Selling an enterprise is a serious decision, requiring the consideration of many aspects. In addition to ensuring the company lands in the best possible hands, it is no less important to conclude the transaction at an optimal profit. The following provides information on the complex process of selling a company, helping to clarify the fundamental notions, the method of determining company value, and providing practical tips for selling the company successfully.
In short – What are the most important aspects of selling a company?
Our article provides a comprehensive overview of the important information concerning the sale of companies.
For many, this step is a difficult decision, as it is a milestone decision in the life of a business owner. We therefore cover the most common reasons for selling an enterprise, briefly describing how such a process takes place. We’ll introduce the key notions linked to the topic of selling a company, provide insight into the competencies of our company, and answer the most frequently asked questions.
The most common reasons for selling a company – when it’s time to make a change
Building a company or group of companies offers may challenges to every entrepreneur. Many of them make sacrifices over the course of decades to ensure the success of their business visions. From time to time, the question arises as to whether continuation is the only possibility, or whether selling the company would be the solution and that there’s more to life than one’s own company.
Lost motivation – when it’s time to quit
If the business is successful and the founder(s) face(s) no further challenges, it is worth considering the exit option. This is particularly timely when the daily routine management tasks are no longer satisfactory, and we often think we’d rather be laying the foundation stone of another success story.
“Many entrepreneurs told me that although they are very proud of their business success, they regret not having spent enough time with their families over the years and never having enough time for their hobbies and friends,” says Balázs Gál, Financial Consultancy Division Manager at Mazars. These are all perfect reasons for selling a company, especially if the business is successful and it has not yet started going under due to reduced owner’s attention.
Market conditions – if growth and financial performance are already low
The enterprise may suffer from conditions over which the owner has no influence (e.g. an economic crisis). In cases such as these, it is worth assessing whether it is better to continue and hope for a positive change of the situation, of it would be more reasonable to decide on selling the company while it still has any interpretable worth.
Quit while you're ahead – when a chapter ends
Building up a business is tremendous work, and we do so according to the best of our knowledge. However, a point in time may arrive when we do not want to invest further material resources, or we feel we have no more options to move the company forward. These are the times when it is worth considering selling the business.
In this case, there is still the possibility of examining the various subsidy options, and/or credit facilities may be negotiated with banks. However, it must be seriously deliberated, especially with respect to the owner’s age and private objectives, whether it’s worth venturing into a new project or to leave it to the new owner instead.
Generation change – when it’s time to retire
The revenue gained from selling the company may be spent on the experiences missed over the years and/or supporting the family, or on charity.
The agreement can be made for the gradual sale of the company, creating a transition between active years and retirement. A conscious successorship plan acceptable by all parties involved can be worked out, gradually handing the company over to the family (members) or the management.
“It is important that company owners always have a plan for an advantageous exit even when it is not particularly timely. This is the appropriate business behavior, as it provides security both for the owner and the company. Furthermore, this may also translate to a higher value in the subsequent transaction, as the company has already made preparations for the challenges of the transaction process. In addition to conventional transaction consultancy, Mazars also offers valid assistance in the emerging accountancy, taxation and legal issues,” highlights Balázs Gál.
The process of selling the company
Selling a company is a multi-factor progress, requiring the knowledge of several experts. In practice, selling the company means selling your share, which results in the enterprise changing ownership. From here on, the new owner will own the various assets and the employees, who will still be employed by the same company but come under the management of the new owner.
The 5 pillars of selling a company successfully
1. Sort out the finances
After deciding on selling the company, the first important step is to make sure all financial statements are readily available.
Audit or financial due diligence?
Failure to recognize the difference between the annual audit and financial due diligence and make appropriate preparations may be costly, given the time, effort and value lost. The purpose of the audit is to provide proof that the financial reports are compliant with well-defined rules and procedures; however, it often fails to answer questions that may be important for potential investors.
While an audit is controlled by auditing standards, the scope of a financial due diligence may significantly vary, depending on the company size, the sector of industry it is active in, the specific requirements of potential investors, and many other factors.
2. Determining the company value is especially important
Although a financial due diligence is an organic part of every company sale transaction, company owners are often not ready to face the special requirements of potential investors, therefore it is worth engaging the services of an external consultancy firm. This helps locate potential buyers and provides confidence in conducting the negotiations.
Fundamental notions in the course of determining the value of the company
After the financial due diligence, the following formula helps determine the company’s value: EBITDA = Corporate value- Net debt= Equity +/- Net current asset modification= Amount paid to seller
The value of a company is most often calculated using its sustainable profitability, generally the EBITDA (earnings before interests, taxes and depreciation) and a multiplier. As such, one-time or non recurring items or the post-transaction changes of the cost structure are identified; this is the sustainable EBITDA, often referred to as "normalized" EBITDA.
The company’s value, based on profitability and a multiplier, is decreased by the company’s net debt, to get to the value the seller must receive for the business. Net debt is financial debt (e.g. bank loans, overdraft, financial leasing) minus the total cash of the company.
Net current assets
The "target" net current assets are typically agreed upon by the parties. This is generally based on the net current asset level of the previous twelve months, provided this information is available. Upon determining the net current assets target, the growth tendencies, the general economic environment and the seasonality factor must all be taken into consideration.
3. Focus on increasing revenue
Demand is higher for companies with increasing profitability, consequently they can be sold under much better terms. It is therefore worth striving for maximum revenue prior to selling the company, broadening the clientele, thereby supporting the success of sale.
4. Time the sale appropriately
It is a good idea to time the sale of the company by consciously preparing for this step in the 1-2 years before the exit. With this, we are giving ourselves time to appropriately prepare the process.
5. Find a consultancy firm specialised on selling companies
In order to sell our business share successfully, it is worth contacting a highly experienced consultancy firm such as Mazars. The consultancy firm sees the entire sale process through: it provides support in accounting, financial matters, assesses the value of our company and also seeks out potential buyers. In addition, it coordinates the entire process for financial and legal compliance.
Mazars employs 44,000 professionals in over 90 countries. Our professional services are built on a comprehensive and profound knowledge of local and global conditions. This is no different when it comes to selling companies.
Thanks to our broad professional experience, we discuss relevant questions as early as the first reconciliation with the client, and provide valid answers for every emerging issue.
Their contribution will make every step smooth, transparent and safe.
Frequently asked questions about selling companies
Can my business be sold? Based on our experience (with little exception) any enterprise can be sold, provided adequate assistance from the right consultancy firm is available. For selling a company successfully, it is important among others to optimise financial administration, introduce appropriate pricing and seek out potential buyers.
The precise determination of the value of a company depends on a number of factors. The team of experts at Mazars assesses the value of the enterprise, which is the first step towards a successful sale.
This depends on many factors. Consideration should be given to personal reasons and economic conditions as well. It is advisable to prepare the sale of a company consciously, to have time to optimise the business’ finances and locate the buyer offering the best terms.
Many administrative, legal and accounting factors must be examined, and if necessary, optimised. The first steps begin rapidly, and practice has also shown that the perfect buyer can be found over a short 3-5 months. According to our experience, the complete process can be concluded in about 12 months.
Theoretically, yes. Practice has however shown that it is worth involving experts in the various processes, as the road to selling a company leads through a series of questions on accounting, financial and legal matters. It is advisable to engage the services of a consultancy firm with domestic as well as international experience, where the appropriate experts are available who may accompany us as partners through the management of the entire process.