the negotiated warranties and indemnities. The share purchase agreement might provide for a few other key matters.

Earn out clauses – the purchaser might tie the final consideration into future earnings targets. The risk for you is that your additional consideration is tied into financial performance post your exit from the business when you no longer have control

Employment clauses – the purchaser may form the view that you involvement is critical to maintain earnings and negotiate a wind down period where for example you remain as a full time employee for a year and a part time employee for a further year. This happens where the business relationships held by you have to be carefully transferred to the person coming in to run the business

Non compete clauses – The purchaser will not want you setting up in competition so non-compete clauses are standard inclusions. However, such a clause cannot stop you earning a living indefinitely so a typical length of a clause is two to three years.

As I said the above is a brief summary of the sales process. You must get professional advice on this.