to make the process easier

Checklist When Selling A Business

Most business owners don’t know where to start when they want to sell their businesses. Selling a business can be a complex process as there are many financial and legal aspects that come into play during this process. Here is a list of items to assist all potential business owners when they consider selling their businesses.

 

1.  Compile vital financial information

Correct and relevant information is what any potential buyer will be in search of when he considers buying a business. There are numerous areas within your business where information is vital but none more important than profitable financials. The best starting point would be to compile the latest financial statements accompanied by the previous’ two years annual financial statements (AFS).

 

2. Compile an asset list

List all assets of the business with a clear description of each. Determine between tangible and intangible assets.

Ensure that all tangible assets are in working order especially electronic equipment such as computers, fridges, etc.. In terms of the Consumer Protection Act defects and problems with equipment should be pointed out to the buyer beforehand. It is important that vehicles are in a good condition and roadworthy.

An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software. Be sure to list these assets if they form part of your business as this could influence your price.

 

3. Compile a stocklist

The potential new owner will take over the stock on the hand-over date. It is vital that you are therefore able to produce an accurate estimate figure regarding stock at hand. If you don’t have a programme that indicates stock levels it would be advisable to compile a manual stock list. The new owner will purchase the stock from you at cost price after stock take before the hand-over date. The stock will be an additional amount payable to you and is not usually included in the purchase price. Provide the potential buyer with an estimate when the stock is not included in the purchase price.

 

4. Valuation

Businesses don’t sell that are not correctly priced. If you have never valued a business before, it is advisable to hire the services of a professional. It may be expensive, but it could be worth your while. If you are working through a broker, you are in luck. Ask him/her to explain to you how they determined the price.

The price of a business is usually determined by two factors being assets and stock:

  1. Assets
    • (i) Intangible assets – are assets that don’t have a physical nature such as goodwill, brand recognition, patents, customer lists, trade secrets, contracts, software etc.
    • (ii) Tangible assets – can best be described as physical items that add value to your business such as land, buildings, vehicles, machinery, furniture, equipment, cash, shares etc.
  2. Stock
    – Stock can best be described as the goods that a business holds for the sole purpose to generate profit.

Methods to determine price. There are a couple of methods to determine the price when the abovementioned figures are available. These methods are usually in conjunction with each other. These methods are the following but not limited to:

  1. ROI method. – ROI refers to return on investment. This method is based on the nett annual earnings divided by the ROI percentage, which is calculated according to the risk factor. A medium risk ROI is between 20-25%.
  2. The Asset base method – This is usually the value of the stock together with both tangible-and intangible assets.
  3. Market based – This method is not scientifically based but rather on the price that the market is willing to pay for the business. This price could be determined by industry ratios.

 

5. Lease agreements

If you are renting the business premises, ensure that the landlord will be accept a potential buyer as a new tenant to ensure that the business will commence uninterrupted.

Arrange for the settlement of Hire Purchase (HP) and lease agreements on assets that have been financed. If your agreement stipulate that the buyer will take over these leases and HP’s, you will need to assist him in obtaining a new lease or HP and settle the current outstanding balance.

 

6. Staff

As a current business owner who intends to sell his business you have numerous obligations towards your staff, even after the sale of your business in terms of the Labour Relations Act. It would therefore be advisable to consult with your business practitioner to discuss your staff situation especially if the new owner doesn’t intend to take over all the staff members.

Decide on a good time to inform the staff that you are selling because no one knows your staff like you do. It would be advisable to inform them after the transaction has been completed. Arrange a meeting with your staff in conjunction with the new owner as well.

 

7. Withdrawal of sureties

Ensure that you release yourself from all sureties regarding any lease agreements. This could include but not be limited to the rental lease agreement as well as any hire purchase agreements.

 

8. SARS Implications

Depending on the structure of your deal it is important to finalise your financial statements. It is best that your accountant attend to this for the tax implications are different depending on your decision to either de-register the CC/Pty Ltd, declare a dividend or keep on trading in the same CC/Pty Ltd.

If your deal was for the sale of your shares/membership you would also need to provide the buyer with a set of effective date financial statements.

Keep in mind that if your transaction is structured as a going concern, that it is important that the buyer is also registered as a VAT vendor from effective date. If not, SARS will levy 15% VAT on the transaction which you will have to pay. If you are not registered for VAT there will be no VAT payable on the purchase price. BizCom will assist you with completing a comprehensive sales agreement and following up the process with the buyer.

 

9. Maintain Confidentiality

The last thing you want is for the general public to know that your business is for sale. This could cause serious and irreparable damage to your business. Rumours could create the impression that you are selling for all the wrong reasons which could favour your competitors. These, among other, are the reasons why it is vitally important that the sale of your business is kept confidential until the process is finalised.

Please feel free to download this form for your ease of reference.