First steps in selling a business in Spain

The following article provides some considerations and suggestions when selling or buying a business in Spain.

1. Introduction to the sale of companies

2. The first steps in selling companies

3. The profile of a business buyer

4. What to do before placing a business for sale

5. Final questions and doubts concerning the sale of companies

Is this the right time to sell your company? The sale of your company is an important decision and you must know the correct steps when selling your business, including:

• gathering information on the company (profits, expenses, inventory, liquidity)
• considering the presentation of your business (keep opening hours, renew or replace obsolete equipment)
• considering the factors that add value to the company (clients, products, formulas, software, employees, know the role of external advisors, the brokers, and professional intermediaries - valuing the company, negotiating with the purchaser, closing the sale)
• how to promote the sale of your business with the assistance of Internet-based platforms to buy and sell companies.

1. Introduction to the sale of companies

Is this the right moment to sell? The sale of your company is a very important decision since you probably have devoted your time, money and energy to start up and operate your business. Still, now you have decided it is the right moment to sell and you want the best professional advice available. This is when the assistance of a broker or a professional advisor makes the difference in getting the best price for your business.

The following are some of the issues and questions commonly asked by sellers. If you have come this far, the sale of your company has probably raised enough of your curiosity to lead you to this first step. You do not need to make a commitment yet, but you are only gathering information on what is required to sell your business successfully. This section will solve many of your doubts and help you in the selling process.

Question 1

The first question that each seller confronts is: How much is my company worth? To be honest, if we were selling our business this would also be the first thing we would want to know. However, we are going to postpone dealing with this important question for a while. If money is the only motivation to sell, then you are not ready to sell. There is no difference between the value you think your business has and what you want for it. The opinion your accountant, lawyer, or best friend has about the value of your business is not important; only the market can fix the value of your company.

Question 2

The second question you must consider is: Do I really want to sell my company? If you have a solid reason to sell and are committed, most likely you will end up selling.

The next question is: Do you have reasonable expectations about the sale? The affirmative answer to these two questions indicates that you have a serious approach to the sale.

2. The first steps to selling a business

Let's assume that you have decided to take the first steps; even before putting your company up for sale, there are things you need to do. First you need to gather the following information:

• Financial statements for the last three years
• List of fixed assets and equipment
• Leasing contracts and related documents
• List of loans acquired by the company (quantity, repayment conditions)
• Copies of equipment leasing contracts
• Copy of franchise agreements, if applicable
• Estimate of inventories, if applicable
• Names of external advisors

Notes:

If you own a small enterprise, you must gather the information about these topics. After you gather the information listed you must ensure that is complete and up to date. Most probably, you may have forgotten most of this information so you must pay great attention in completing this task. You must have the information well-organized, as if you were to submit it to a potential buyer. Everything starts with this information.

Make sure that the business tax returns are current and as accurate as possible. If you are half way into the fiscal year, make sure you have the previous year returns available. If needed, you can get professional help to put your tax returns in order. As you will see further down, the valuation of a small enterprise is generally based on its liquidity. This includes business sales as well as the income and profits of the owner, the depreciation, and other non-monetary factors. Do not worry if the balance sheet is not what you think. When all factors are added to the balance sheet, the liquidity of the business may look quite well.

Potential buyers will want to review the financial statements of a company. A balance sheet is not usually required unless the worth of the company is over one million euros. Buyers want to check sales and costs. They will want to know if they can afford all company expenses and still make a living out of it (more about this later). You may find a buyer who is willing to take the risk, or a professional with industry experience who is confident about building the business.

The big question is not what you can sell your company for, but the net profit. Fiscal laws determine how much money you will be able to put into your bank. The way your business is legally set may be important at the time of determining your tax situation when selling your business. For instance: Is your company a partnership or a property? There are taxes that apply to certain types of business. The important point is that before you think about the price to ask for your business, you discuss the tax implications of the sale with a professional tax advisor. Nobody wants to be in the middle of a transaction with a committed buyer, only to discover that the tax implications of the sale will yield a much smaller net worth than anticipated.

Buyers buy companies for as many reasons as the sellers who sell them. In closing a deal, it is important that the buyer is as committed as the seller. If the buyer is not serious, the sale will never close. Some of the motivations of buyers include:

• Firing or relocation
• Early retirement (forced or not)
• Job dissatisfaction
• Desire to gain more control over their life
• Willingness to be self-employed
• Desire to begin a business with a portfolio of clients
• Aspiration to expand or make your company grow

3. Profile of a business buyer

This is the profile of the average individual buyer seeking to replace a lost job or leave an uncomfortable work situation. Almost 50% have less than 100.000 euros to invest in the sale. In most cases, these funds, or a great deal of them, come from personal savings or family help. The purchaser often has never owned a company, and most probably, will purchase a business that he or she would have never thought about. The main reason to enter the business is to leave their current situation, either unemployment or an unsatisfactory work situation. The potential buyer would like to be self-employed, have control over their life without working for others. Money is important, but is not the first item on the list; in fact it's possibly fourth or fifth on the list. In order to fulfill the dream of owning their own business, the buyer may take the "leap of faith" required to take the risk of buying and running the business.

Buyers that enter in a business strictly for money are not pragmatic buyers of small enterprises. Consider the features of a willing buyer:

• Desire to buy a business
• The need and urgency to buy a business
• The financial resources
• The capacity to take his her own decisions
• Reasonable expectations to make a profit with the purchase

What do purchasers want to know?

This may be a bit premature since you may not yet have decided to sell, but it may help you in the decision-making process, not only to understand your potential buyer but also to understand what they would like to know at the time of purchasing the business. These are some of the questions that you may face:

• How much are you asking for the business?
• What is the annual growth in sales?
• What is the inventory?
• How much debt is there?
• Is the seller willing to advise on the business and be available for a period of time?
• What makes this business unique?
• What defines the product or service?
• What can be done to make the company grow?
• What can the purchaser do to add value to the business?
• What are the benefits, in good and bad times?

Buyers want liquidity

The first thing to take into account is that the majority of buyers want to buy liquidity. Note though, liquidity is not the same as profits. Most buyers check the statement of earnings and losses or the tax returns, as well as owners' own or family income. They will take into account any excess employee or family compensation. They will also check big one-time expenditures, such as a new information system or building remodeling. They will consider non-monetary factors like depreciation and amortization. They will also review the owner's qualifications. These are factors that a professional intermediary will take into consideration when recommending the sales price.

4. What needs to be done before placing the business for sale?

Appearances count

You must replace obsolete equipment before making the decision to sell. Do not assume that the new owner will like to replace it or that the price will be just slightly less if you do not replace it. The moment to improve your company is now, even if you are selling it. This will make it a good investment. Moreover, you never know when the moment for selling will arrive. Keep in mind that anything that increases sales will improve profits and more importantly, liquidity.

Everything has value

There are other things that add value to your business. Do not underestimate the value of a portfolio of accounts or client lists, the products or techniques used, or well-maintained equipment, the receipts or secret formulas, the tailor-made software or good employees. These are off-balance sheet factors and, while they are not considered in the most commonly used valuation techniques, they add value. Check your business carefully not to oversee the factors that make your company attractive to buyers.

Eliminate surprises

Before placing your company in the market, eliminate all possible sources of surprises. Review each aspect of your business and solve any problem that may show up during the sales process. Nobody likes surprises, least of all, potential buyers. Whether it is a legal, accounting, or environmental problem, solve it now. You must produce an operations manual, as it may add value to your business. Even if it does not add value, it may help the sale move quicker. Preparing a manual on how to manage your company may be beneficial, even if you do not plan to sell your business. It does not need to be a very elaborate document and may cover only basic points. Make sure you include all items that can be of use to a new owner, but not client lists or secret formulas.

As a seller you are part of the selling process. These are some recommendations to help you in the selling effort. We have selected items that are especially relevant to your type of company.

It may be useful to look at your company from the perspective of a buyer trying to step into your shoes. What would you do to make your company more attractive or sellable? Logically, the financial situation of your company is crucial for the sale, but appearances also count. Remember that first impressions are important. If a potential buyer does not like the appearance of your business, he or she may lose interest in finding out more.

You may want to check the following factors to see if some are relevant for your company:

• Keep the normal working hours; they may tend to be reduced when you place your company for sale. However, it is important for potential buyers to see your company in its best condition.
• Undertake all required repairs and maintenance; for example, repair signs, change exterior lights, etc. You do not want your business to look poorly maintained.
• Keep inventories at constant levels. If you allow your inventories to shrink, your business will look not cared for. Increase the inventories and your company will look very active.
• Withdraw all elements that will not be included in the sale and all unnecessary items, especially those that are not working.

5. Final questions and doubts concerning the sale of a company

How long does it take to sell a company?

It usually takes between five and eight months to sell the majority of companies. You must take into consideration that this is only an average; some businesses take longer to sell, while others are sold in a shorter time. The sooner you have all the information required to begin the selling process, the shorter the selling time. It's also important that the valuation of the company is correct from the beginning, although sellers start with the wrong assumption that they can reduce the price, overvaluing their companies. This approach often fails, as buyers do not like high prices. The downpayment is key to a quick sale. The lower the downpayment (usually 40%), the shorter the time it takes to successfully sell the company. A reasonable downpayment also tells the buyer that the seller is confident in the company's potential.

Why is the seller's financing so important for selling the company?

Surveys show that sellers that ask for full price in cash get, on average, only 70% of the asking price, while sellers that agree to receive the money in installments get an average of 86% of the asking price. Reasonable payment terms increase the selling potential and shorten selling time. The majority of sellers are not aware of the positive impact of self-financing the sale of their business. In some instances, it can significantly increase the sales price, and, as previously stated, it tells the buyer that the seller is confident that the company can pay for itself.

What can you do when you have a buyer for your company?

An interested buyer must be able to produce a written offer for your business. This offer may have one of several contingent clauses, generally concerning the detailed review of the financial statements and leasing and franchise contracts (if pertinent) and other relevant details concerning the company. You can accept the terms of the offer or make a counter offer. However, you must understand that if you do not accept the initial offer, the buyer can withdraw it at any point in time.

The first offer may be inadequate, but it is worth reviewing it with care. It may have several shortcomings but may also have points that are worth serious consideration. There is an old saying "the first offer is generally the best that the seller will get." This does not mean that you should accept the first offer or any other, it only means that you should give all offers due consideration. When you agree with a buyer, both should endeavor to review and satisfy all conditions and contingencies of the offer. Full cooperation from both parties is important in this process. You do not want the purchaser to think that you have something to hide! At this point, the purchaser may bring in external advisors to help him or her to review the information. When all conditions are fulfilled, final selling documents are drafted and signed. Once the closing is completed, the payments are made and the new owner can take possession of the company.

What to do to help sell the business

The buyer will require up-to-date financial information. If you use an accountant, you may work with them to update the information. If you use a lawyer, you must ensure that he or she is made aware of the closing process for the sale. Unless licenses are required, there is no need to wait if the buyer and you want a speedy closing of the deal, generally within a few weeks. Time is of the essence in any business sale, as delays allow the buyer to reconsider or introduce changes to the original offer.

What is the role of the brokers or intermediaries?

Brokers and intermediaries are professionals who facilitate the sale of your company. It is important that you know what to do with a professional intermediary. He or she can help you to price your company, structure the selling process, find a suitable buyer, and assist you and the buyer in successfully negotiating and closing the sale. It can also help the buyer with the details concerning the purchase of your business. However, a professional intermediary is not a magician that can sell an overpriced company. Most businesses can be sold provided that they are reasonably priced. You must understand that only the market can fix the final sale price for your company. The downpayment that you are prepared to accept and the conditions of the seller's financing impact not only the final selling price but also the success of the selling process.

How to promote the sale of your company?

There are online platforms that can help you advertise and promote the sale of your company and find suitable buyers in an expedient and efficient manner. Brokers and professional intermediaries also use these internet sites to advertise their portfolio of companies and expedite the contacting of potential buyers.

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