Guide to Selling a Business in Europe
Step 1: Orientation
Start the business sales process by answering a few questions:
- Why do you want to sell your business?
- When do you want to sell your business?
- Do you want to sell your business in one go or in phases?
- What is the minimum price you want to receive for your business?
- Who could be the best (type of) buyer and where could someone like that be found?
- Within what period do you want to sell your business?
- Do you want to remain involved with your company? If yes, in what capacity?
It is extremely helpful to have these things clear to yourself at the very start of the process.
How we can help
Answering these questions are mainly a personal matter. Of course we can guide you when it comes to making these decisions. For example, sometimes it is best to wait a little bit longer before you actually put your business out for sale. Or we can give you an idea what your chances of selling are. Contact us below
Step 2: Preparation & Optimization
In this phase you will make the business ready to be sold. You make sure that the administration is well-organized. Additionally, you can most likely take a few actions to increase the value of your business.
Look at your business through the eyes of a potential buyer. Why is your business an interesting buy? What are the opportunities/risks? One of the most important things is that the company is not dependent on you as a person, but can function well without you.
Make sure that:
- The company is as independent from you as possible.
- Administration and financial reporting are in order.
- All contracts, agreements and agreements are properly recorded.
- The turnover is easily predictable (subscriptions, contracts, etc.).
- The company does not depend on a very small number of customers and/or suppliers.
In the run-up to the sale you can increase the value of the last financial year of your business by implementing the following measures:
Pump up your profit (or minimalize your loss) by spending a little less. Critically assess all fixed and variable costs and analyze what is really necessary for the buyer and what does not really add to your business.
Research your customer base: how can you get more turnover from existing customers? Could you increase your prices without losing customers? Can you sell additional products or services to current customers (cross-selling)?
Optimize working capital
You can perform several actions to optimize the amount of working capital.
- You can optimize the amount of stock/inventory. For example if you are selling a clothing store, by looking critically at the amount of jeans you have in stock at any given moment compared to the amount you actually sell per week (taking the delivery time and availability of the goods at your suppliers in account).
- Monitor your debtors better. Make sure you get paid in time, so you have more money at hand.
- Negotiate better terms and margins with your suppliers.
Step 3: Valuation
Arguably the most important question in the entire process: What is the value of my company? What your company is worth is sometimes relatively simple, often very complicated. In the end, it is worth what a buyer is willing to pay. You can have wonderful spreadsheets and presentations, but if there is not a single buyer in the market to buy it, you are left empty-handed.
What the company is worth is to very little extent based on the past. Almost everything comes to down to what the buyer thinks the company could be making in the future. The buyer will balance this with the investment he or she has to make and the risks in taking over the business.
Generally, a buyer looks at these three aspects of a business:
- Gross profit - Usually the average gross profit over the last three years
- The composition of the revenue - What kind of transactions? One-off transactions, returning customers or even a subscription based transaction model?
- How dependent is the business on its current owner/founder - Is the business for a large part based on the owner's network and/or knowledge or can it be handed over easily?
Business value formula
The standard formula applied in most small and medium sized enterprises is 4 to 6 times the gross profit.
Again, this is a formula and other factors could play a role in you receiving more or less or not selling at all, but this is common practice.
The method above is a very rough estimate, but is often not far off. In additional a few risk factors should be mentioned that can influence the value of your business:
- The business is dependent on a small number of large customers. If one customer walks away, the business loses a disproportional large amount of its revenue.
- The business is dependent on a small number of large suppliers. For example, your business sells a specific product that is only made by one of two factories in China. When they go bankrupt or there are import issues, you cannot easily switch to another manufacturer in Europe.
- You business' reputation and position in the market. How do customers look at your brand? How is your reputation with your dealers, suppliers, business relations etc.
- Threshold to enter the market for competitors.
- Spread of activities. Do you focus on one thing or do you have several activities that could back up each other?
Value and price
Based on these factors a rough value of the company can be given. However, the value of the company is not per definition the amount, the price, you will get for the business. Buyer and seller will negotiate and the buyer will have to "give in" a little or the seller will have to add a little extra. In this stage there are many factors at play that determine the price: other competing buyers, the buyer's financial position and how much the buyer wants to buy and you want to sell. If you play your cards well, this will end up in a deal that works well for both buyer and seller.
Find a Business Valuation Professional
If you are struggling with the right valuation of your business, you can contact a professional specialized in the valuation of businesses. This is also called an appraiser. This is some one who has thorough and expertise necessary to estimate the value of an asset, or the likelihood of an event occurring, and the cost of such an occurrence.
Step 4: Choose transaction type
There are roughly two ways of selling your business:
- Share transaction. The buyer buys all or a part of your shares
- Assets/liabilities-transaction. The buyer buys the assets/liabilities, all or a substantial part of them
Step 5: Prepare Documents and Sales Brochure
Gather all your financial statements, tax returns and any other objective data you have on the company dating back at least 3 years (if possible). Let an accountant check it thoroughly.
It is recommended to have this all these documents easily accessible throughout the process, because you want to be able to check this on a regular basis. Furthermore, it makes you look professional and trustworthy towards a potential buyer if you can come up with requested data in no-time.
We recommend you to set up a sales brochure that you can easily reuse for different types of buyers (both for a competitor and a buyer who does not know the market). Include the following elements:
- History and background of the company.
- Activities of the company and an overview of the market.
- Customer profiles and sales segmentation.
- Financial key figures and summary of annual accounts.
- Forecasts for the future of the company.
- Legal structure and ownership relationships.
- Organizational structure and workforce.
- Other matters, such as housing, assets and intellectual property.
- Reason for selling the business.
- Overview of what is being sold, when is it being sold, the preferred type of transaction.
- Your role and any involvement in the company after the sale.
Include a sales price or not?
A much discussed item is whether to include an asking price to the sales document or not. The advantage is that it creates clarity towards potential buyers and that you will not waste any time on buyers that are not seriously willing to pay a certain amount. On the other hand, by setting a price you will most likely not get receive a larger sum than that price. However, if there are multiple buyers in the market to buy your company, you can always say that one bid was over the initial asking price.
In general, if you do not have a clear idea of what the company is worth, it is probably best to leave it open to buyers to put a value on it.
Recommended Document: Non-Disclosure Agreement (NDA)
By handing over your sales brochure and financial data, you are handing over a lot of information that could be very valuable to competitors. Make sure to draft a non-disclosure agreement (NDA) where you clearly state what you are sharing with which goal. It is crucial that you include a penalty clause regarding unauthorized use of the information that you hand over.
Step 6: Connecting with potential buyers
If you are thinking that a potential buyer will just walk through the door, in most cases you are wrong. After all the preparation, you are ready to get your message out there. We recommend to find potential buyers in several ways:
- Using online tools and platforms, such as Google Ads, LinkedIn and country-specific sales platforms.
- Reach out to your existing network. These people have been following you and your business ventures. They or people they have told about your business might be interested.
- Reach out to competitors. Many companies are taken over by their competitors. Who would be more interested in taking over your business than your competitor?
- Contact your bank, accountant, tax advisor or lawyer. These people deal with many businesses and have large networks.
- Try to quickly get 2 or 3 potential buyers interested in your proposition and keep them interested.
- Make sure that your potential buyers have the financial means to buy the company and are not just looking for information before you hand over any sensitive information on your business.
- If you are reaching out to many buyers, keep good track of what you have sent to them and when. Log phone calls, write down the progress per client and take notes about why they are interested and what are there doubts. We recommend to use a spreadsheet or an online tool like Trello or a CRM to keep track. Make sure any team members that are helping you have access to this information as well, as it will prove very valuable in the sales process.
Step 7: Negotiate and sell
After you have found several potential buyers for your company, it is time to negotiate the best deal. Remember that the price is an important aspect of a deal, but not the only one. The other terms (your involvement post-sale, payment terms etc.) are very important as well. It occurs regularly that it is not the party with the highest bid that ends up reaching an agreement, but the party the seller feels most comfortable with selling it to.
Professional advice or do-it-yourself?
The negotiation can be done by yourself. When the financial stakes are high it can be wise to have a professional advisor sit at the negotiations as well or at least assist you in preparing for them. We can help you find a good advisor. It is often best to meet a few and see which one is most aligned with you.
Verification and due diligence
At this point you should have checked and verified if the potential buyer is trustworthy and has the money to pay for your business. The buyer will most likely want to conduct a thorough due diligence to verify all the information you have given so far and to inspect the business further. Since the buyer has signed an NDA, you should be very open and transparent at this stage. A lack of trust in this phase could hurt the deal.
It can be wise to sign a letter of intent with the buyer to make clear that both parties intend to sell to each other. This is often on the buyer's request since it usually grants a exclusivity to the negotiations (in other words, you are not allowed to negotiate with anyone else). Although a letter of intent is not a sales agreement, it is an agreement nonetheless so make sure you are agreeing with what you are signing.
- Be inviting and transparent. The verified buyers are seriously interested. Try to trust them (unless you have clear signals that they are not to be trusted).
- Set a clear limit for yourself. Determine what is the absolute minimum price and under which conditions are you willing to sell. Do not be afraid to stick to these limits. Also make very clear what is negotiable and what is not. Perhaps it is very important to you that your personnel will keep their jobs after the sale. Make this clear from the beginning, so the buyer is aware of this.
- Never become dependent on the deal. Always be willing to walk away and find a better deal.
- Take notes! Make sure that you and the potential buyer are on the same page about numbers, interpretations etc. Preferably create a shared document to put the progress of the negotiations on paper to prevent any surprises.
Sell your business
Once you have reached an agreement, it is time to draft a sales agreement which includes all the elements that have been discussed and negotiated. If the communication and expectations have been clear and properly communicated up to this point, this should not cause many problems. It is always recommended to have an accountant and lawyer go through the agreement once more.
Find a professional for negotiation and selling
Do you need expert advice?
Get in touch with us to learn more about doing business in Europe.