How to Sell Your Business in Singapore: 4 Steps
Are you a business owner looking to retire? Or, are you thinking of moving on from your business to another venture? If you happen to fall into either of these situations, it may be time to consider selling your business.
Selling your entire business is different from selling your shares. When you sell your business, the business’ existing assets and liabilities are taken over by the buyer (subject to indemnities and specific terms of the sale and purchase). This is unlike a share sale where, save for the change of shareholder, there is no change in the owner of the business’ assets.
You may refer to our article on share transfer in Singapore for more information on selling your shares.
In this article, we lay down the key considerations in selling a business and the 4 steps involved in ensuring a smooth completion of a sale. In particular, it will cover:
Best Time to Sell Your Business
When is the “right time” to sell your business? Should you sell it when it is flourishing, or should you let it go only when it seems like your business isn’t doing as well?
Ultimately, this would depend on your objective of the sale and needs. If your intention is to walk away with as much cash as possible, then selling your business when it is highly profitable and performing well would be recommended.
However, if you are urgently in need of cash and/ or you are seeking to move on to another venture, the profitability of the business may not be the defining feature in deciding when to sell your business. Therefore, you should ask yourself why you wish to sell your business and what you want to achieve from the sale.
Determining the Price of Your Business
The next big question is: how much can you sell your business for? Determining the price of your business is going to involve several considerations. There are a number of ways to calculate a reasonable selling price of your business, including the following:
- Return on Investment (ROI) method: This method calculates the potential benefit the buyer can receive by dividing the potential investment return by the total cost of investment.
- Asset value approach: The value of your business is determined by subtracting the total liabilities from the total assets.
- Sales of comparable businesses’ method: This method determines the value of your business by comparing your business to similar businesses that have been sold recently.
Different factors are taken into account depending on which method is used – for example, the return on investment method relies heavily on depreciation and amortisation, while the asset value approach focuses on the value of the business assets.
In view of the complexities that may come with determining an appropriate sale price, you may wish to engage a valuation expert or a business broker appraiser. The valuation expert or business broker appraiser will be able to advise you on which valuation method to adopt and provide you with an objective valuation of your business. This would ensure that you do not under- or over-value your business.
How Do You Sell Your Business in Singapore?
Depending on the complexity of the sale and length of negotiations, the time taken to complete the sale of a business can range from 3 months to a year.
Typically, the sale of a business in Singapore would entail the following 4 steps:
Step 1: Preparing the preliminary documents and getting your business financials in order
Before starting to find a potential buyer, it is important to first gather and finalise the paperwork. Important documents would include:
- Financial statements;
- Business projections;
- Lists of the business’ assets and equipment; and
- Operating manual(s) of the business.
These documents should be properly reviewed so that you know if any adjustments have to be made before putting your business up for sale. For example, you may realise that you need to replace certain broken equipment, or clear certain debts, before your business is ready to be put up for sale.
Besides, certain documents such as the operating manual(s) of your business would need to eventually be shared with potential buyer(s), so you would want to ensure the accuracy and comprehensiveness of the information provided therein.
Step 2: Finding a buyer and commencing negotiations
The next important step would be announcing the sale and identifying potential and qualified buyers.
For a start, you should not limit yourself to finding just one potential buyer – instead, cast your net wider and aim to get two to three prospective buyers, as you never know if some of them would back out during the negotiations and discussions that follow.
As you commence the initial phase of negotiations, it would be ideal to execute a Non-Disclosure Agreement (NDA). This is to safeguard your business information and data, since you would be sharing and giving out such (possibly confidential) information about your business during the course of negotiations with the various potential buyers.
Additionally, following the conclusion of the first phase of discussion, do consider entering into a Memorandum of Understanding (MOU) with the potential buyer(s). A MOU records the parties’ understanding of the terms that have been discussed and agreed, and lays down conditions that the parties have agreed on for the transaction to take place. Certain terms of the MOU, such as terms on confidentiality and exclusivity, may also be made legally binding.
Not sure how to go about preparing and drafting these documents? You may wish to engage one of our contract drafting lawyers to assist with the drafting of the NDA and MOU to ensure that your business interests are properly safeguarded during the negotiation process.
Step 3: Facilitating due diligence checks and concluding negotiations
The potential buyer(s) of your business may wish to conduct due diligence on your business to get a sense of its existing legal, financial and commercial status, and to be made aware of any possible red flags including any existing and contingent liabilities.
This would involve a review of key official documents, material contracts and litigation/bankruptcy searches on key personnel of the business. Therefore, as the seller, you should be ready with your data room, which is a repository of documents and information either in a physical or virtual form, for potential buyers to access.
Where there are risks or problems identified with the business, consequences may follow. For example, the buyer may negotiate for a lower price, or request to incorporate indemnities in the final sale and purchase agreement.
Thus, after getting your data room in order, you may want to make the necessary rectifications or arrangements where possible, to avoid being placed in a less favourable position during negotiations.
Step 4: Signing a sale and purchase agreement and completing the sale
The execution of a sale and purchase agreement would seal the deal. This agreement lays down the detailed terms and conditions for the sale and purchase of the business, and would include terms like:
- Representations and warranties;
- Dispute resolution mechanisms in the event of disputes; and
- Governing law of the agreement.
If these terms sound unfamiliar to you, fret not – reach out to one of our corporate lawyers to advise and assist you on drafting and finalising the sale and purchase agreement.
Besides, the sale of a business is likely to involve other transfer and consent documents to be executed. For example, you may need to transfer a lease to the buyer on completion of the sale. You may also need to adhere to certain execution formalities in the sale and purchase agreement and other ancillary documents to successfully effect the sale.
These nitty-gritty details might be foreign to you, so earn yourself a peace of mind by engaging a professional lawyer who is experienced in putting everything in order leading up to and post-completion.
Retaining a Stake in Your Business
Even after the sale, you don’t necessarily have to cut all ties with the business you had painstakingly built. If you wish to continue being a part of the business, even if just for a period of time to oversee the proper transition of the business, you could then consider the following options:
- Remaining a shareholder by retaining shares in the business;
- Working for the business as an employee;
- Sitting on the board of directors; or
- Becoming a consultant who provides advice to the business.
Each of these roles entails different levels of commitment and control over the business. For example, compared to an employee, being a consultant would likely require a lower time commitment. On the other hand, a consultant is likely to have less control over the business’ operations as compared to an employee.
Of course, any arrangement for you to stay with the business would be subject to discussions with and agreement by the buyer. Specific contracts would also need to be drawn up and signed by parties, such as an employment agreement (if you become an employee), or a consulting agreement (if you become a consultant).
Therefore, which role you should and can take on after selling your business is ultimately a question of preference, readiness and agreeability between parties.
Whether you wish to retire or simply want to move on to the next business venture, selling your business could provide you with the monetary gain and freedom you are looking for. Nonetheless, from determining the price of your business to preparing documents during the course of negotiations, the multitude of considerations involved in selling a business can create many hurdles and challenges for you.
While it is not impossible to manage the entire sale on your own, it may be ideal to engage a seasoned lawyer to assist you through the entire sale process, including the drafting of agreements and advising you on the next steps to take.
Feel free to approach one of our experienced corporate lawyers who will be able to share more information with you.
- Business Sale and Purchase in Singapore
- Pre-emptive Rights to Share Transfers
- Due Diligence Process in Mergers and Acquisitions
- How Stamp Duty Applies When Buying a Singapore Company
- Shareholders' Exit Rights: What You Need to Know
- How to Buy Over a Business in Singapore
- How to Sell Your Business in Singapore: 4 Steps