Selling your business, or a portion of your business is a delicate matter that should be carefully considered. Extensive consultations are necessary to ensure that when you part with a portion of your firm, it is a business deal worth having. Regardless of the reasons driving the sale, retirement or raising additional equity, due care must be exercised by all parties. Otherwise, many business ventures have been ruined after acquisition or when the acquisition efforts fall apart.
Careful considerations that should govern the decisions to put up your business for sale should primarily answer the question; Does selling a portion of the company increase or decrease the value of the retained portion? The answer should always be a resounding yes; you should only sell a portion of your business if you are left owning a smaller share of a company that increases in valuation following the sale. Rule of thumb, 60% of a million is greater than 100% of a hundred thousand.
Does the sale add value to the company?
- It might seem a bit tricky to determine whether the company valuation will appreciate positively, but there are scenarios that that help to surmount the predicament.
- The use of the sale proceeds – if the proceeds are earmarked for expansion either geographically or facility-wise, then the valuation is bound to appreciate for there is a potential increment in sales revenue.
- Access to valuable resources – business process, is significantly influenced by supply and demand. If the acquisition will help you access ready market for your goods and services or allows access to cheaper raw material and productions cost, then it is worth pursuing.
- Access to intellectual capital and modern technology – technology is at the heart of driving modern day business world and failure to keep up could significantly ruin a company. Strategic partnerships that help your business with innovative solutions and products are desirable and worth having.
Advantages associated with the sale:
There are other upsides that add to the appeal of selling ownership shares of your business, which are vital in informing the process:
- No new debts are incurred -Unlike loan financing, selling partial ownership does not involve repayment requirements that would otherwise put a strain on the company’s financial budget. Long term loans or taking on too much debt leverage could severely cripple operations leading to failure and bankruptcy.
- Shared risks – equity financing reduces the amount of risk shouldered by each party, in case a newly launched investment fails to take off. All sides bear a portion of the loss, alleviating potential lawsuits and indemnifying their respective businesses from failure or even bankruptcy.
Disadvantages associated with the sale:
There are, however, some disadvantages to equity financing that need to be considered.
- Loss of ownership – small business owners often give up too much equity too early with full comprehension of the new ownership structure. The venture capitalists then end up taking a larger portion of the profits, much to the frustrations of the founders.
- Loss of control – when the investors own have a higher stake in ownership, they dictate and shape the direction the company assumes. This may be a potential source of conflict later on as the business grows bigger and more profitable.
When these essential elements of the sale are properly addressed, sales negotiations should commence. It is most important to plan the selling process to ensure the acquisition is smooth and most importantly, insure the selling company from negative blowback should the process fail. Harmonizing business policies between the two different groups is often a tedious and time-consuming endeavor; as such business negotiations last for days, months or even years.
It is, therefore, important not to focus all the energy and attention to the harmonization process at the expense of running the company. As is often the case, the CEOs of start-ups or small firms are actively involved in the everyday running of their business.
Consecrating too much time to the negotiations may result in them neglecting their firms. This in turn, might hurt the performance of the firm, making it unattractive to the investors. It is, therefore, prudent to have a skilled team of negotiators to handles these matters or have a capable team running the company while negotiations are underway.
And finally, be on the lookout for unexpected deal breakers when putting up your business for sale. New investors are not emotionally involved in the newly acquired business as the founders. Consequently, the investors might call for a reduction of the workforce, antagonizing your loyalty to the employees who stuck with your through the lean times. Such incidences drag out the acquisition process and might end up hurting the sale process.
For more advice on the process of putting your business up for sale online, get in touch with a business broker or an online marketplace such as AnyBusiness that understands the nature of acquisition and transactions.