Management and finances

Selling a company: What you should be aware of

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Selling your own company is a big step for entrepreneurs and one that often only happens once in their professional life. The most common reasons for failure of these plans are the lack of experience in how to sell a company and the enormous amount of time required for this type of succession planning.

Our experts have put together tips for you on what you should be aware of when selling your own company and how to avoid mistakes.

What's the process for selling a company?

Selling a company is a process with several steps. The length of every phase is very individual and can vary enormously depending on the company and succession solution:

  1. Planning and preparation
  2. Determining the company value
  3. Searching for suitable purchasers (market approach)
  4. Checking potential purchasers
  5. Negotiating the purchase offer and due diligence
  6. Signing the contract and transferring ownership

Entrepreneurs are subject to many demands during the process, as numerous factors must be taken into account when handing over responsibility for the company to third parties. Take a structured approach and factor in enough time to avoid typical mistakes.

Avoid the following mistakes when selling the company 

Mistake #1: Starting the selling process too late and underestimating the time required

Selling a business takes time - it can take at least six months, maybe a year, from looking for a buyer to signing the purchase contract. Added to this are the preparation time and the time required to establish the company value and produce a sales portfolio.

As a general rule, entrepreneurs only deal with selling a company once they have already decided to sell. The short lead period can have negative consequences: If a company is being sold under time pressure, the successor is often appointed as a compromise solution or a lower purchase price is achieved. In the worst case, no suitable buyer can be found and the company has to be liquidated.

Tip 1: Work out the right time to sell and start planning early

It's a good idea to address the issue of selling the business as early as possible. If you begin planning some time before selling, you have enough time to decide on the best time to sell. A business that is flourishing and successfully managed can achieve a higher selling price and is more attractive for potential purchasers.

Ideally start planning the sale of your company around five years before the planned handover. That way, you will have enough time to introduce the necessary steps to benefit from tax breaks, for example, as part of the distribution of non-business assets.

Mistake #2: Unrealistic selling price

Pricing is one of the most important factors when selling a company. Owners and interested parties must agree on this point before the company can actually be handed over. The basis for establishing the selling price is an estimate of the company's value that is as realistic as possible.

Owners frequently overestimate the value of their company due to their emotional attachment. You should avoid this misjudgment: An excessively high price is daunting for suitable purchasers, not least when the investment is assessed in the lending process. The result: In the long run, owners have to downgrade their price expectations, their negotiating position is weakened and they lose valuable time.

Tip 2: Take the buyer's perspective into account in your pricing.

Plan enough time for realistically establishing the company's value and try to stay objective when it comes to the valuation. Look at the various models for calculating the company's value and do not hesitate to seek external support: Tax advisors or succession advisors have the professional tools and necessary objectivity to calculate the value of your company.  

The selling price can then be set. Depending on who you sell the company to, the selling price and actual market value can vary significantly from one another. This is why lower prices are usually achieved when it is a family succession. If the business is being sold to a competitor, the price can be up to 40 percent above the control premium. A useful tip here for realistic pricing is to look at things differently: Put yourself in your interested party's shoes and ask yourself from the customer's perspective "Would I buy the company for this price?"

Professional support also pays dividends here: Tax or succession advisors have experience in pricing, bring knowledge of the buyer market and help with this sensitive issue.  

Market return and specific business risks determine a company's value

Market risk and specific business risk have an impact on a company's value. One important factor in this is, for example,  the level of interest rates, as this has a two-fold effect: The higher the interest rate, the lower the company's value and therefore the more expensive funding is for the buyer. If, for example, the future achievable net profit is CHF 500,000 and the risk rate is 10%, the company is theoretically worth around CHF 5 million based on a yield of 0% for a 10-year Swiss government bond. If the yield rose to two percent, the company's value would fall to around CHF 4.2 million, assuming that all other related risks remained the same.

As well as market risk, specific business risks also have to be taken into account, such as difficulty in selling due to reliance on who the current owner is.

Mistake #3: Restricted buyer search

In many cases, entrepreneurs are unaware of what means are available to them to look for a buyer. Rather than approaching the market as a whole, they often focus on their own network. This already limits the choice of potential buyers from the very beginning: Very few interested parties are available with whom agreement has to be found.

The problem: It's not a disaster if one out of ten interested parties drops out. If you only have two potential buyers, one refusal can already mean that you will have to reduce the selling price or make other compromises to enable you to sell when you want to.

Tip 3: Use the many options of the market approach

To ensure that your company is handed over successfully, you should consider a broad approach to the buyer's market and the range of interested parties. By doing so, you strengthen your negotiating position, create competition and can decide on a more independent basis. You should therefore communicate your buying intentions as discreetly, broadly and selectively as possible. To do so, you could also consider the following measures:

  • Post an anonymous publication on online platforms
  • Use anonymous word of mouth recommendations
  • Also look at companies as potential buyers that would like to expand their business field as well as companies in your sector
  • Consult experts who have a broad network and tap into buyer markets which you would otherwise be unable to access

Mistake #4: Insufficient checks on interested buyers

The right successor for your company must have a wide range of skills: Management quality and sector knowledge are just as important as a coherent vision of the future and sufficient financial resources. It's your job to check the candidates for these qualifications. And you should ideally do so through intuition and as early as possible in the process. If you've already spent many hours in discussions and shared sensitive information on your company's annual turnover, it's annoying if negotiations break down due to lack of financial feasibility. It means that you lose time and energy unnecessarily.

Tip 4: Create a requirement catalog for potential buyers

Before you start looking for the right buyer, you should define the attributes for your successor:

  • What financial resources must they have for taking over the company?
  • Should they be an employee, competitor, private investor or investment company?
  • What qualifications are a must for being able to run your company successfully?
  • What future aspirations for your company should he or she have?

Write a list with technical and commercial criteria and sort the requirements in order of priority. This list should be your basis for pre-selecting candidates - it saves time and standardizes the selection process.

Mistake #5: Tax optimization potential remains unused.

Another factor that many sellers of SMEs forget is the potential for tax optimization. The key issue here is that of tax during a company transfer: The income generated from selling a company not only depends on the selling price, but crucially on how it is taxed.

The level of tax liability is based on the legal form of your company:

  • if your company is a joint stock corporation, common stock is usually sold to the new owners. This is attractive for you as the seller, as capital gains are normally exempt from tax, so you receive the full selling price.
  • Individual companies are normally sold in the course of asset deals. As a result, only the assets can be sold and the social security tax liability applies, meaning that after contributions and tax, you as the seller are only left with around 70 percent of the selling price.

In practice, tax optimization often gets forgotten due to lack of knowledge and time pressures. Optimization potential such as changing a company into a stock corporation, for example, remains unused due to the lead time required, and the income generated from selling the company falls short of what is possible.

Tip 5: Check out the potential for tax optimization   

Use the tax advantages for yourself. By establishing a holding company, you can, for example, claim tax savings when you sell your company. Furthermore, selling a company is the perfect opportunity for transferring non-business assets into your private assets. As this type of asset is not usually taken over by buyers, you can also increase the attractiveness of your company. You should also consider the issue of pensions: When transferring non-business assets to private assets, there are a number of opportunities for saving tax that you should use.

If, as an entrepreneur, you're unsure about the tax structure when it comes to selling your company, you can seek a tax ruling from your relevant cantonal tax authority before the transaction. To do so, you have to set out the details for the authority and the related tax consequences from your perspective. You then receive binding information from the authority. The advantage: The sometimes complex and unclear tax consequences of selling a company are confirmed before the transaction, thus avoiding future disputes with the tax authority.

Consulta: Professional support when selling your company

AXA relies on the Swiss firm Consulta for matters of succession planning. As a specialist in succession planning for SMEs, the company has already advised over 400 owners in Switzerland. As a customer, you benefit from an extensive partner network and the many years of experience of more than 25 experts who support you throughout the whole process of selling your company.

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    Management consulting, audit, law and tax: Consulta offers all services you need for a successful succession solution on a one-stop basis.

    Find out more on succession planning from Consulta

Conclusion: Good planning pays dividends

Selling your life's work is an emotional and organizational challenge. With early planning and a structured approach, owners can avoid problems and create the ideal conditions for placing your SME on the market. This way, you'll not only achieve the right selling price, but you'll also know that your company is in good hands for the future.

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