As just one of the changes in the current Australian economy, there’s now a distinctly different emphasis in the market for small businesses. Any owner who plans on selling a business today needs to consider the following factors. In fact, many of them make good business sense anyway, but now they’re even more important. Further down the page, there’s a comprehensive list of the facts and figures you need, but look at these principles first.
Be prepared to help with finance. Consider vendor financing the buyer. Full cash settlement on the sale was a reasonable expectation when money was much more freely available from banks and most buyers had some home equity to use for security. But today, a seller who wants full price for the business may have to help finance the sale. It also shows faith in the future of the business.
Market value of a business can be improved by boosting profitability by reducing costs. These savings can sometimes be made by re-negotiating agreements with suppliers so they charge less or offer more product or service. It’s often in their interests to work with you along those lines to keep your business.
Talk to your landlord, if the lease is close to ending. Try to re-negotiate a more favourable rate per square metre, because commercial rental prices have declined in the current economic climate - you see a lot more 'for lease' signs around today.
Write a business plan. Selling a small business with a proper plan can make the company much more appealing. Buyers are much more interested, in black and white, how it can be successful under new ownership.
One of the other most valuable documents you can have is a complete Operations Manual. While these take time to write they are a clear sign to a buyer that you have really thought the business through and refined it. It’s also a great confidence-builder for buyers looking to run the business without running here there and everywhere for help. They can feel confident that if they strike a problem there is written solution in the manual.
Work on advertising for new customers, building new client relations with social media tools, (eg YouTube, blogs, Facebook etc.) and making sales calls. Instead of ideas for a buyer to follow up on, these are action steps you are actually taking now and they help a potential buyer understand how growth can be achieved.
Update your website to attract new customers, to improve communication with existing customers, and perhaps even to accommodate Internet purchasing. (In fact it’s critical that you regularly update your site anyway – the search engines today are looking for new or updated content all the time. If your website isn’t up-to-date and regularly updated you’ll slip in the search engine rankings fast.) I pay my marketing people to spend several hours a month tweaking the website and I respond to any queries about the site from customers so everything possible is included to make sure I stay on Page One. I also use Adwords campaigns and we’re just about to implement a social media campaign. Prospective buyers are much more likely to envisage themselves owning an enterprise if it is has a powerful, up-to-the-minute website.
The main problem today is a buyer wants to pay what the business is worth based on today’s profitability, while the seller wants to collect what it “used to” be worth (and, the seller claims, will soon be worth again).
This is where a broad range of valuing tools and serious experience in the market really comes into play.
There are a number of standard methods used to value a business but it’s vital that different valuation methods are each taken into account when calculating the true value of business.
Each one of these methods individually does not always represent the true value of a business. We have seen valuations where the derived value of these five different approaches varied by several hundred percent!.
For example, there are Rule of Thumb values based on multiples of adjusted nett profits or percentages of gross sales. The rule of thumb methods only work when there are many similar businesses having the same operating expenses and assets. This doesn’t always happen and when you use the method on more unique businesses, it just doesn’t work.
However most businesses today are valued as a multiple of SDE (sellers discretionary earnings) with the base multiple varying by industry. SDE is the sum of taxable income before interest, income tax, depreciation and amortisation, which gives EBITDA (earnings before interest, tax, depreciation and amortisation of loans). EBITDA is then added to the owner’s benefits and discretionary expenses charged to the business like salary, write-off of company car, health insurance, holidays etc which gets us to the true SDE – which is usually higher than the company’s taxable income.
Most businesses are valued at a multiple of SDE with the multiple varying by industry. We weigh all these factors and adjust the multiple up or down based on our practical experience here. Examples of factors that will vary the multiple up are: increasing sales, margins and profits, repeat/referral customers, location, the seller’s willingness to offer vendor finance and the business’ growth potential. Examples of factors that will value the multiple down are: declining revenue, margins and/or net, customer concentration, competitive threats, short time in business and an above market premises lease rate.
We take all these methods and variable into account, and based on over 13 years of selling businesses here, we can arrive at a valuation of the business based on logic and truth and experience. In fact, frequently we will value the business higher than you or your accountant do and then achieve that price at sale.
Selling your business is an important decision, second only to having taken the original step of buying or starting it up in the first place. You would never embark on a new business venture without extreme optimism and enthusiasm; the same energy should exist when it comes time to sell your dream -- don’t sell without giving it 110% effort.
Here are the recommended steps to realize your dream of moving on;
Decide to decide.
Be sure your books and financial records are in good order so as to be easily understood by someone who is not familiar with your operation.
- Clean up the property. This is not a 'Going Out of Business Sale' but a 'Going Into Business Sale'.
- Decide on a marketing plan for the sale of your business and establish a budget to accomplish it.
- Retain the full marketing services and expertise of us as your business broker. Let us do all the time and money-consuming promotions, advertising, pre-qualifying appointments, and the detail management that go into locating quality prospective buyers. And then see it through to sale smoothly and quickly to the satisfaction of both parties
You need to be realistic on how the sale will move forward and you need to put just as much preparation into the sale of your business as you did when you started it. A seller needs to be optimistic about their expectations, but realistic as well.
Sellers should answer the following questions as a way to determine their expectations of the sale of their business:
Why are you selling? Is it for personal reasons or are you looking to retire? Perhaps it is the economy and you want to showcase the fact your business is doing well. Whatever the reason, be sure you know why you are comfortable with your reason so you don’t change your mind when a buyer makes an offer and reality sets in. Knowing why you are selling your business should be a part of your exit plan.
What are your expectations of the sale? Having an idea of the price you are expecting or needing to get for your business and what kind of timeframe you want to sell in is also important. Sellers need to have a thorough valuation of their business completed so they are putting a realistic price on the business. Current market conditions are outside factors that also need to be taken into consideration. A valuation by an outside party like us will provide you with a realistic picture of what you can expect in the way of price. A word of warning about accountants valuations; very few accountants have the advantage of knowing the market for selling businesses like we do. They don't have the unique advantage of being able to refer to multiple previous sales of similar businesses that have been sold by us in the area. We have 13 years of past sales to refer to and an in-depth knowledge of the individual businesses sold and the variable factors involved compared to your business.
What does your ideal buyer look like? Think about the qualities you feel the buyer of your business should have and what kind of offer they would be presenting. Is the buyer looking to continue to build on your success? Will the buyer be a good fit for the staff you leave behind? There are also some very important new kinds of buyers out there - some are laid off individuals are looking to buy a business as an alternative to traditional employment and some boomers are looking for a business that fits their lifestyle while providing financial support during retirement. Then there’s the huge immigration market to the Sunshine Coast from overseas who are frequently highly cashed-up and moving here on a Business Migration visa.
As mentioned above, you may need to work out how much you’ll be willing to negotiate and if you are willing to consider vendor financing for part of the price.
Here’s your basic checklist on what you’ll need to provide in order to achieve a quick, clean, and above all, profitable sale:
* The last 3 years of Profit and loss statements, balance sheets, and tax returns of the Business;
* Complete listing of all equipment and other assets to be included or excluded in the sale;
* If applicable, an interim profit and loss statement, balance sheet & BAS (Business Activity Statements), and full copies of all lease documents relating to the premises;
* Equipment leases/chattel mortgages, phone agreements.
* Copies of all franchise agreements, if appliable, licenses, loan documents, contracts or agreements;
* All agreements relating to employees;
* Any environmental reports
* Copies of all other documents needed to present a fair and accurate description of the Business to prospective buyers.
There’s a fully comprehensive list of Due Diligence requirements that a buyer will expect in the section TIPS ON BUYING A BUSINESS on this site which will also help you prepare for the sale.