You’ve Built Your Business – How Do You Sell It?

18 March, 2022Sara Corleison

After circa ten years in business, I made the decision to sell Tailor Skincare. Tailor was an incredible passion project of mine and something I’d lovingly refer to as my “first child”, making it a tough decision and one I struggled with for many months before committing to the sale.

At the end of January this year, I passed the reins over to the new owner and was filled with a bitter sweet mix of emotions. I was both sad to be letting go of my first child, but even more excited to cheer the business on from the sidelines and to see new doors open up for me as I cleared space in my life for a new chapter.

Before listing Tailor Skincare for sale, I asked myself a few key questions, which helped me get really clear on the best course of action – to sell or not to sell, and then what to do when you’ve decided to list your business for sale. Hopefully, my answers can help shed some light on how to navigate the business sale process.

Why do you want to sell your business?

My answer to this question was twofold. I wanted to sell for both personal reasons and for business growth reasons.

I gave birth to my first (real) child, Annabelle in 2020 and a week after her birth, I was back in the office working. Annabelle came along with me and I thought I was superwoman. But honestly looking back, I regret not spending more quality time with her during the first precious moments. So when considering the business sale, I decided to prioritise family, friends, health and wellbeing. I’d been solely focused on the business for nearly a decade and it was time to make a shift. I understand this experience is mine and everyone has the right to a different view, there’s no judgment from my end.

The other factor, which influenced my decision to sell was financial capacity. I started Tailor Skincare in my kitchen making everything by hand with a cake mixer. I invested my minimum wage salary as start-up capital and the profits from the business to fund growth. I grew the business from a start-up to one of New Zealand’s most loved, award-winning Natural Skincare brands over this time. Tailor has never had a cash injection to grow and I could see that in order to take Tailor to the next level, we needed significant funding to cut through the fiercely competitive landscape both in New Zealand and abroad. Rule number one of business is to put the needs of the company first. I wanted the best for the business and to see it grow by securing the financial backing it deserved. Because of my decision to prioritise family, I could see what the company needed most and I decided to exit completely rather than staying in and securing investment capital to fund the next stage of growth.

Is the timing right to sell your business?

Timing can have a significant impact on the market valuation of your business. Waiting a quarter or six months can make all the difference to your profit and therefore, value of the business. Take a look at where you’re at in the financial year and how your Profit & Loss looks today versus in three to six months’ time. Perhaps it’s best to wait it out so your valuation looks better. Or perhaps it’s time to sell now on a high note when the business looks the best it ever has. We sold off the back of Tailor Awakens product launch along with the close of Christmas sales. This made it relatively good timing for us to sell. However, we also rebranded the company last year (twice) and as a consequence, had a number of one-off costs to swallow bringing the Profit and Loss down somewhat. However, the rebrand left the brand looking really sexy – so this was an attractive feature of the business. There will always be the question of timing and it’s up to you to balance the pros and cons for the question of “if not now, then when?”

Do you have a plan for what you will do after you sell your company?

A reinvestment plan is super-important to ensure your money is working for you rather than you working for your money! Gone are the days of living off the interest of a bank term deposit. Due to inflation, your money will produce a net loss in the bank. So having a plan is more important than ever. Perhaps a mixture of low risk and high reward options could be the solution. Or perhaps you have the next business venture simmering away on the back burner ready to get on the boil.

This question also relates to the potential restraint of trade clause in your Sale & Purchase agreement. It’s common for the buyer to place a restraint of trade over the seller. You need to carefully consider what direction you’d like to take your career after the sale and how a restraint of trade may impact on this.

Do you want to sell all or part of the company? Would you be ok with either option?

This question is important because perhaps you’re selling a part of the company to gain a cash injection for the business. Or perhaps you’ve decided that you’ve taken the business to the peak of your appetite and now it’s time for a fresh face to come in and run things and take it to the next level. I was ready for a lifestyle change and to free up my capacity for new and exciting projects on the horizon.

Do you have a team and how do you navigate the sale process with them?

I had an incredible team on board and listing the business for sale was sensitive grounds to navigate. I chose to share the business sale with my team on a need-to-know basis. I didn’t want anyone feeling anxious or uneasy in their employment especially in the beginning of the sale process. It was business as usual in terms of company operations through the sale process. Towards the tail-end of sale negotiations, the team were informed of what was happening and how they were likely to be impacted at the time they needed to know. Many new owners will want to keep the current team on board, at least in the beginning of the business handover to maintain continuity of business operations. But I do understand this can be a grey area to navigate and in my opinion, informing staff should be on a case-by-case basis. You know your business best and can use this insight to minimise disruption.

Ok, so you’ve decided to sell. What next? Ask yourself the following and get these affairs in order.

Get your affairs in order. Build a data room and keep it up-to-date with the close out of each month. Key documents to include are employment contracts, supplier agreements, IP asset records, any key product information (but not the secret sauce) along with up-to-date Profit and Loss and balance sheets. You will also need a compelling Information Memorandum. The key to a good IM is to sell the sizzle, include all valuable information without giving away all of your secrets. Address any business risks head-on and document how these are mitigated to remove anxieties. It’s also helpful to show that you intimately understand your finances. I put together a clear picture of our product cost of goods sold (COGS), the profit margins for each product in each sales channel along with which sales channel was most profitable and the trigger points for gaining revenue in each channel. For example, for our ecommerce channel, we mapped out that if you spend $X, you make $Y – thus giving a picture of scalability once new funds are introduced. For the retail channel, we broke down each retailer, showing who was the most profitable along with mapping out opportunities both in New Zealand and abroad for a new owner to capture.

What is the best way to sell the business? Should you sell privately or use a broker?

I chose to sell via a broker and felt this took a lot of the stress out of the process. Selling the business or raising capital adds additional workload to your already busy schedule. Having a broker can assist you with all of the back and forth enquiries, which happen in the initial stages of the sale process. They will also have a database of qualified buyers and can use their expertise to weed out the tyre-kickers – helping to save you time. Later on in the process, a broker can help you with the sale negotiations. It can be valuable to have a middle man between yourself and the buyer. I found my broker could articulate my wants and needs to the buyer by removing any emotional tone. That said, it really depends on the size and nature of your business as you will be giving away a considerable percentage of the sale proceeds. If I could give one piece of advice, it would be to reserve a broker fee payment until the funds have been settled rather than going with the standard contract terms of payment upon an unconditional sale.

How do you value your company?

You may have an idea of your magic number and it’s good to have this. But ultimately, your company’s value is dictated by what the market is willing to pay for it. It’s important to gain an indication of your company’s value before placing it on the market. This can also help you decide as to whether today’s market price is worth selling for or whether it’s better to wait until you’ve grown the business a little more. I chose to value Tailor using a multiple of EBITDA after normalisation. Simply put, EBITDA is the profit a company earns before tax and I chose to normalise as there are some costs a business incurs, which are not always there (for example, one-off rebrand costs). The normalisation process helps to smooth out costs and income to give a reasonable picture of what profit the business could generate in the buyer’s hands. You can talk to your accountant about this if you’re selling privately. Alternatively, many business brokers can also walk you through this process when putting together a Profit and Loss sheet to accompany your information memorandum.

If you’re using this method and there’s not a whole lot of profit to be gained, you may like to look at alternative ways of valuing your business such as: Asset Valuation (if you have a number of valuable assets in the business such as machinery or property); Future Earnings Potential (perhaps your business does not have an income history or revenue is on the way up and has exponential earning potential, then use this method to value your business).

I hope this insight into my business sale process has helped you gain further insight into the next best step for you in your business journey. If you have any questions for me, I’m available to consult on business start-up, scale and sale. Email [email protected]