A short practical guide to achieving the best price for your business.
If you have thought about selling your business, you may or may not know what to do next. How do you prepare and present your business for sale to achieve the best possible price?
The process includes:
A. Why are you selling?
To sell your business you have to have a buyer. A buyer will buy for his reasons, not yours. Your attitude and what you say can drastically de-value your business. Comments like "the place can't run without me" will make any potential buyer run to the hills or they will drastically reduce their offer price.
You need a genuine reason for the sale. Buyers will not pay top dollar for a business that is broke. By broke I mean in the way of making losses or without systems, contracts and a future.
This is the most important part in selling your business. Sellers will have one view; buyers another; accountants another. There are different ways to value a business, some more complex than others and each method has its advantages and disadvantages. Valuations are usually based on a combination of methods. The skill lies with the valuer to reach a suitable valuation conclusion.
Because buyers and sellers usually have different ideas about what a business is worth, it is a good idea to get an experienced Chartered Accountant who undertakes many valuations to assess a business. A well-prepared, balanced and independent valuation can help speed up negotiations and offer a more complete picture of the value of a business.
C. Prepare for Sale
Potential buyers will want to look at the books. An experienced valuer will present the annual Financial Statements in a special format that shows the Earnings Before Interest And Taxation (EBIT), or a variation depending on the industry. The idea is to show the operating results of the business before interest costs and taxation, as this can vary from business to business. In addition, lists of all the assets will be compiled with market values. Copies of major contracts, lease agreements, staff details and operating hours will be required for the purchaser's due diligence.
D. What is Goodwill?
Goodwill is the value of the business over and above the tangible assets and needs to be worked out. Goodwill is the assets of the business other than tangible assets, which are assets you can see, and touch like the truck and trailer unit. There are many intangible assets in the makeup of any business and working out the value of these is not straightforward. Intangible assets are such things as brand, copyrights, intellectual property, business systems, good reputation and loyal customers and are generally referred to as the 'goodwill' of a business and are often considered to be where the real profit of a Company lies.
The difficulty though is working out how much this goodwill is worth. Often the vendor's view will vary considerably from that of the potential purchaser. You need to get an objective opinion from your Accountant experienced in business appraisals, to assess the value of the business including the goodwill.
To maximise the sale price of the business may take two to three years working with your accountant to maximise the eventual sale price.
E. Mistakes to Avoid
How many times have we heard people say, "If only I'd done that"? In selling your business, you may only get one chance of getting it right, so you need to be aware of the possible mistakes such as:
1. No preparation
Unbelievably, many businesses come to the market without a single idea of what is involved in the sales process and what they want to get out of the sale. It is vital that you understand these aspects and have a firm plan for what you would like to achieve. If you are poorly prepared, it will show, frustrate buyers and waste everybody's time. The end result is NO SALE. Do not underestimate the amount of time and effort it will take to get a positive result. It can take two to three years to get a business ready for sale.
2. Inadequate financial records and information
Private businesses are set up to minimise tax, not show maximum profits. However, profit is one of the principal yardsticks of valuation. Low Profits = Low Valuation. If there is a good reason for low profitability and you can demonstrate solid results, make sure you document this. Nothing kills a deal quicker than failure to produce accurate, up-to-date, financial information or not answering queries quickly and efficiently.
3. Why do you want to sell?
This will be one of the first questions a buyer will ask you. Give some serious thought to why you want to sell. Common reasons include retirement, health, capitalisation or a career change. If the buyer isn't comfortable with your reason, they will simply walk away. If you have not made a firm decision to sell, whatever your motivation - don't. Wait until you're sure it's what you want to do and have a firm idea of what you want to achieve.
4. Non-qualified prospects
Beware the tyre-kickers, bargain hunters and general time wasters. Don't be afraid to ask for financial information or do background, credit and Company checks. A serious buyer won't mind. Make sure the buyer has the means and motivation to make a purchase. Use a quality business broker who will be able to check this thoroughly for you as part of their service. Be WARNED, you can waste significant amounts of time and money getting distracted by the wrong prospects.
5. Trying to sell yourself
Selling a business is a complex and time-consuming process. It is very easy to underestimate the process and think you can do it all. You wouldn't be the first or last to take your eye off the ball while trying to sell, letting your business suffer - weakening your sales proposition.
A buyer will automatically assume a position of advantage if they see you have chosen not to take professional help, especially if they equip themselves with an army of experts.
6. Over negotiating
Many a deal has turned sour because one side feels cheated. You may have to work with the new owner for a period post-sale. A skilful negotiator will work toward everyone feeling happy with the outcome.
Do what you do best - carry on running your business. Use your Accountant to help you. An experienced Accountant will guide you all the way through to completion of sale‚¬" hassle free and at the best possible sale price.
Prepare early for the sale of your business, the earlier you prepare, with the assistance of experts, to get your business in the best possible shape, the greater the eventual sale price.
"An eagle was soaring through the air when suddenly it heard the whizz of an arrow, and felt itself wounded to death. Slowly it fluttered down to earth, with its lifeblood pouring out of it. Looking down upon the arrow with which it had been pierced, it found that the shaft of the arrow had been feathered with one of its own plumes. 'Alas!' it cried, as it died"
"We often give our enemies the means for our own destruction."
~ "The Eagle and the Arrow" by Aesop
HJ Pryde ACA Coombe Smith (PN) Limited