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How to value your business and sell it:

The ultimate guide

So, you’ve decided to sell up.
Maybe you’ve taken your business as far as it can go or maybe you’ve decided you need to switch things up a bit.

But you can’t just stick your business on eBay and hope for the best. There’s a lot you need to do before you sell your business. This guide will take you through how to value your business and how to sell it.

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Chapter 1

How knowing why you’re selling can put you on the path to success

Knowing why you’re selling your business is as important as knowing how to sell it.
If you’re clear on the why, then you’ll be clear on the how.

Reasons to sell

It might be the case that you want out – the business has got too big for you to run or you’re simply tired of running it.

You just want to liquidate your shares and take the money. Perhaps you need it as seed capital for a new venture, or perhaps you want to retire.

Or you might want to sell for strategic reasons: perhaps getting snapped up by a bigger fish can help your business move up the food chain.

Investopedia’s resource on selling businesses goes into detail about strategic acquisitions.

Screenshot on why business owners sell

 

Being acquired by a larger player might give your business a much-needed injection of cash to finance an expansion.

Or perhaps getting access to a larger company’s resources can help your business grow and diversify its customer base, or leverage bigger and better production processes.

Whatever your reasons for selling, make sure that you’re clear on why you’re doing it.

That way, you can set goals and criteria for the sale. Making sure that you have all this down, and know what would count as success for you, means that you can chart a way forward.

Your goals and criteria will be particular to your own business – just as there is no blueprint of a successful business, there’s no blueprint for a successful sale.

If you’re just looking to liquidate your holdings then a successful sale might be one that makes you the most money.

But if you’re hoping for a strategic acquisition your wishlist might look a bit different: you might be looking for a company with a well-established production line, or one with a worldwide customer base.

 

Getting specific

Whatever your goals are be sure that you’re clear on them. Write your goals up in a document that you can refer to throughout the process.

When you’re setting goals, it’s important to be as specific as possible. Some examples might include:

  • You don’t just want to be acquired by a company that can sell its own product everywhere – you want to be snapped up by a company that is willing to commit to expanding your business throughout the MENA region.
  • You don’t just want to sell your business to someone with a better product – you want to sell it to a company that’s willing to devote a significant amount of time and money to research and development specifically for your product.
  1. You don’t just want to sell your part of the business – you’re looking to liquidate your share in a structured buyout that sees your holdings gradually diminish over time, meaning you have a smaller and smaller role in the business as time goes on.

Once you’ve set goals for your sale you can create a roadmap for the process.

 

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Chapter 2

How to tell when to sell?

Knowing when to sell is as important as knowing why to sell.

Getting the timing of your sale right can make selling your business faster and easier, and get you to your goals – whatever they may be.

And the timing of your sale might well be tied in with your reasons for selling.

Screenshot on why it's time to sell your business

 

If you’re selling up for personal reasons, then the timing of your sale might not be entirely down to you – you might be selling due to ill health or a family emergency. Otherwise, you’re in the driving seat.

You might choose to sell up for business reasons. For instance your business might have expanded to the point where you no longer have the skills to run it. The skillset that a startup’s founder needs is very different to that needed of a the CEO of a large company and you might find that it’s time to bow out.

In this case it’s time to find a buyer with the skills your business needs.

Or you might find that the market has moved on, making your business less and less viable.

Think traditional minicab firms in the age of Uber. This can be a blow – not just in financial terms, but personally – but it gives you a brief window of opportunity to act.

If there isn’t a way forward for your business then it’s probably time to find a buyer who will take the business’s assets off your hands.

Alternatively someone might have made you an offer you just can’t refuse. You’ll never be offered this chance again, so it’s a no-brainer.

On the other hand, there are definitely bad times to sell a business.

If your business is going through a dry patch, with falling profits or soaring costs, you should try to hang on.

Buyers will always pick up on the scent of a business that’s in trouble and will use that as leverage to get a lower price.

Ideally you want to sell your business when things are on the up, or at least steady. The better your business is doing the more attractive a prospect it will be for buyers.

You also need to think about the market. If you’re selling in an economic downturn, then it’s likely that buyers will have less cash to splash.

If you feel indispensable then you should cling on – the business isn’t ready to sell yet you should work at making sure it can run without you.

Both you and your business’s buyers have the same thing driving you: the drive to get the best price. For you that’s a high selling price, and for them that’s a low buying price.

You need to time your sale right so that you can achieve your goals.

 

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Chapter 3

How to value your business: Five ways to succeed

There are a variety of ways to value a business. The way you go about doing it will depend on a few factors including what type of business you run, how long it’s been going, and what kind of money you’re making.

Asset valuation

Asset valuation is one of the simplest ways of valuing a business. It’s based on the value of all of a business’s holdings, whether they’re tangible – like property or equipment – or intangible – like patents or trademarks.

 

Asset valuation definition screenshot

 

Add all this up and, once you’ve taken appreciation and depreciation into account, you’ll have your business’s net book value, which is what asset valuation is based on.

There are two different approaches to an asset-based valuation:

 

Business valuation methods screenshots

 

Going Concern Valuation

This kind of valuation assumes that your business is going to keep on going under its new owners.

When calculating the value of a going concern’s assets, you need to take into account the business’s intangible assets, because those assets are going to transfer to the new owner.

You also need to take into account the goodwill that your company has.

This is your business’s reputation. It’s viewed as an asset with a quantifiable value, and it can be bought and sold like any other asset.

For instance, if you’re selling off a newspaper then your buyers won’t just pay for your printing presses.

They’ll also be buying the value of your subscribers and your brand because your buyers will continue printing and selling.

 

Liquidation Valuation

This is the kind of valuation you’ll go for if your business is going under – it just takes into account the value of the tangible assets your business owns, minus any liabilities your business has.

This type of valuation doesn’t take into account intangible assets or liabilities, because the business is probably going to get shut down. They just don’t matter.

When calculating this type of valuation you just add up the cash you’d make if you sold off all your assets, then subtract from that the cost of your liabilities.

So, if you sold a business with £250,000 worth of property and equipment but with £50,000 of outstanding debt you’d come out with £200,000 from the sale.

Settling for an asset valuation can be a good strategy for businesses with lots of money tied up in property and equipment, but it doesn’t take into account how much money it is making or the business’s potential to grow over time.

 

Price/Earnings Ratio

A price/earnings ratio valuation is based on how much money a business is making right now. It’s best for businesses with a solid track record, as it ties your business’s value to how much money you make on a regular basis.

There are two steps to calculating this:

  1. First, calculate your normalised earnings. These represent your business’s day-to-day transactions and don’t take into account large one-off costs or profits. When calculating these you also need to account for seasonal variations and smooth them out.
  2. Next, multiply your business’s normalised earnings by a given multiple to get its value.

There’s no set rules for determining these multiples. The multiple you use will vary depending on your business but will normally be between 3x and 5x, although in some cases higher multiples aren’t unheard of.

 

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Multiples can depend on a whole range of different factors: the sector your business is in, how stable the business’s foundations are, the number of contracts or customers the business has, and much else besides.

That said, as someone with a business to sell, you’re going to want to wrangle as high a multiple as possible.

 

Entry Cost Valuation

Unlike asset valuation and price/earnings ratio valuation, entry cost valuation is based on your competitors and other players in the market.

Entry cost valuation is based on the cost that it would cost a similar business to start from scratch – that’s everything from buying equipment and property to paying staff and gas bills to marketing. Everything until you open the door, in fact.

 

Discounted Cashflow

The discounted cashflow method of valuing a business is best for businesses that are very well-established, with a reliable cashflow year-in, year-out.

There’s a complex formula governing discounted cashflow – if you want to take a look then Investopedia has a good guide.

But the upshot is that the method estimates what your business’s forecasted profits are worth today.

It works by taking profit forecasts and applying a negative interest rate to them, to work out what that forecast profit is worth today.

Essentially, if you’ve got £1.00, and there’s a 5% annual interest rate, then your pound will be worth £1.05 in a year and £1.28 in five years, thanks to the power of compound interest.

But if you forecast that you’ve got £1.00 in a year’s time, then you’ve got a theoretical £0.95 now. And if you’ve forecast that you’ve got £1.00 in five years time, then you’ve got a theoretical £0.77 now.

In that second example the 5% negative interest rate is known as the discount rate. This might vary based on how much the business is expected to grow over the years.

For instance, if you’ve got a discount rate of 20%, a projected £1.00 in a year’s time will be worth a theoretical £0.80 now or £0.33 now if you’re projected to get it in five years time.

The discounted cashflow method is a popular way of valuing businesses among accountants and bankers – Warren Buffet uses it, among others.

 

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But it’s a pretty inflexible way of doing things. Because you’re dealing with compound interest, if your sums are out by even a small amount you can find that you’re drastically under- or over-valuing your business.

It also doesn’t take into account variations in your business. It’s pretty unlikely that you’ll keep growing at the same rate year after year.

 

Comparables

Much like the entry cost valuation method, this one pegs your business’s worth to that of similar businesses in your niche.

But rather than working based on startup costs, this method works based on what similar businesses have sold for.

This method is useful because it is quick and easy- providing that you get the right data.

But it’s not so useful if you’ve got a niche business where there’s not much to compare it to.

Ultimately, though, your business is only ever going to be worth what a buyer pays for it. Different valuation methods will suit different businesses.

An asset-rich but cash-poor business – like a restaurant that owns its own property and equipment but is losing money fast – will benefit from an asset-based valuation, while a tech startup without many tangible assets but which turns a tidy profit will benefit from a price/earnings ratio valuation.

 

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Chapter 4

Save time and money by ditching the brokers and go it alone

Selling your business is one of the biggest decisions you’ll ever make.

Selling your business is one of the biggest decisions you’ll ever make.

And it can be tempting to leave it up to a professional – after all, they know what they’re doing and will get you the best deal. Right?

If you’re set on using a broker to sell your business then you need to be sure that they’ll get you a better deal than you could on your own.

 

Why shouldn’t I use a broker?

Reputable brokers are likely to charge a large upfront fee or take a hefty percentage of the profits they get for your business – or even both.

Because of this brokers are impractical for many small businesses. If you run a small business with a modest turnover then a 10% commission on top of engagement fees, retainers, and other costs can eat away at your profits.

There are brokers who work commission-only but they tend to be pretty shady characters – it’s best to avoid them.

What brokers bring to the table is knowledge and an extensive network of contacts.

But the dominance of traditional brokers is being increasingly challenged by online platforms.

These typically charge a much lower fee for you to list your business and you l with potential buyers, kind of like an eBay for businesses.

 

Where can I list my business?

Popular online brokerages include Businessesforsale.com, which does what it says on the tin. It claims to be the largest online brokerage for businesses and has roughly 75,000 businesses up for sale on the website from across the world. The sheer size and reach of the site makes it worth using.

 

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Another well-established option is Daltons, which has a similar fee structure to Businesses For Sale. Daltons tends to specialise in bricks-and-mortar businesses – it’s popular among shops and restaurants.

 

Dantons business screenshot

 

Both of these websites are simple enough – you pay a monthly fee to use the platform. All you need to do is create a listing that advertises your business and upload any relevant photos and documents.

These two websites are just listing platforms, though, and don’t provide many tools for managing the sale of your business. They leave you to find ways of communicating with buyers and arranging the sale yourself. Bizdaq is a more fully-featured platform than the other two.

 

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It has a tool for valuing your business that uses an algorithm that analyses your business’s headline figures and the market – how much other businesses in your sector and your location have sold for.

This can be useful, but it shouldn’t replace a proper valuation because you don’t know really how Bizdaq have worked out their estimate.

You can also use Bizdaq to communicate with potential buyers, as well as to manage offers.

 

How do I write a brilliant listing?

No matter which platform you use, there are a few things you need to do to grab potential buyers and convince them that your business is worth it for them.

When writing a listing, you need to include a catchy headline that hooks readers. What really makes your business unique? Make sure that your headline answers this question. A bland, generic headline will do nothing to grab readers.

 

Businesses for sale listings

 

The first thing you should list in the body of your listing should be headline figures – your approximate turnover and profits, how long you’ve been in business, as well as any key draws like a great location or large customer base.

Your listing needs to be detailed and specific.

If you’re selling a business with a bricks-and-mortar location, then you ought to tell buyers where it is. And if you don’t tell readers how much money your business makes it looks like you’ve got something to hide.

And a picture says a thousand words.

Much like when you sell a house – or anything, really – sharing attractive photos of what you’re selling can really help.

 

Business for sale recording

 

Whether you’re sharing photos of your location or your products, make sure that the photos you take look smart and professional.

Your listing is your pitch to potential buyers so it’s important to make sure that it’s as watertight as possible and communicates what makes your business an attractive prospect.

 

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Chapter 5

Power through the paperwork and make everything go smooth as silk

There are certain legal responsibilities you need to bear in mind when selling your business.

There are some things you’re required to do under employment law, and you need to tell HMRC and Companies House that your business has changed hands.

What do I need to tell my employees?

Every business, no matter how large or small, has to comply with employment law. And there are certain requirements you need to fulfil when you sell your business.

When you sell your company your employees are protected under Transfer of Undertaking (Protection of Employment) or TUPE laws.

 

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You must inform your employees when, and why, you’re selling your business as well as about any redundancy or relocation packages.

They need to be told how the transfer will affect them, when it will take place, and whether there will be any reorganisation.

If your employees’ jobs are transferring when you sell your business then the new employer needs to offer a contract with the same (or better) terms as the one you offered them.

If not, they need to be offered a redundancy package that’s proportionate to their salary and the amount of time they’ve been working with you.

 

What do I need to tell HMRC?

What you tell HMRC when you sell your business depends on how your business is registered.

I’m a sole trader

You need to tell HMRC that you’ve sold your business using this form, which notifies them that you’re stopping self-employment.

 

Home Office recording

 

Because there’s no legal separation between you and your business as a sole trader, you can’t exactly sell your business – you’ve got to stop self-employment instead.

You also need to fill out a self-assessment tax return for the year that you sell your business, even if you sell it early in the year and don’t make enough money to pay income tax.

If you’re registered for VAT then you can transfer your VAT number to your business’s buyer.

I work in a partnership

Your responsibilities change depending on whether you’re transferring your shares to another partner, or all partners are selling up.

If you’re stopping self-employment when you sell up, then you need to fill out this form. If you’re selling the whole partnership, then the “nominated partner” who liaises with HMRC needs to fill out a partnership tax return when you sell.

I run a limited company

Your responsibilities are a bit different here.

You need to contact Companies House whenever you sell shares in your business or appoint new shareholders, or if you resign your directorship.

 

Companies house screenshot

 

When you sell a limited company you need to appoint the new shareholders and directors before you resign your own directorship.

 

Capital Gains Tax

When you sell your business, no matter if you’re a sole trader or director of a limited company, you need to pay capital gains tax.

This is normally 20% of any profits you’ve made in the sale but you may qualify for Entrepreneurs’ Relief.

Entrepreneurs’ Relief halves this so that you only have to pay 10%.

If you’re a sole trader or one part of a partnership, or you owned more than 5% of the shares in the limited company you’re selling, then you qualify.

 

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Chapter 6

How to find the right buyers for your business

You don’t want to accept the first offer you’re given. You don’t want to sell to the first buyer you come across – you want to sell to the right buyer.

What constitutes the right buyer will vary depending on the goals you have for selling your business. The right buyer for you is the one that helps you meet those goals.

Anyone can be a potential buyer, from family or friends or current employees all the way to huge corporations. But most buyers are either looking to buy for financial or strategic reasons.

Strategic buyers want to buy your company because it fits in with their long-term goals – maybe because you have roots in a market they want to tap in to, or because you make a certain product.

Financial buyers want to buy your company because they’re interested in its profitability and its stability – they want to use it as a revenue stream.

When you sell your business you want to make sure that your interests are aligned with those of your buyers.

Doing this increases your chances of finding a buyer who can provide you with maximum value.

It’s important to do your due diligence with potential buyers. No matter what your goals are knowing who you’re dealing with is vital to make sure that you’re a good fit for each other.

There are a few questions you need to ask any potential buyer no matter what your goals for the sale are:

  • Who’s buying your business? What are their backgrounds and why do they do what they do? If they’re buying your business for strategic reasons then what skillset can they bring to the table?
  • How are they funding their purchase? Are they able to buy your business outright or will they have to take on debt to buy it? It’s important to be clear on this because borrowing may lead to instability in the future.
  • How are their other ventures doing? Chances are your buyer has other businesses, and their track record can be a good indication of how they’ll run yours. Take a look at the filings they’ve registered with Companies House, as well as their physical locations, if they have them.

It can also be useful to check out intangibles, and get to know how buyer’s employees. Their experiences working with your buyer can speak to how they’re going to run your business.

 

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Chapter 7

How to negotiate the sale of your business

You don’t want to accept the first offer you’re given. You don’t want to sell to the first buyer you come across – you want to sell to the right buyer.

Making a deal with your buyer is as much about relationships as it is cold, hard stats.

You need to get to know your buyers.

The better you know them and what drives them, the easier it is for you to make a really good deal.

 

What’s driving this sale?

As we said in the first chapter, you need to be clear on your goals. What’s driving this sale for you?

And why does your buyer want to, well, buy?

If you’re crystal-clear on your goals and those of your buyers then you are in a much stronger position when it comes to negotiating.

 

How do I justify my valuation?

How you worked out your company’s value is as important as how much it’s worth. And how you justify this to buyers is crucial.

If you’re basing your business’s value on the assets it has, then do your buyers view your assets as equally valuable?

For instance, if you’re selling a coffee shop you might sell it along with all the equipment – the espresso machine and coffee grinders and so on – and include the cost of all this kit in the business’s value.

But what if your buyers don’t want to use your espresso machine or your coffee grinders and they’re not willing to pay for them?

In this case you need to make the case for your equipment in order to get what you want for your business.

If you’ve valued your business using a P/E ratio, how do you justify the multiple you’ve used to arrive at that value?

It could be that your multiple is an industry standard that everyone charges, in which case there isn’t much room for you or your buyers to negotiate.

If you’ve valued your business using the discounted cashflow method you’ll likely have to make the case that your business will grow by the amount you’ve forecast.

 

Anything else?

It’s likely that you’re negotiating over more than just the value of your business. There’s going to be other things.

For example, you might have to sign a non-compete agreement with your new buyers. Many buyers will ask for you not to compete against their new business for a certain length of time.

If this is the case then you’ll need to agree on the terms – how long it’ll last and if you’ll be compensated for giving up potential trade.

Your buyer may want to sign up to other restrictive covenants – these are agreements that restrict what you can do.

A non-compete agreement is one kind of restrictive covenant.

Others include non-disclosure agreements (NDAs), which govern what you can and can’t talk about and non-solicitation agreements, which concern marketing and advertising, and hiring activities. A non-solicitation agreement might stop you from hiring any of your old employees for a few years, for example.

 

Be transparent – up to a point

When you’re negotiating the sale of your business, the most important thing is honesty.

Being upfront with your buyers is key – after all, buyers want to know what they’re getting. And outright mis-selling your business won’t do you any favours.

But equally, there is such a thing as being too open. Giving too much information when you start negotiating can deprive you of vital leverage.

There’s a fine line between being too cagey with your buyers and giving too much away. Working out how to tread it is key to negotiating the sale of your business.