Sell my Business

EVERYTHING YOU NEED TO KNOW ABOUT SELLING A BUSINESS IN SOUTH AFRICA

 

Selling a business that you set up from scratch and have worked hard to grow is a difficult decision and an overwhelming process. Some business owners plan their exit strategy years in advance. In fact, many plan it at the same time they launch their business and use their exit strategy to guide their business decisions. Others are forced to sell under circumstances beyond their control.

 

A Quick Overview of Everything you need to know about Selling a Business in South Africa

✔️Prepare to exit the business
✔️7 Things to do before you put your business on the market
✔️How to find a suitable buyer for your business
Advantages and disadvantages of selling your business through a business broker
Factors to consider when valuating a business
What is due diligence and what to expect?
How to prepare a sales agreement
Duty of care when selling a business in South Africa
Conclusion

 

You can sell your business yourself or you can hand it over to a professional business broker who has experience in buying and selling businesses in South Africa. Once you know what is involved in selling a business, you can decide which option is best for you.

 

Prepare to exit the business

 

It might sound crazy but when you write a business plan for a new business, it should also include a business exit strategy. It’s wise to set out up front how you plan to exit the business when the time is right, not only because it guides decisions you’ll make along the way but also ensures you have more control of the process.

A well thought-out exit plan has a big influence on management’s business decisions; impacting on everything from technology and product development to sales and marketing.

Typically, you would prepare an exit strategy at least three to five years in advance, giving yourself time to build the business and realize its value and ultimately control how you will exit the business.

A business exit strategy covers any one of the following:

• merge with a similar company to get more market leverage
• be acquired by an industry leader
• launch an Initial Public Offering (IPO)
• put your business up for sale on the open market
• sell out to your business partner or an investor
• sell to existing employees
• leave the business to your children or a family member
• become a passive owner
• milk it for all it’s worth and then close the business
• liquidate the business
• declare bankruptcy

 

7 Things to do before you put your business on the market

 

There is a risk to initiating the sale of your business and investigating suitable buyers. Firstly, if your intentions leak out to your employees, suppliers and clients, it can damage staff morale and existing relations with loyal suppliers and clients.

Secondly, circulating confidential company information to potential buyers puts you at risk of information and intellectual capital falling into the wrong hands, namely your competitors.

Before it becomes common knowledge that your business is for sale, there is some prep work that needs to be done. Rather get all your ducks in a row as they say, than risk doing a U-turn later, changing your mind and suffering the consequences.

 

 1

Determine the value of your company

 

Do you know the true value of your business or do you only have a rough idea in your head of what you would like to sell it for?

Your first step is to determine the net worth of the business in order to set a fair price. A starting point is the company’s financial history and cash-flow projections. A potential buyer wants to see that the business is financially stable and making profits.

If it’s not in your realm of experience, it’s recommended that you enlist the services of a professional business appraiser because there are many methods used to determine the net worth of a company. Choosing the best method for your business is important because the price you can ask for your business is influenced by the valuation method used.

The three common methods used to valuate a business are:

 

Asset-based valuation

 

The asset-based valuation method calculates the end value by finding the difference between assets and liabilities. It’s a simple case of addition and subtraction.

Components such as machinery and infrastructure that add value are considered to be assets. Components such as bad debt that reduce value are considered liabilities. To find the value, an appraiser subtracts liabilities from assets.

The asset-based method finds the book value of your business which is the equity on the balance sheet. The book value is the lowest price you would ask for your business. If you are selling a healthy business, you would want to price higher than the book value. If you are selling a business that’s not performing well or you’re trying to sell it fast, you’ll ask a price closer to the book value.

 

Market-based valuation

 

The market-based valuation method looks at comparable sale prices for businesses sold in that industry and sets the price at a fair market value. The price determined by the valuator reflects the net worth of what the market would consider paying for the business.

It’s similar to selling a home at a fair market value. You would consider what other homes in a particular area sell for based on what the market are prepared to pay for the type of home in that location. So it’s a market-centric price rather than a business-centric price.

 

Income-based valuation

 

The income-based valuation method considers the financial history of the business and the average profit made year-on-year. For this reason, it’s important that you keep good financial records from the get-go and keep accurate records as the business grows.

The onus lies on the business owner to prove how much profit the business has made each year, depending on how far the valuator will go back. The company does not need to be debt-free but must be able to show that the business makes a profit despite its debt obligations.

It’s a simple process of looking at past profits and cash flow statements and finding the average. The valuator will then help you estimate what profit the business is likely to make in the future and its ability to sustain its current profit-to-loss ratio.

 

2

Boost business performance

 

Unless there’s a rush to sell the business, be strategic about putting plans in place to boost sales and bring in more money before potential buyers look at your books.

There are four ways you can increase revenue; increase the number of customers, increase the frequency of transactions per customer, increase the average size of the transaction and/or raise your prices.

 

3

Get your financial affairs in order

 

This step is pretty self-explanatory. Firstly, you need an accurate picture of the financial health of your company in order to determine the value of the company so you know what price to ask.

Secondly, potential buyers will scrutinises your financial records and poor financial record keeping will cast doubt on whatever you try to sell them in terms of the financial health of the company.

 

4

Formalize contracts with suppliers and clients

 

If you’ve worked on a ‘gentleman’s handshake’ or haven’t formalized a business relationship with important suppliers and clients, you need to correct this and get everything in writing before you announce your intentions to sell your business.

 

5

Review your business exit strategy

 

How you saw yourself three or four years ago exiting the business may no longer be relevant. Grand plans to build your business and merge with another business or better still, be bought out by a bigger business for a huge sum of money may not have panned out.

Leaving the business to your children may no longer be a good idea. Or maybe, you can’t afford to live off what you sell the business for and you need to stay on as an employee.

Review and adjust your business exit strategy. Nothing is cast in stone so be flexible.

 

6

Retain the services of a business broker

 

Selling a business through a business broker has its pros and cons. You need to look into your options, what it will cost you and whether a business broker is needed.

 

7

Identify potential buyers

 

The process of selecting the right buyers to approach when you are selling a business is referred to as pre-qualifying potential buyers. This is the role of a business broker but if you don’t plan to enlist the services of one, you’ll have to weed out serious contenders from people who are going to waste your time.

Pre-qualification is a standard practice in the sale of any business. In fact, if you’re a serious buyer, you will expect to go through a vetting process. Brokers will often ask potential buyers to sign a confidentiality or non-disclosure agreement at the start of the pre-qualifying process.

 

How to find a suitable buyer for your business

 

The most common question asked by business owners who want to sell a business in South Africa is how do you find a suitable buyer? There may be a few obvious candidates available to approach immediately but business owners should not limit their reach if they want to maximize a return on investment.

There are different types of buyers to consider. A reputable business broker should be able to help you narrow down the list of potential candidates.

 

Your competitors

 

If your business is financially stable with good long-term prospects, it makes sense that one of your competitors may be interested in buying your business to expand their own product line and gain more market share.

It’s a case of ‘not re-inventing the wheel’ for a competitor where there is synergy between the two businesses and an acquisition can boost sales and ultimately profits.

 

Vertical integration

 

Vertical integration is when a company owns or controls more components of the supply chain. This may be driven top-down where a retailer extends its business reach in wholesale, distribution and manufacturing. Or driven bottom-up where a manufacture expands its operations to have more control of the same going up to retail outlets.

Vertical integration allows companies to control processes in the value chain, improve efficiencies and harness cost savings.

Look for a potential buyer where vertical integration makes sense. This could be a competitor or an existing supplier or client.

 

Foreign companies looking to expand their global footprint

 

These negotiations are typically dealt with through a Merger & Acquisition firm or a business broker who has an international network of potential buyers wanting to enter the South African marketplace.

 

Investor

 

This may be someone who has invested in your business as a silent financial partner and is interested in taking over greater control of your business, or an outside investor looking for an investment opportunity that will give a good return on his or her investment.

Usually investors don’t want to take over the day-to-day running of an established business and may require you to stay on to continue running the business. The investor benefits by keeping you in the business because of your knowledge and expertise of the industry and where you have good relationships with your employees, suppliers, distributors and clients.

 

Sell-out to a partner(s)

 

Selling your company to an existing partner(s) is one of the more common ways to sell a business. This may be the case if you’re due for retirement, want a change or where the partnership relationship has broken down.

It has obvious advantages in that your partner(s) have an intimate knowledge of the business, there’d be little to no disruption to business operations and there should be no damage to staff morale. Handled correctly, it should be a smooth transition where both parties are satisfied with the outcome.

 

Handing over the business to a family member

 

This is common practice for family-run businesses but also fraught with dangers. With proper planning, a business owner should not incur heavy costs when transferring ownership to a family member. However, without careful tax planning, you can pay far more in taxes than necessary when transferring ownership to children.

It’s important to ask the hard question; is your child (or children) the right successor for the business? If not, it’s prudent to set up an executive management structure that oversees the overall running of the company and possibly stay on as a figurehead until such time as the family member has proven him or herself competent in running the business without you.

 

Advantages and disadvantages of selling your business through a business broker

 

If you are planning to sell a business – or buy one for that matter – the question of whether you should go through a professional business broker will have crossed your mind. Business brokers have the knowledge and expertise to procure potential buyers, handle negotiations, conduct due diligence and oversee the process through to signing the deal.

While it makes sense to use the services of a business broker for the arduous task of selling a business, many business owners opt to forgo that option to save money on commission. A business broker may help you get a better price for your business but you pay them to do all the legwork and seal the deal.

 

Advantages of using a business broker to sell your business

 

Professional valuation

 

There are different methods used to arrive at the book value or fair market price for a business. They take into account tangible and intangible aspects of the business itself and the market conditions. Business brokers are ideally equipped to evaluate your business and arrive at a sound valuation.

 

Industry expertise

 

Business brokers often specialize in certain areas and have specialist expertise in market trends and conditions in a particular industry. More importantly, business brokers know how to leverage opportunities that exist in industries and have a network of pre-qualified buyers looking for a business in that arena.

 

Advice and support

 

Selling a business is not only overwhelming for the owner of a business, it can also cause irreparable damage to staff morale and relationships with suppliers and clients. A professional business broker understands these dynamics and is there to provide advice and support; softening some of the emotional stress of selling.

 

Negotiation skills

 

Professional business brokers have years of experience in buying and selling businesses for their clients and key is sound negotiation skills. As they are not emotionally vested in the company, business brokers should be able to negotiate the best deal where both the seller and buyer are satisfied with the deal.

 

Marketing support

 

Business brokers provide sellers with access to a digital platform that targets prospective buyers in various industries. They generally specialize in certain industries and know how to package a business to make it appealing to buyers.

 

Extensive network

 

A business broker builds up an extensive network of prospective buyers over time and this will save you time and money finding suitable buyers on your own. They tend to work quickly in narrowing down potential candidates and facilitate the process by screening and short-listing qualified buyers.

 

Disadvantages of using a business broker to sell your business

 

Brokers cost money

 

Business brokers charge a commission on the sale of a business and many owners find this quite onerous. The cost of using a business broker to sell your company needs to be weighed up against the value the broker will provide in terms of a professional valuation and negotiation skills, as well as time and money saved on pre-qualifying suitable buyers.

 

Business broker industry is not regulated

 

The business brokerage industry in South Africa is unregulated which means many unsuitable and incompetent brokers operate without consequences. This means you need to thoroughly vet any business broker that markets themselves in your specific industry, even if they come highly recommended.

It’s important that you conduct your own due diligence on a business brokerage before you engage its services. Verify their area of expertise and industry specialization as well as years of experience, track record and feedback from their clients.

 

Loss of control

 

It’s hard not be wary of a broker’s intentions because at the end of the day they’re in the business to make money. This might mean they push a price for a quick sale and easy commission or they push so-called pre-qualified buyers who aren’t in fact suitable.

Handing over the sale of your business to an outsider is difficult for entrepreneurs who are used to being fully in control of their company. Trust your gut; if you feel you’re being pushed too hard or don’t have a good feeling about a potential buyer, step away from the sale to give yourself time to assess the situation.

 

Questions to ask a business broker before retaining his or her services

 

There is a lot a stake when you sell a company. Not only do you want a good return on your investment and secure your financial future, you need to consider how selling your business will affect your employees, suppliers and clients.

Do your own due diligence on prospective business brokers. Here are a few questions you can ask to gauge whether they are the right business broker to facilitate the sale of your company:

 

• how will they market your business?

 

• what is their business track record?

 

• do they specialize in a specific industry?

 

• how many and what types of clients does the broker represent?

 

• do they have pre-qualified buyers for your type of business?

 

• is commission paid upfront or on conclusion of the sale agreement?

 

Factors to consider when valuating a business

 

Valuating a business is a combination of hard facts and subjective analysis. Ultimately, the price is based on the seller’s view of the intrinsic value of his or her business and what the market is willing to pay.

Factors that influence a business valuation typically relate to the financial health of the business, its standing in the industry, ability to service debt and marketing attributes.

Questions a business broker will ask:

 

• is the business in a stable and sound financial position?

 

• what is the company’s history?

 

• how long has the business been in operation?

 

• how long has the current owner owned the business?

 

• can the company produce an up-to-date set of audited financial records?

 

• what are the company’s assets and liabilities?

 

• are the company’s products and services in demand?

 

• are the products and services marketed effectively?

 

• who is the competition and how does your business weigh up in performance?

 

What is due diligence and what to expect?

 

It’s common practice for a prospective buyer to conduct due diligence on your company to ascertain that the value of the business is there. Basically, it’s a bit of sleuth work into a business’s history, current performance, market trends and its financial records.

Due diligence is an investigation, audit or review of factors that influence the book value or fair market price of a business. Due diligence is typically conducted before a buyer enters into a proposed transaction with a seller.

It can be an uncomfortable process for sellers because effectively strangers are combing through your private business affairs to find irregularities. Don’t take it personally. Potential buyers need to check the consistency in numbers of sales targets, profit margins, overheads and working capital before they make a subjective judgement on extrinsic factors.

 

What to expect from the due diligence process

 

Typically, the due diligence involves prospective buyers:

• talking to your clients or customers
• talking to your suppliers
• talking to your employees
• investigating your audited financial records

When a buyer conducts due diligence on a business, it exposes your intentions to sell the business to your employees, suppliers and customers. You can expect this to be unsettling and cause some damage to morale and existing relationships. For this reason, it’s important to be upfront and honest with everyone concerned before prospective buyers start digging around.

 

Prepare in advance for the type of questions buyers will ask

 

To get the price you’re asking, you may be subject to a grilling from prospective buyers. Be prepared and plan ahead of time how you will answer their questions.

Pretend that you are the buyer and ask yourself the kind of questions you would want answers to in order to evaluate the intrinsic value of the business. Start with these questions:

• what does your company do well?
• what could your company do better?
• how loyal are your employees?
• what do your customers think of you?
• what do your customers think of your competitors?
• which products and services do better than others?
• how effective is your marketing strategy?
• does your company have growth potential?

 

Do a SWOT analysis

 

A SWOT analysis is a tried and tested approach used to create a framework to evaluate a business within the context of the macro-environment and micro-environment.

SWOT stands for Strengths, Weaknesses, Opportunities and Threats where:

• strengths and weaknesses relate to internal factors that impact on how a business operates and how profitable it is, and

 

• opportunities and threats relate to external factors that impact on potential growth relative to local and global trading conditions.

A SWOT analysis merely provides sellers with a comprehensive guide to evaluate how the company stands in the current market environment and areas that can be improved upon to increase its worth. It doesn’t replace the hard facts of audited financial reports and what the profit and loss statements say.

 

Four parts of a SWOT analysis

 

Strengths

Strengths are what a company excels at and what gives the business its competitive edge. They range from strong customer relations, loyal employees, advanced technology, aggressive marketing and effective management.

 

Weaknesses

Weaknesses are areas in the business that are preventing it from reaching its full potential. Time permitting, these are the areas that need to be addressed to improve the health of the business before putting the company up for sale. Issues range from high employee turnover, high debt, limited growth prospects, weak profits, lack of capital, weak brand, inconsistent marketing and poor customer loyalty.

 

Opportunities

Opportunities are external factors that currently work or will work in your favour in the future. They are there to take advantage of to give your company the competitive edge. It could be something like optimal weather conditions, diseases or a pandemic such as Covid-19, increased buying power, a tourism boom, favourable exchange rates or government policies.

 

Threats

These are external factors that pose a real threat to your business. Common threats include rising operational costs, increased competition, load shedding, corruption, drought and the country being downgraded to junk status.

 

 

How to create a digital due diligence folder

 

Prior to handing your company over for scrutiny, it’s a good idea to set up a digital due diligence folder. You can use a platform such as Dropbox or Google Drive where folders can be shared with a business broker or prospective buyer.

It’s reflects well on your professionalism and helps you control the flow of information. Preparing it ahead of time on advice from a business broker will ensure that you have time to collate and clean up your financial and organizational records.

Typical information to include in a digital due diligence folder are:

• profit and loss statements
• past audited financial records
• three-year financial plan and growth projections
• up-to-date business plan
• management reports
• organisational charts and employee records
• rental and lease agreements
• customer and supplier agreements
• marketing portfolio
• credit agreements and loan obligations
• partnership and joint venture agreements
• articles of incorporation
• shareholder agreements
• shareholder communications
• IP-related agreements
• government regulations and authorisations
• marketing and sales plan
• SWOT analysis

 

How to prepare a sales agreement

 

The first step in selling a business in South Africa is to prepare a formal and legally-binding sales agreement. It acts as the primary document in purchasing the business assets and stocks and needs to cover all the inclusions and exclusions for a sale.

It’s highly recommended that you use the services of an attorney to draw up a formal sales agreement or at the very least, reviewed by an attorney before the transaction is concluded.

Here is a checklist of items that is typically covered in a sales agreement for a business that has been sold to another party:

 

• full names of the seller, the buyer and the business
• business registration number
• purchase price
• list of assets included and excluded in the sale
• any adjustments made
• terms of the agreement
• terms of payment
• stock inventory list
• any representation and warranties of the seller and buyer
• access to business information
• running of the business prior to the sales transaction being concluded
• contingencies
• stock holder’s agreements
• access to intellectual property, including trade names, trademarks, patents and research and development
• fees, including the broker’s fees
• covenant not to compete with the new business owner
• date of handover (seller to buyer)

 

Duty of care when selling a business in South Africa

 

A duty of care is a legal duty to take reasonable care not to cause harm to another person that could be reasonably foreseen. This duty is found in tort law where someone who acts in a reckless fashion can be held liable for the damage their actions cause. It is one of the responsibilities of an owner of a business and is relevant when selling a business in South Africa.

Specifically, it is the legal responsibility or obligation of a business owner or shareholders in a company not to omit any information, procedure or activity that will likely cause harm to other individuals or groups. This includes tangible damages such as physical harm or financial ruin and intangible damages such as psychological or reputational damages.

Claims under this tort law are based on the legal premise that people are liable for the outcome of their actions if they harm or injure others.

 

Conclusion

 

You took risks starting your company, you’ve worked hard to grow the business and make a profit and you’ve built good relationships with your employees, suppliers and clients. This adds to the intrinsic value of a business and your reward is a fair market price.

The main take-out of this article is to re-enforce the notion that selling a business is something you plan well in advance. An exit strategy prepared a few years ahead of when you plan to sell the business helps to guide business decisions. More importantly, it ensures you are well prepped for scrutiny by prospective buyers.

Selling a business can be overwhelming. The challenging process of determining a fair value for your company and finding a suitable buyer is often coupled with the emotional stress of walking away from loyal employees, suppliers and clients. This is where a third party such as a professional business broker, accountant or an attorney can help because they take an impartial approach to the arduous task of selling a business.