When deciding to transfer your business ownership to a buyer, there are certain transacting basics you must be know, especially as it touches on the legal aspect.
The first step is to determine the value of the business. There are usually 3 steps to arriving at a fairly balanced rate that favours you the seller and at the same time sound fair and attractive to the buyer.
Estimate seller’s discretionary earnings (SDE)
Experts generally agree that the ideal starting point for transfer of business ownership is to recast the seller’s business earning so as to get their seller’s discretionary earnings (SDE) figure. The number gives you a good idea of the true income potentials of the business which can then be used to estimate the value of the business.
Determine the SDE multiplier
As a general principle, businesses are valued at between 1 and 3 times the SDE — referred to as the SDE multiple or multiplier. Various factors are considered when finding the right SE multiple to apply, such as the business size, the company assets (tangible and intangible), and the level of independence from the owner.
Add other company assets and minus its liabilities
The final step in the business valuation is to take an inventory of the assets and liabilities not already added in the SDE multiplier. The buyer will want to make sure they’re only buying company assets (including intangible ones like goodwill, trademark and reputation), and that the seller retains any liabilities.
To value the business on your own or to hire a professional?
How do you want to carry out the valuation process?
Both the seller and the buyer could decide to hire a professional appraiser, as business valuation which can sometimes get a little technical. Or they could decide to value the company on their own, with the assistance of a lawyer and an accountant.
The biggest motivation in self valuing your business is that you’re able to save costs, which could range between £400 and £6, 500.
Doing it on your own with the help of your legal partner is also faster, possibly taking you a few hours; in contrast to a professional appraiser that could take to 2 to 4 weeks.
If you decide to go the self valuation route, you can also take advantage of good online business value estimation tools such as BizEquity software which guides through the valuation process by asking you critical questions about your company, and costs about £400.
Resolving disputes from selling your business
Sometimes disputes could arise during or after business ownership transfer arising from common mistakes such as misrepresentation or false declaration to a prospective buyer, pricing issues, or breaching confidentiality.
In such instances, it always in the best interest of all the parties to resolve any problems amicably rather than litigating the dispute. It is advised to take use the alternative dispute resolution (ADR) forum, especially for mediation.
The platform allows all the parties to present and discuss all the issues of contention before an impartial third party who is typically experienced with the issues involved.
Having said that, the most important factors when transferring business ownership to a buyer is to make adequate preparation, carry out due diligence and ensure transparency all through the transaction process.
It is important that all books and records are accurate and up to date. They include key business details such as accounting/booking, personnel, sales record, tax returns, client lists, titles to vehicles, titles to property that would be transferred in the transaction or leases if applicable, and necessary UCC documentation for any equipment.