Selling a Business in South Africa

When is the Right Time to Sell My Business?

The decision to sell your business can be motivated by many factors, and some may be out of your control.

They can include ill health, a need to liquidate assets, planning a new strategic path, or becoming distressed and overwhelmed. No matter your motivation, the timing of your sale can influence the price. The sale price usually reflects past performance and profits, so you’ll need to consider this, especially if you have a small business, before you put your business on the market. 

External economic factors within South Africa can also affect your sale price. Consider outside and local financial performance, including specific events that will directly affect your business.

Following declining profits and performance

This can be an emotional and challenging time for a business owner. You may notice a slump in performance that has drained your motivation and energy, and you don’t have any strength or determination left to build the business up again. 

Sadly, this is common with distressed business owners. Unfortunately, if your business is not profitable and there is a decline in performance, you will have a lower sale price. If your business is struggling, ask yourself if you can keep it running and increase profits, securing a better sile price in the future.

Perhaps an unforeseen competitive threat means you’ll unlikely recover. If this is the case, you need to objectively assess the likelihood of restoring the business to its previous heights or risk it deteriorating further.

Amid sustained performance levels with slight profit variation

A business sale price can be based on the previous three to five year’s average profits. A potential buyer can see that the business has performed consistently over a sustained period. Once your ‘for sale’ sign is up, maintain your momentum and don’t become complacent.

The selling process may take a while. You don’t want to lose your sale price advantage before the completion by burning out and taking your foot off the accelerator.

Even if your business is not running as planned, you will need to keep sustaining it until you’ve handed over the keys to the new owner. Buyers want to see what the future of the business can be, so they’ll want to see a functioning business. 

Rising performance and climbing profits

An established, growing business will always sell quicker for a large price because astute investors are ready to take advantage of future market success. 

But why would you want to sell your business if it is booming? You have an opportunity to relish in your success and enjoy the hard-earned rewards of your labour.  

Because buyers will pay large amounts for rising profits, a period of growth and profitability is a critical time to quietly check in with yourself: why do you love owning and running your business? Would you be as motivated when faced with falling profits? Will you sustain this growth and profitability? What are the pros and cons of selling it at its best?

You’re not enjoying the business anymore

When you started your business, you were motivated by entrepreneurial challenges. Now that your business is established, these challenges may become generic tasks that disinterest you. If you are no longer stimulated, it may be time to prepare your exit. 

Your business has outgrown your skills

This is a difficult reality to face. Ownership and leadership require humility and acceptance. Perhaps someone with new and advanced skills can take your business to the next level. If you can no longer provide the skills and energy your business needs to keep developing, you should consider selling it to someone who can.

Threats on the horizon

Threats that impact your profit and performance are always looming. Perhaps you own a boutique hotel, and you’ve noticed that Airbnb is attracting your customers. Think of your local video stores that are constantly affected by streaming giants like Netflix. You must keep up to date with these trends in South Africa to anticipate the future of your sector. Consider the impact of possible infrastructural changes around your location. 

A lucrative opportunity

A business exit strategy can also be motivated by opportunity. Perhaps you’re a profitable, innovative social media site that has attracted the attention of Facebook. You are offered a multi-million-rand acquisition. You’ve likely worked hard on building your brand, but a corporation like Facebook has the resources and workforce to take your business to a new level. An offer like this may be worth considering.

Regardless of your reason for selling, creating an exit strategy and preparing your business for sale means you’ll be ready to take advantage of any situation you see on the horizon. So, let’s discuss whether you should seek professional help or navigate the process on your own.

Should You Sell on Your Own or Use a Broker?

There are pros and cons to appointing a professional advisor and doing it alone.  If you choose to do it yourself, you risk taking your eyes off the business. If your business doesn’t sell quickly – or at all – you can miss out on crucial opportunities and lose track of your performance and profit health. If you seek help from a broker, you’ll need to find one who will take your selling journey seriously. This option can also be expensive, and not every advisor will have the patience or ethical groundings. Ask your business networks and industry associations to recommend a business broker. There are plenty of suitable brokers in South Africa to choose from, so take your time and find the right one for your business.  

A broker’s marketing strategy

Ask the broker for a detailed plan on ways they will advertise the business, solicit buyers, and achieve visibility. Request copies of profiles they have developed for other clients. Expect detailed insight into the businesses they’ve profiled. If their strategy is only to write an online listing, you won’t get much value, and you should consider finding someone else or doing it yourself.

Their sale successes and failures

Ask the broker for at least ten sellers with whom they have worked and contact them.

Regardless of how many businesses the broker has sold, a positive review speaks volumes about the broker’s ability and ethics.

What do they ask in their first meeting with you?

You may encounter brokers who will pressure you to sign up for a listing in your first meeting. This is not a good sign. Multiple listings don’t necessarily make an excellent business broker. Instead, they should ask you many questions about the business you are selling. You want a broker whose primary plan is to learn about your business. This will equip them to sell it and find a buyer. Follow-up meetings also demonstrate that they are willing to invest time and effort. They should also prepare you to answer potential questions a buyer might ask. You’ll want them to express whether your business can be sold.

The value in an intermediary

Using a broker can make a deal flow better and ease communication. If you need to take a firm stance and deliver bad news, a broker can help.

However, too much intercession can work against you when negotiating a sale, so try and incorporate your own form of communication. 

To get a buyer comfortable enough to make an offer, they need all their questions answered and will need assurance that the transition will run smoothly. The more confidence and trust you can instil in the buyer, the greater your chances of making the sale are. It can be challenging building this credibility through a third-party broker alone, so involve yourself in critical communications.

Some points to consider

• How much are you willing to pay for the services of a business broker? A business broker will usually take a commission from the sale. 
• Will you feel a lack of control over the process if you are used to doing everything yourself? Or will managing the sale alone put your business under strain?
• A broker may pressure you to accept a contract you're not happy with. If the deal seems like it may fall through, a broker may pressure you to accept a lower price so they can get their fee. Make sure that you find a broker that you trust.
• How many clients is the broker currently working with? Do they have time to represent your business effectively?

Once you’ve decided whether to appoint a business broker or go through the selling process alone, you’ll need to prepare your business for sale.

How to Get Your Business in Top Shape to Sell

Preparation is essential when it comes to selling your business. This guide discusses ways to assess your business, document operations, consolidate paperwork and make your premises presentable.

Assess your business

This is slightly different to valuing your business. It requires analysing your business carefully to understand how it works.

Ask yourself the following questions:

• What do you do well?
• What could you improve on?
• Who are your suppliers?
• How many products/services do you sell annually?
• Are there specific products and services that sell better than others or with more significant margins?

A helpful method for assessing your business is the SWOT analysis:

• Strengths
• Weaknesses
• Opportunities
• Threats

This method provides a reasonably well-rounded look at your business, focusing on its weaknesses, vulnerabilities, strengths, and potential.

If you haven’t been analysing your business, now is the time to document it so prospective buyers can understand the business they might purchase.

2. Share your operations

As a business owner, you shouldn’t be the only one that understands how your business functions. Your team should be trained throughout the business’s life, even more so when you start to prepare it for sale.

This can include anything from day-to-day operations or annual audits. The buyer will want to know if your business will still function once you’ve exited. Create an operations manual and share it with your workforce so that everyone is on the same page.

It would help if you considered a succession plan so that no one is left in the dark once you sell. Will there be a handover period that will give you and the new owner time to discuss logistics? Make sure your staff are well trained and ready to help their new boss learn the ropes.

3. Consolidate the paperwork

A business owner will know how much paperwork is involved – from meeting minutes to financial records, legal documents, and general filing. It would be best to keep everything organised. It’s imperative to have every financial statement and accounting record from at least the past year, if not longer.

Keeping paperwork organised and accessible is required to prove that you have a lucrative business worth buying and keep the process as smooth as possible throughout.

4. Improve your business’s appearance

Take time to look at your business through a customer or buyer’s eyes. There might be peeling paint, a squeaky door, or a broken tap. Minor improvements like these can affect your asking price. Our impressions are usually based on what we see, so fixing up small things will get your business ready to sell. Your potential buyer will want to believe that they are making the right choice buying your business. Improving its appearance will ease some of their concerns. 

Having well-documented financials, a succession plan, a premise that has been cared for, and a thorough assessment of your business could result in a happy buyer and your desired selling price.  

How to Value Your Business and Understand It's Worth

Our guide outlines some motives for business valuation, the information you’ll need to get an accurate valuation, methods and the influence of intangible assets and goodwill.

Many business owners are under the impression that valuing a business is essential only when you want to sell it. While this is true, it is helpful to have an idea of its valuation throughout your business journey:

• You are expanding and buying another business
• You are going through a divorce or separation
• You are insuring the business
• You are applying for a loan
• You are looking to attract investors
• You want to know your net worth

What you’ll need to value your business

The history of your business

Your business has likely come a long way from its humble beginnings, and there’s no doubt it will evolve in the years to come. Having records of the business’s origins, goals and journey are crucial to understanding its value.

Employee information

Having a thorough record of your employees will help potential buyers understand their job descriptions, unique skills, pay rates and staff morale. Be conscious of current employee’s leave entitlements and how you’ll handle this in the sale. If you have strong employees who wish to leave alongside you, ensure their exit will not put the business at a disadvantage. 

Legal and commercial information

Information regarding your commercial contracts, lease arrangements, licences, permits and registrations can impact the value too. You must provide proof that your business complies with all relevant environmental, health, and safety laws and disclose any current or pending legal proceedings. 

Get advice on any location exclusion clauses that may affect the business.

Financial information

This includes profit margins, annual turnovers, asset market values and an assessment of tangible assets. All this can help valuation experts know more about the liabilities of your business and areas that are doing well.

Market information and industry conditions

Take an objective look at the industry and think about short and long-term outlooks and how the industry is growing or shrinking. Consider your competitors and the competitive edge you have in the market. 

These factors can influence your business’s value. Spending time assessing this type of market information is important; it can also make you aware of the prices other businesses in your market are advertising for.

Some valuation models

Business valuation is a process and set of procedures used to determine what a business is worth. While this may sound easy, getting an accurate business valuation can be challenging and requires detailed checklists, preparation and thought. We cover the valuation process in more detail in our valuation guide.

Here are some standard methods for valuing a business:

Asset-based valuation

Basing your valuation on your assets can give you an overview of your business’s value.

You’ll need to consider both tangible and intangible assets and their depreciation rates. To use this method, add up the value of your assets and subtract any liabilities. Tangible assets can be tools, equipment, and property. There are parts of your business that you can’t quantify but that still play a significant role in the value of your business. These intangible sources, or goodwill, include:

• Customer loyalty
• Brand recognition
• Staff performance
• Customer lists
• Management stability
• Intellectual property ownership
• Reputation 
• Business operation procedures

The figures in your accounts are a good starting point, but financial advisors are obliged to be prudent: they must use the minimum the assets could be sold for, so be realistic when you assess the value of your assets.

Industry-based valuation

You can consider the pricing guidelines of the industry your business belongs to. Each industry is different, so research your industry to discover industry rules and formulas and arrive at a clear understanding of where your business lies within the system.

Comparable business-based evaluation

Look at businesses like yours. By reviewing comparable businesses, you can assess what yours is potentially worth.  Of course, this method is not always accurate because every business is different. It has its unique customer base, locations, equipment, and tools.

Using this method in isolation will not give you an accurate value, but it will provide you with a ballpark figure if you want a starting point.

Asset liquidation-based valuation

This valuation method is based on how much money the business owner would receive if all tangible assets were sold on the open market immediately. It is appropriate for failing businesses, but it is less effective for a business that wants to continue operating since it does not consider intangible assets.

Entry or start-up costs

This method involves gauging how much money it would take to build the business from scratch and reach its current size, status, and revenues. Consider the time and resources it takes to train staff, purchase premises and equipment, and establish branding and marketing.

This method should not be used on its own, as it does not consider intangible assets.

Discretionary income-based valuation

This method considers the current owner’s discretionary income to estimate the future owner’s income and the return on investment. This only covers current income and cannot accurately encapsulate the future growth of the business.

Price/earnings ratio valuation

This is a common method. The market value per share is divided by post-tax earnings per share to deliver a P/E ratio.

For example, if a business is trading at R33 per share and has earned R1.30 per share after tax, it will have a P/E ratio of R25.38.

Generally, the higher the ratio, the more investors expect the business to grow in the future.

Discounted cash flow

Discounted cash flow (DCF) will help you estimate the value of an investment by calculating a business’s future cash flows. Simply put, DCF attempts to calculate the value of an investment today, by making assumptions of how much money it will accumulate in the future.

It’s appropriate for companies that have growth potential but lack hard assets and a financial track record. The most common example is a web-based start-up. The method deducts intangible criteria from projected cash flows or NPV (net present value).

Take the example of a company that makes a profit of R10k annually that will remain steady for the next ten years. R10k received in five years’ time is not worth the same as R10k received today. If the buyer received that R10k today, they could put it in a bank (assuming a 5% interest rate) and in five years’ time it would be worth R12,763.

If you work backwards, the R10k received in five years' time is worth R7,835 today, based on the following discounted cash flow formula:

= R7835

R10k received in 10 years' time is worth R6,139 today:

= R6139

Adding all these figures together gives the buyer an idea of how much he or she should pay now to receive the returns from the business in the future. If the value arrived through DCF analysis is higher than the current investment cost, the opportunity may be a lucrative one. Unless you are familiar with DCF, we suggest seeking professional help if you choose this method.

Multiplier valuation by sales

Each industry has its own publications, business brokers and industry associations that can provide current multiples for your industry. The multiplier method uses the business’s gross sales multiplied by this multiple to reach a valuation.

For example, if gross sales are at R60,000 and the multiple is 0.4, the result will be a R24,000 business valuation. Remember that there are factors that can increase and decrease this multiple, so your valuation may not always be accurate. 

Some factors that can increase a valuation multiple:

• Loyal customer base
• Stable earnings
• Goodwill
• Your market industry

Some factors that can decrease a valuation multiple:

• Unstable earnings
• Reliance on owner
• Small product or services offering

Multiplier valuation by profits

This method gets its multiple from the profits of a business. Because of this, small businesses slot into the lower range of multiples while established companies fall into a higher range.

This method isn’t always accurate since it doesn’t consider current financial status or threats on the horizon.  

A business valuation is a complex and detail-orientated procedure. It is worth seeking specialist advice to ensure you are selling or buying the business for its actual worth.

Once you’re confident in the value of your business, it’s time to start thinking about how you’ll advertise it to attract buyers. Once you’ve found a buyer, you’ll need to prepare for due diligence: the buyer’s thorough examination of accounts, customer and supplier relationships, and physical assets.

Essential Skills for Negotiating the Sale of Your Business

In successful negotiations, both sides should win. The negotiating process should not feel confrontational. Standing up for yourself, arguing a suitable sale price and going through terms of conditions are often equated with conflict. However, this is an inevitable process of working toward a mutually beneficial gain.

Negotiating is a skill, so you’ll need to practice and grow.

Important negotiators are:

• Flexibility
• Creativity
• Awareness
• Preparation and organisation
• Honesty
• Strong communication

Planning is crucial

Planning is vital in sales negotiations. Decide your minimum outcome, your anticipated outcome, and your ideal outcome. Also, prepare an option B in case negotiations fail. Have a clear idea of the other party’s expectations and desires.

Precise planning comes from knowledge and insight, so research the buyer thoroughly and take the time to meet with them throughout the due diligence process.

Be clear

Present your plan calmly and concisely. Be clear about what you are offering and what you require from the other party. Look at the process comprehensively and be conscious of the expectations from both sides.

Mutually beneficial solutions

Negotiating is also about compromise. Ask questions and pay attention to details. The first proposal is rarely accepted, so make sure you are willing to compromise and make or receive concessions. On average, expect to say no three times before you say yes.  

Closing the deal

As you negotiate your sale, be conscious of signs that your deal is reaching its conclusion. 

The party’s counter-arguments may lack energy, they may exhibit tired body language, or you may discover there is a convergence on the position you are both taking. This is a great time to introduce closing statements, put decisions in writing, and quickly follow up on any commitments.

What if negotiations fail?

From your initial planning, you should have a minimum acceptable sale outcome. If that isn’t accepted, it’s wise to have a plan B and C. In the trade, this is known as your ‘best alternative to negotiated agreement’ or BATNA. 

Use this backup plan to keep the negotiations going. Remember, the focus is on outcomes and not disagreements. There is also great power in walking away, or if you’ve reached the limit of your negotiating skills, you can invite a third-party mediator.

When you’ve agreed on initial terms, the only thing that stands between you and a successful sale is a smooth due diligence process.

The Due Diligence Process When Selling Your Business

Mutual trust established during negotiations can easily collapse if the buyer begins trawling your accounts, speaking to customers, or auditing employees. Here’s how to navigate due diligence safely.

A thorough buyer will conduct due diligence to confirm information presented in the initial sales pitch and identify any red flags. Being prepared for questions a buyer might have, and having all supporting documentation ready, will significantly aid the process. 

What to expect during due diligence

An investigation into business history and trends

The purchaser will want to look at sales targets, profit margins, overheads and working capital to see consistency in the numbers and possible areas of improvement. If there have been irregularities, a purchaser will ask for explanations. 

Talking to customers

The best way for a buyer to rate products and services is to talk to current customers. 

The buyer will assess your relationship with the customer, the impact a change in ownership may have, and gauge how much they need your help post-sale for a smooth transition.

Talking to suppliers

Like the customer conversation, due diligence will also uncover outstanding debts, how the suppliers perceive the business, how it compares to any supplier relationships with competitors, and if a change of ownership would impact supplier agreements.

Investigating and comparing financials

Due diligence allows a potential buyer to check if sales forecasts and projections are realistic. Balance sheets will be compared, and the buyer may request a comprehensive audit and assess whether any outstanding debts are manageable.

Talking to and auditing employees

A buyer will audit employees against any industry pay agreements. They will also check employee turnover against industry norms. Employees may be asked if they will stay or leave following a change of ownership. A buyer will also want to know which employees can help them most in initiating a seamless transition. 

How you can contribute to a successful due diligence process

Due diligence pays off, with angel investors reporting that those who invested 20 hours or more in due diligence were five times more likely to get a return. So, it’s worth taking steps to pre-empt due diligence so you can achieve the best sale negotiation.

Create a digital folder containing documents related to your company and requests made in the due diligence process. You can then share this folder in response to a due diligence request. 

In the form of documents organised into folders, this online repository of information allows you to define information flow in advance rather than prepare each piece on demand.

Possible requests from sellers as part of a due diligence checklist:

• Organisational charts
• Past financials and projections
• Management reports
• Stockholder communications
• Customer and supplier agreements
• Credit agreements and loan obligations
• Partnership or joint venture agreements
• Articles of incorporation
• Shareholder arrangements
• IP-related agreements
• Government authorisations

Other useful, customised documents you may wish to include:

• Customer acquisition channels
• Case studies of key customers
• A list of customers in your sales pipeline
• A spreadsheet with your company’s key metrics: your revenue, users, growth rates, customer acquisition cost, lifetime value, etc 
• A financial plan for the next three years

All this information may be overwhelming, so seeking support from professionals will alleviate some of the stress.

Circumstances are different for every business for sale. Choose the option that is going to deliver an advantageous outcome. If you’ve carefully mapped out your road to selling, the process will be easier to handle. This is a big step with many considerations. If you still have questions or concerns, just contact us and we’ll support you. 

Ready? Set. Sell!