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There are a number of different scenarios that could lead to the decision to sell a business. It could be necessitated by the inability to carry on with operations, mounting business losses, a godfather offer by a competitor or investor, or it could be as simple as deciding to go in a different direction.
Whatever the case may be, it’s important to note that selling a business is not as straightforward as drawing up a contract for the sale. There are laws governing such a process and you want to ensure that you abide by these guidelines to avoid any issues in the future.
This article is designed to discuss the legal consideration for selling a business, how to go about it, and provides some tips on how to better go about the sale of your venture.
Legal Considerations for Selling a Business in the Philippines
Bulk Sales Law
The Bulk Sales Law (or Act No. 3952 as amended by Republic Act No. 111) is the primary statute governing the sale of businesses. Essentially, this law protects creditors and suppliers by preventing the defrauding of creditors through the secret sale or bulk disposal of all (or substantially all) of a merchant’s stock of goods.
Under the Bulk Sales Law, a sale is considered a sale in bulk when:
- There is a sale, transfer, mortgage, or disposal other than in the ordinary course of trade and regular operations of a business;
- The sale is of all or substantially all of the business or trade;
- The sale is of all or substantially all of the fixtures and equipment used in business.
The Bulk Sales Law requires several formalities. These include:
- The sale in bulk to be accompanied by the sworn statement of the vendor/mortgagor that lists the names and addresses of – and amounts owing to – creditors;
- The sworn statement will be furnished to the buyer;
- The seller is required to prepare an inventory of stocks to be sold;
- The seller is required to notify the creditors of the projected sale at least 10 days before such a sale.
You don’t have to comply with the above formalities if:
- The sale is made in the ordinary course of business
- There is a written waiver from all creditors
- The sale is by virtue of a judicial order
- The sale is made by an assignee in insolvency or those beyond the creditors’ rights
When there is a violation of the Bulk Sales Law (which means the above requirements aren’t met), the sale in bulk is still considered valid between the parties but void to affected creditors. This means that the purchase is considered to hold the property in trust for the seller, while also considered liable to the seller’s creditors for the properties forming part of the bulk disposed of therein.
These all basically mean that before buying all (or substantially all) of the assets of a business, you must comply with the Bulk Sales Law.
6 Steps for Selling a Business in the Philippines
1. Determine the Business’ Value
Before you do any move towards the sale of your business, you first need to determine its market value. To do this, there are a few considerations to make.
- Price to Earnings Ratio – You could estimate the business’ earnings for the next three years or so and multiply that by the typical price to earning’s ratio to get the value of the business.
- Revenue – You could also base it on how much money the business generates in a year or get the help of a business broker to determine its industry value.
- Add Up All the Assets’ Value – You should also consider the value of all of the assets of the business. That should include the inventory and all equipment used to run the business. The value of these assets should be added to the final price you set.
- Discounted Cash-Flow Analysis – There are online NPV calculators that you can use for this. This analysis focuses on the annual cash flow of the business and then projects it into the future. You would then discount the future cash flow value to today.
- Other Considerations – Aside from financial considerations, you should also consider factors like geographical location, industry projections, among others that could possibly affect the value of your business now or in the near future.
Related: 150+ Profitable Business Ideas in the Philippines
2. Prepare All Required Business Documents and Legal Paperwork
Another thing you need to do is make sure that all the important business documents are ready even before you put your business up for sale.
No matter how big or small your business is, know that any potential buyer will expect you to have your documents prepared. After all, they will have to check these papers to see how profitable your business is and whether or not it’s a good investment.
Do have these financial and legal documents prepared:
- Updated Balance Sheet
- Cash Flow Statement
- Existing Insurance Policies
- Tax Returns for the Last Three Years
- Profit and Loss Statement for the Last Three Years
- Employment Agreements
- Confidentiality Agreements
- Copy of the Current Lease
- Detailed Profile of the Business
- Existing Contracts with Distributors, Suppliers, and Others
- Document for Any Seller Financing
- Any Other Legal and Financial Documents
Related: 10 Ways to Fund and Finance your Business
3. Decide Whether You Will Sell Your Business on Your Own or Hire a Broker / Investment Banker
There may be instances when selling your business by yourself is the better route, like when you are planning to sell to a relative or a trusted employee, or if you do need to save money and can’t afford a broker’s commission.
In most other circumstances, though, getting the help of a broker can make a huge difference. For one, it would give you more time to keep the business afloat.
A broker might also be able to fetch you a higher price for your business while providing you with more options.
Should you choose to work with a broker, you should take the time to choose the right one for you. Make a list of those that interest you. Once you have a shortlist, interview them and listen to their proposal and plan of action before you decide on one.
4. Find Buyers and Qualify Them
Finding the right buyer may be one of the most time-consuming steps when selling a business.
It may take six months to two years, or even longer. That said, it’s not wise to go with the first potential buyer you come across. It would be better if you have at least two or three potential buyers to choose from.
Also, make sure that you check if the potential buyers are pre-qualified for financing. Do make some room for negotiation but don’t be swayed if you are offered a price that you are not happy with.
Any agreements that you come to should be a signed one and don’t forget to have your potential buyers sign a nondisclosure agreement to ensure that your info is protected.
Another viable option for finding potential buyers of your business is through online platforms such as:
5. Make the Presentation
Even if your business is quite well-known, don’t expect your prospective buyers to know every detail there is to know about your business. Expect that you will need to provide them with all the information they need to know.
A prospective buyer would find what you’re offering more appealing if you have a proper visual presentation. Make sure that your presentation covers all the important details and that it highlights the strengths while disclosing any weaknesses.
Don’t make the mistake of hiding any weaknesses as your prospective buyer will almost certainly do their part in checking the information you provide them. Thus, it will be better that any potential issues are disclosed off the bat.
6. Negotiate and Close Deal
As mentioned above, there are many financial and legal factors that have to be considered when making a sale aside from the purchase price.
Think of the sale price as simply the end result. When you have decided on the buyer to whom you want to sell your business, you’d have to negotiate the terms which may include seller financing, any liabilities that would be assumed by the buyer, any employment contracts, assets that will be retained, earnout, and more.
Only after negotiation, when both parties have agreed to all terms can you proceed to closing the sale.
Related: How to Buy a Business in the Philippines
Tips for Selling Your Business
Now that you know all the steps that you need to go through when selling your business, here are some tips that could help make the whole process easier for you.
Put Yourself in the Buyer’s Shoes
When selling a business, don’t just approach it from a seller’s standpoint. Instead, put yourself in the position of a prospective buyer.
Ask yourself “If I am the buyer, would I be interested in the business at this price or does it really make sense to purchase the business with the terms being presented?”
It’s easy to think of how you’ll profit from the sale, and that’s natural. But if you do want to make a sale sooner rather than later, you’d better see how your offer looks from a buyer’s point of view.
Create Value for the Buyer
You might think that as a seller, your responsibility to your buyer ends when the deal is closed and that your sole focus should only be on making that sale. To be able to do the latter, though, you would have to create value for your buyer as well.
Provide your buyer with helpful information on how they can optimally leverage the business. You may ask a seasoned adviser to go over strategic plans and come up with possible growth opportunities for the buyer. This can greatly help you make a successful sale and at the same time help the buyer improve the business’ performance in the future.
Market the Sale of Your Business
Even if you choose to work with a broker, don’t leave all the work to him or her. Do your part in marketing the sale of your business. After all, you are the best person to promote it as you know the business inside out. Just make sure that you plan your strategy carefully and don’t hesitate to discuss your ideas with your broker so that you can work towards the same goal.
Set a Realistic Price Range
One of the biggest mistakes you can make when selling your business is setting an unrealistic price for your business. You may think highly of the work you’ve put into your business, but if it can’t be represented in financial terms, you can’t expect to fetch an ideal price for it.
Always take into consideration the current market, the industry you are in, the competition, and the economy as a whole when deciding on the price.
That said, there’s also danger in setting the selling price too low as it could appear suspicious to potential buyers. Consult with a professional who can do their research regarding similar business sales and who can give you sound advice regarding your business’ value.
Related: The Complete Guide to Business Valuation in the Philippines
Spend Enough Time and Effort in Choosing the Right Buyer
It can be exciting when you hear the news that someone is interested in purchasing your business. However, you should know that the first offer you get may not be the best one you could get. So do allow yourself to carefully think things through and wait for additional leads.
When you have at least three offers, you can compare their offers and go for the one that fits what you’re looking for in the next owner of your business.
You might find that selling your business is almost as hard as it was when you were just starting it, or even harder. That doesn’t mean you should have a “just get it over with” mindset.
You might feel frustrated when you’ve been waiting a while to even get a lead but know that when you take all the necessary steps and follow the tips above, you’re getting closer to your goal.
As much as possible, don’t feel pressured to make a sale in a short time (unless that’s what you really need). Just do your part as a responsible seller and trust that you will eventually get the best offer for your business.
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