Before selling that business...

Covid-19 has pushed many businesses into economic turbulence, and many business people are selling off to get on a recovery path. However, before a sale –off, one must consider options that make financial sense depending on their reason for selling. Important to consider is preparing yourself in advance.
Merger
Edirisa Sembatya, managing director at Finding XY, offers three options on how to sell off a business profitably. He says the first option is a merger. In this case, two businesses in the same or totally different line of trade can become one entity.

Occasionally, the partner with most financial leverage will have the most control.

Partial sale
The second option Sembatya offers is a partial sale, where the owner of the business sells shares to an investor in return for a cash injection into the business. This is called a private equity investment.

The owner sells a percentage of his equity to an individual or institution interested in the business. A merger and a partial sale are mainly to raise liquidity to keep the business afloat.
Thirdly, a business person can downsize operations by selling branches or part of the value chain to entities that specialise in that type of business operation.
“This gives you the chance to concentrate on the core part of the business and outsource functions that you previously owned. This might improve your cash-flow position tremendously,” Sembatya explains.

However, to proceed on any of the above options, the seller will need to prepare for key considerations.
Valuation
Sembatya says if the business has been in existence for a long time and has complex structures, you will want to consider hiring a professional valuer.

If the business is small, then you are as good as considering your tangible and intangible assets and less liabilities to come up with a value for the business.
Intangible assets can include your brand if it is reputable, software, contracts, and good will. Other costs to consider are transactional fees and legal costs.
Charles Ocici, the executive director at Enterprise Uganda, says the uniqueness of a brand matters while valuing a business. For instance, good will is an intangible asset that a brand is holding such as a reputation for quality and consistency.

This gives a business seller an upper hand in negotiations and earning more money.

“Whereas some businesses being sold are similar on the market, a business should ride on goodwill and brand identity to have an edge in securing good investors. This gives you better opportunity on the market,” Ocici shares.

Professional Business Plan
When selling your business, buyers will want to look at your business plan. According to Sembatya, the business plan describes your business activities, products or services, customers segments, business model, management, marketing plan, shareholding structure and others.

A business plan serves two main purposes.
“It helps you document your business and think critically about how you are going about it. Secondly, it informs external stakeholders about your business,” Sembatya says.

Such external stakeholders include investors who want to buy shares or take over the business, financial institutions who may want to extend credit to your organisation.”

Right buyer
For you to get the right buyer, you need to look at who has sold a business similar to what you are selling. Ocici notes that such a person acts as a lead.
“You’re not the first to sell a particular asset, find out from a person who has made a similar sale before, and the process they went through,” he explains.

By talking to a person who sold such a business before, it puts a business seller on a straight curve in getting the right buyer. He says such people may include professional associations which can easily market the business to prospective buyers.

A prospective buyer may also be a person specifically dealing in such kinds of business assets. And social media is one of the main marketing tools Ocici points out to spot such a buyer.

“Social media marketing requires targeting pages or personalities that are popular and are within the niche of the business to market it effectively to the right audiences,” he says, adding: “If somebody says YouTube, consider who’s attracting more visitors on their site.”

Audited financial statements
Three main financial statements are key in determining the health of a business; a balance sheet, an income statement and statement of cash flow.
The balance sheet states the company’s assets, liabilities and shareholder’s equity while an income statement shows the company’s profitability by comparing the revenue to the expenses. A cash flow is a summary of the amounts of cash and cash equivalents generated and spent during the given period.

Sembatya says investors will want to review your financial statements dating back to at least five years. Financial statements are used to analyse the performance of the business and determine its going concern. Investors will use it to determine a company’s level of leverage.

Examine your tax position
It is important to declare your tax position to a potential investor because it is a liability to the government.
Ian Rumanyika, the public relations manager at Uganda Revenue Authority says: “Any investor would want to understand if a business is compliant or non- compliant with their tax obligations. A compliant business is in a good position with the government because there’s no debt and in foresight, it may be in a position to make more money than operating informally.”

Market value
Covid-19 has pushed the current market value for most businesses to shrink due to a low purchasing power. Ocici advises that when selling off a business, you have no option, but to go by the current market trend.

Offer additional benefits
If you are giving an additional benefit to a buyer or investor, for instance, when selling off rentals, you can offer to speed up the transfer process as an advantage to the buyer.

“You will deal with such a buyer faster than a business seller without such extra benefits,” Ocici notes.

Financial health
Financial statements
Three main financial statements are key in determining the health of a business; a balance sheet, an income statement and statement of cash flow.

The balance sheet states the company’s assets, liabilities and shareholder’s equity while an income statement shows the company’s profitability by comparing the revenue to the expenses.