Selling a business is not something to be taken lightly. It requires planning, research, and intentional timing. If you’re considering selling your business, there are several steps you need to take.
Beyond the initial assessment of selling motives, a thorough financial review is crucial. This involves scrutinising revenue streams, profit margins, and operational costs to present an accurate financial picture to potential buyers.
Legal considerations, such as due diligence requirements and transfer of ownership regulations in South Africa, must also be carefully navigated. In this article, we’ll cover all the essentials you need to know about when you’re selling your business.
Assess Your Reasons for Selling
Whether you want to sell your business within a year or it’s more of a long-term plan, you need to assess why you want to sell your business.
Maybe you’re preparing for retirement. Maybe you’re looking to pivot into another sector. Maybe it’s burnout. Or you’ve realised your business has outgrown your resources.
Whatever the reason, be honest with yourself. Potential buyers will ask, and their perception of your answer could influence the price they’re willing to pay.
Get a Business Valuation Done
Before you list your business, you need to know how much it’s worth. This is not guesswork. A professional business valuation takes into account:
- Net profit
- Business assets
- Intellectual property
- Client base
- Market position
- Growth potential
- Operational systems
In South Africa, you can approach firms that specialise in valuations or work with a mergers and acquisitions (M&A) advisor. Don’t rely on a simple multiple of revenue – each business is unique.
Getting a clear idea of your business’s worth is important because overpricing your business can scare buyers away. Undervaluing it can cost you millions.
Prepare Your Financials and Paperwork
No serious buyer will commit without seeing clear, verified numbers. That includes:
- Your annual financial statements
- Management accounts
- Tax clearance certificate
- Employee contracts
- Lease agreements
- Supplier and client contracts
Make sure everything is clean and up to date. A due diligence process will uncover any red flags. You can use cloud-based accounting tools like Xero or QuickBooks to streamline access to financial records. If your bookkeeping is outdated or manual, consider hiring a professional to clean it up.
Formalise Your Exit Plan
An exit plan is the roadmap of how you’ll transition out of the business. It’s not just about the sale, it’s about what happens after.
Will you stay on for six months to train the new owner? Will you continue as a consultant? What happens to your staff?
Having a well-thought-out exit plan increases buyer confidence and smooths the handover process.
Decide on a Sales Structure
There are two main ways to sell a business in South Africa:
- Asset Sale: You sell the tangible and intangible assets of the business (equipment, brand, customer list), but not the legal entity.
- Share Sale: You sell the shares of the company, meaning the buyer takes over the legal entity, along with liabilities.
Each has tax and legal implications. A share sale might attract capital gains tax (CGT), while an asset sale could lead to VAT being charged. Work with your accountant and lawyer to determine which route suits your situation.
Identify and qualify buyers. There is a range of different buyers you might want to consider. You might sell to:
- A competitor
- A supplier or customer
- An employee
- A private equity firm or investor
- An international buyer
Use non-disclosure agreements (NDAs) before disclosing sensitive info. Additionally, don’t assume every interested party is serious. Make sure you vet them accordingly. Ask for proof of funds and find out their intent.
Negotiate the Deal
If you’re selling a family business, bring in an independent advisor early on to mediate. Personal relationships often complicate negotiations. The initial offer received for your business is just the starting point of the negotiation process.
Be prepared for multiple rounds of discussions focusing on key aspects such as the final sale price, the structure of payment including potential earn-out clauses or full upfront payment, the duration of the handover period to the new owner, plans for staff retention, and the amount of working capital that will remain within the business.
Throughout these negotiations, it is crucial to remain composed and consistently refer back to the rationale behind your business valuation. Avoid allowing emotional factors to influence your decisions.
Legal and Regulatory Compliance
Once the terms are agreed upon in the sale of a business, you will need to address legal and regulatory compliance. This involves several key aspects to ensure a smooth and legally sound transfer of ownership. You’ll need:
A sale-of-business agreement drafted by a legal professional. Ensure the legal professionals you work with are legitimate and experienced in handling legal contracts for small businesses.
Resolutions from shareholders.
- Updated CIPC records.
- SARS clearance.
- Notification to landlords, other key stakeholders, and investors.
Make sure your lawyer is experienced in Mergers and Acquisitions (M&A) law or commercial law. Once everything is signed, ensure you clearly communicate the business sale with:
- Staff: Be transparent, especially if contracts or roles may change.
- Customers: Reassure them about continuity.
- Suppliers: Let them know who will be taking over.
- Investors: Inform them about their returns and next steps. They were likely informed about the sale while you were still considering it, but be sure to communicate their returns and next steps clearly. Inform them about their returns and next steps.
