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Selling a business

If you’re thinking of selling your business, you may be looking for a little help. That’s why we’ve put together a series of guides to walk you through the process.

Our guides will help you decide whether now is the right time to sell and how to get your business in shape before you do. We also help you with the tricky process of valuing your business. And, when its time, read about how to negotiate the best deal.

When is the Right Time to Sell My Business?

Thoughts of selling your business can be motivated by a range of factors, some of which may be out of your control.

They can include ill health, divorce, a need to liquidate assets or realise a new strategic path, boredom or even becoming overwhelmed.

Regardless of your motivation, the timing of your sale can really influence the price.

Sale price typically reflects past performance and profits, so taking this into account may help you reach a decision on when to put your business on the market.

Right time to sell a business

Following declining profits and performance

This is the most challenging time for a business owner. Perhaps seeing a slump in performance has drained your motivation and energy and you simply don’t have any fuel left in the tank to build the business up again.

Sadly, this is all too common with burnt-out business owners. The trouble is, a decline in profits and performance will also mean a lower sales price.

If your business is at this stage, you need to ask yourself if you can keep it running and increase profits, ensuring a better sale price in the future.

Perhaps a new competitive threat means you will be unlikely to recover. If this is the case, you need to objectively assess the likelihood of restoring the business to its previous heights – and valuation – versus the risk of things deteriorating further still. Do you stick or twist?

Ask yourself: Can I keep it running and the profits growing, to get a better valuation price?

Amid sustained performance levels with slight profit variation

With this scenario, a business sale price can be based on the previous three to five years’ average profits, as a potential buyer can see that the business has performed consistently over a sustained period of time.

The trick here is not to be lulled into false security. Once that ‘For sale’ sign is up, it’s important to maintain momentum.

The selling process may take a while. You don’t want to lose your sale price advantage because you think the finish line is in sight and you take your foot off the gas prior to completion.

Rising performance and climbing profits

A growth business will always sell quicker and at a better price because astute investors are ready to take advantage of future market success.

However, few business owners want to sell when business is booming. They find themselves enjoying the fruit of their hard labour and are keen for it to continue.

Yet as buyers will pay more for rising profits, a period of growth is always a time to check in with yourself on why you love owning and running a business.

Would you be as motivated when faced with falling profits?

Profit and performance impact on how your business is valued so taking this into account vital.

In addition to profit and performance, there may be other reasons why you’re considering selling up.

You’re simply not enjoying the business anymore

As a business grows, entrepreneurial challenges that were once exciting motivators are often replaced by more administrative or human resource-related challenges.

If the tedium of admin isn’t for you, perhaps it’s time to prepare for your exit.

Your business has outgrown your skills

This is a tough one to face, but business ownership and leadership also requires humility. Is it time to sell your business to someone who can take it to the next level?

Threats on the horizon

Perhaps you can see a threat looming that will have an impact on profits and performance.

If you’re a boutique hotel owner, perhaps AirBnB is starting to concern you. Think of Blockbuster videos, unable to be nimble enough to fight off the challenge of Netflix and Stan.

A lucrative opportunity

A business exit strategy can also be motivated by opportunity.

Perhaps you’re a fast, innovative, social media site that has Facebook knocking. Honesty and humility are important here: you may want to be a multi-million-dollar acquisition, but do you have the skills to get to that level? A million-dollar offer may be worth considering.

Regardless of your reason for selling, one thing is clear: it’s never too soon to create an exit strategy and start preparing your business for sale. Having a plan in place means you’ll be ready to take advantage of any situation you see on the horizon.

But will you seek professional help with preparing your exit strategy and/or navigating the sales process?

Should You Sell on Your Own or Use a Broker?

The pros and cons of appointing a professional advisor to help you sell your business versus going it alone – and there’s more to it than getting expert advice versus saving money.

When it comes to selling a business, there are pros and cons to do-it-yourself (DIY) versus using a business broker.

Primarily, choosing to DIY means you will, by necessity, take your eyes off running the business.

If your business doesn’t sell quickly – or at all – you not only will have lost focus on running your business, you may miss out on important opportunities, especially those connected to keeping performance and profits healthy.

Not all business brokers are created equal. It’s worth conducting your own research and due diligence before appointing a business broker.

Ask your business networks and industry associations to recommend a business broker.

Choose right broker

What’s the broker’s marketing strategy?

Ask for a detailed plan that a broker will action to advertise the business, solicit buyers and achieve visibility.

If their strategy is simply to write an online listing, then there is only limited added value and you might consider doing it yourself.

Request copies of profiles they have developed for other clients. Expect detailed pros and cons of the business profiled.

What have been their other sales successes and failures?

Ask the broker for the names of at least 10 sellers with whom they have worked and contact them.

If an owner will give you a positive review of a broker regardless of whether the business was sold or not, it speaks volumes about the broker's ability and ethics.

What do they ask in their first meeting with you?

A ‘churn and burn’ broker is the one who will pressure you to sign up for a listing in your first meeting.

Don’t fall for it. Lots of listings do not a great business broker make.

Instead, expect to be asked lots of questions about the business you are selling. You want a broker whose primary agenda is to learn about your business, because then he or she will be best equipped to sell it.

Asking you good questions in an effort to get to know the ins and outs of your business is a great sign, as is a willingness to invest time with you in follow-up meetings.

Also, they should be presenting questions to you that a buyer will ask.

You want them to honestly express whether or not they feel your business can be sold.

The value in an intermediary

Using a broker can make a deal flow better and ease communication – especially if you need to take a firm stance, because it means you have someone else in your corner to deliver any bad news.

However, too much intercession can work against you when negotiating a sale, so don’t be afraid to mix broker communications with DIY.

To get any buyer comfortable enough to make an offer, they need all their questions answered and will seek assurances that you will be there for an effective transition period.

The more confidence and trust you can instil in the buyer, the greater your chances of making the sale.

It’s hard to build this credibility through a third-party broker alone, so make sure you involve yourself in important communications.

Other questions and points to consider when deciding to DIY or retain a business broker

  • How much are you willing to pay for the services of a business broker?
  • Will you feel a lack control over the process if you are used to doing everything yourself?
  • A broker may pressure you to accept a contract you're not happy with
  • A broker may pressure you to accept a lower price so they can get their fee, which is usually a percentage of the sale price, rather than risking the deal falling through
  • How many clients is the broker currently working with? Do they have time to properly represent your business?
  • Find out how to negotiate successfully

Once you’ve decided whether to appoint a business broker or go it alone, it’s time to prepare your business for sale.

How to Get Your Business in Top Shape to Sell

Preparation is everything when it comes to selling your business. This guide explains how to assess your business, document operations, consolidate paperwork and make your premises presentable.

When it comes to selling your business, preparation is everything. In this guide, we explain how to do this with minimal pain.

The task can seem daunting, but there are a few fairly simple things to consider as you head towards selling your business.

1. Assess your business

This is slightly different to valuing your business and it requires looking at your business carefully to analyse how it works.

Sit down for a few hours and pretend you are one of your customers. Then use that perspective alongside your insider knowledge.

Ask yourself the following questions:

  • What do you do well?
  • What could you improve on?
  • Who are your suppliers?
  • How many products/services do you sell annually?
  • Are there specific products and services that sell better than others or with greater margins?

A great method for assessing your business is the SWOT analysis, focusing on:

  • Strengths
  • Weaknesses
  • Opportunities
  • Threats

This method provides a reasonably well-rounded look at your business and forces you to confront its weaknesses and vulnerabilities as well as its strengths and potential.

You’ve probably been analysing your business in your own head for years. But if you haven’t, now is the time to put it all down on paper so that prospective buyers can understand the business they may be buying.

2. Share your operations

It’s important to ensure that you, as the business owner, aren’t the only one who knows how things work. Obviously, you need to train your team throughout the business’s life, but as you prepare for sale it becomes even more crucial.

This can include anything from day-to-day operations to the once a month/year operations that you handle. You probably do most of these things without thinking, but the buyer will want to know that if you’re removed from the business that your business will still function.

Create an operations manual – this will ensure that everything you and your team have in their heads is documented.

You should also consider a succession plan so that no-one is left in the dark once you sell.

Prepare your business

3. Consolidate the paperwork

As a business owner, you know how much paperwork is involved – from meeting minutes, to financial records, legal documents and general filing, it can be overwhelming – but it’s vital to keep everything in good order.

It’s particularly important to have every financial statement and accounting record from at least the past year, if not the past three years or longer.

Keeping paperwork accessible is not only required to prove that you have a lucrative business that is worth buying; it will also work in your favour to keep the process as smooth as possible throughout.

The best way to prepare your business for sale? Always have selling on your mind, even if it’s not on the horizon. Stay organised and on top of everything so that you’re not overwhelmed when the day finally comes to sell up.

4. Tend to your business’s appearance

After being in business for a few years, you may notice that your premises are looking run-down.

Just take that extra time to look at your business how a customer or a buyer would. Pay attention to the peeling paint, the squeaky door or the broken tap in the break room.

These might seem insignificant to the running of the business, but they could be the deciding factor when it comes to a new owner buying your business at the asking price.

Most of our first impressions are based on what we see, so going the extra mile and fixing up the small things can’t hurt when it comes to getting your business ready to sell.

It’s the equivalent of buying fresh flowers when you’re trying to sell your house: it spruces the place up and makes it look the best it can.

At the end of the day, your prospective buyers want to be put at ease. They want to know that they’re doing the right thing by buying your business.

Having well documented financials, a succession plan, looked-after premises and a thorough assessment of your business could get a buyer over the line and result in your business selling for the price you wanted.

How to Value Your Business and Understand It's Worth

Our guide outlines the principal motives for business valuation, information needed for accurate valuation, scenarios for deploying various valuation methods, and the influence of intangible assets/goodwill..

Many business owners are under the false impression that valuing a business is only important when it comes to selling it.

Valuation is crucial when it comes to selling, sure, but it can also be helpful to have a fair idea of its valuation throughout your business journey, for any number of reasons – the most common being:

  • You are expanding and buying another business
  • You are selling the business
  • You are divorcing/separating
  • You are insuring the busines
  • You are applying for a loan
  • You are looking to attract investors
  • You want to know your net worth

Throughout the process of business valuation, there are plenty of pieces of information you’ll need to have on hand, so making sure everything is prepared and ready to go is of the upmost importance.

What you’ll need to value your business

The history of your business

Your business will have come a long way from its humble beginnings and there’s no doubt it will evolve in the years to come. Having a record of the business’ origins, goals and journey so far is crucial to understanding its value.

Employee information

Separate from personal information, having a thorough record of your employees means that potential buyers are aware of the job descriptions involved as well as special skills, pay rates and even staff morale.

Be mindful of current employees’ leave entitlements and how this will be handled in the sale. It’s also important to identify key employees – if that person leaves, will they leave your business in limbo?

This kind of information can impact the valuation.

Legal and commercial information

Information regarding your commercial contracts, lease arrangements, licences, permits and registrations can impact the value too. You must provide proof that your business complies with all relevant environmental and health and safety laws and disclose any current or pending legal proceedings.

Get advice about any location exclusion clauses that may affect the business.

Financial information

Profit margins, annual turnovers, asset market values and an assessment of tangible assets all come under the financial information umbrella. All this can help valuers know a little more about the liabilities of your business as well as where you are thriving.

Market information and industry conditions

Take an objective look at the industry and think about short-term and long-term outlooks and how the industry is growing or shrinking. Consider your competitors and the competitive edge you have in the market.

These factors can influence your business’ value. Spending time assessing this type of market information is important; it can also make you aware of the prices other businesses in your market are being advertised for.

Valuation models

Put simply, business valuation is a process and set of procedures used to determine what a business is worth.

While this sounds easy enough, getting a business valuation done right takes preparation and thought.

There are a few common methods for valuing a business.

Industry-based valuation

The value of a business can be calculated through considering the pricing guidelines of the industry it belongs to.

Some quick examples of industry valuation: fast-food businesses can be historically valued based on 40% of annual revenue, while motels may be based on a set price of $20,000 per room.

Each industry is different, so research your industry, discover industry rules and formulas and arrive at a clear understanding of where your business lies within the system.

The Australian Bureau of Statistics has plenty of statistical data, grouped by industry, that gives you a good idea of what factors might play a part in your sector.

Comparable business-based evaluation

This is where you take a look at businesses similar to the business you are trying to value. By reviewing comparable businesses you can assess what a given business is potentially worth.

Of course, this method is not always accurate because every business is different, with different customers, locations, equipment and tools.

Using this method to get a specific number will not be in your best interest, but if you’re looking for a ballpark figure, it could be a great place to start.

Asset-based valuation

Basing your valuation on assets can give you a really good idea of the value of a business.

Take both tangible and intangible assets into consideration, as well as appreciation rates, and you will get a good understanding of how much a business is worth.

To use this method, add up the value of your assets and subtract any liabilities.

The figures in your accounts are a good starting point, but remember that financial advisors are obliged to be prudent: they must use the minimum the assets could be sold for.

So be realistic in your assessment of the value of your assets.

Tangible assets can be things like tools, equipment and property, while intangible assets are things like goodwill, brand and intellectual property.

Guide to evaluate business

Asset liquidation-based valuation

This valuation method is based on how much money the business owner would receive if all tangible assets were sold on the open market immediately.

Useful for businesses on the verge of closing down for good, it is less effective for businesses that want to continue operating, since it doesn’t take intangible assets (such as goodwill, customers, branding etc) into account.

Entry/start up costs

This method involves gauging how much money it would take to build the business from scratch to reach its current size, status and revenues.

Consider the time and resources it took to train staff, purchase premises and equipment and establish branding and marketing, along with a host of other factors.

Calculating these costs is not always an accurate method of valuation since, once again, it doesn’t take intangible assets into account.

Discretionary income-based valuation

Conducting a valuation via this method takes the current owner’s discretionary income into account so that the future owner’s income can be estimated and the return on investment calculated.

This only covers current income and cannot accurately encapsulate the future growth of the business.

Price/earnings ratio valuation

This is a common method. The market value per share is divided by post-tax earnings per share to deliver a P/E ratio.

For example, if a business is trading at $33 per share and has earned $1.30 per share after tax, it will have a P/E ratio of 25.38.

Generally, the higher the ratio, the more investors expect the business to grow in the future.

This is not always the best method for smaller enterprises, but no matter the size of a business, a rough estimate of value can be obtained using the P/E method.

Discounted cash flow

Discounted cash flow (DCF) analysis uses the ‘time value of money’ concept.

All future cash flows are estimated and discounted by using cost of capital to give their present values (PVs).

If the value arrived at through DCF analysis is higher than the current investment cost, the opportunity may be a good one.

The business value is based on the estimated cost that any equipment, inventory, receivables etc would fetch on the open market if sold immediately.

Take the example of a company that makes a profit of $10k annually that is forecast to remain steady for the next 10 years. If a potential buyer wants to achieve a 10% rate of return, it’s like putting the profit into an ‘imaginary’ term deposit.

Would the investor get a better return if he or she put the profit in a bank today for five years? And the profit received in five years time: how much is it worth today?

This is because $10k received in five years time is not worth the same as $10k received today — because if your buyer received that $10k today they could put it in a bank (assuming a 5% interest rate) and in five years’ time it would be worth $12,763.

Working backwards, the $10k received in five years' time is actually worth $7,835 today, whereas $10k received in 10 years' time is actually worth $6,139 today.

Adding all these figures together gives the buyer an idea of how much he or she should pay now to receive the returns from the business in the future.

Multiplier valuation by sales

Each industry has its own publications, business brokers and industry associations that can provide current multiples for your industry. The multiplier method then uses the business’ gross sales multiplied by the multiple to reach a valuation.

For example, if gross sales are at $60,000 and the multiple is 0.4, the result will be a $24,000 business valuation.

This method doesn’t always give you the whole picture, because there are plenty of other factors that can come into play to alter the result.

Multiplier valuation by profits

This method gets its multiple from the profits of a business. Because of this, smaller businesses will slot into the lower range of multiples while bigger companies will fall into a higher range.

It can seem more clear-cut, because multiples are based on profits, but it isn’t always accurate, since it doesn’t take current financial status into account, nor can it account for any threats on the horizon.

No matter the method you choose, this article shows how business valuations are complex and detail-oriented.

It’s worth seeking specialist advice to ensure that you are buying or selling a business for what it’s worth.

What is business goodwill?

There are plenty of things about your business that can’t be tangibly measured, but these will still play a part in its valuation. These intangible sources are known as business goodwill and can include:

  • Customer loyalty
  • Brand recognition
  • Staff performance
  • Customer lists
  • Management stability
  • Intellectual property ownership
  • Reputation
  • Business operation procedures

Prospective buyers should also know the value of your business, so that they understand exactly what they’re getting when they hand over their money.

Of course, buyers and sellers can have very different ideas of what a business is worth – especially when the sellers have an emotional attachment to the business.

This is why it’s a smart move to bring in a business broker or professional valuer to assess your business without bias.

Once you’re confident in the value of your business, it’s time to start thinking about how to write the perfect advertisement to attract buyers. Once you’ve found a buyer then you’re advised to prepare for due diligence: the buyer’s thorough examination of accounts, customer/supplier relationships and physical assets.

Five Key Skills for Negotiating the Sale of Your Business

It might seem counterintuitive, but both sides should gain from a successful negotiation. Here’s how to build trust and strike a satisfactory deal as quick as possible.

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The greatest tactic you can take into any negotiation is to give the other party what they want. Counter-intuitive, right?

Yet in successful negotiations, the idea is that both sides gain.

Negotiating can feel confrontational, and this is where the problem lies. Standing up for what you want, arguing for a better sale price, going through terms and conditions – most people equate these processes with conflict (to be avoided) rather than an inevitable part of working towards a mutually beneficial gain.

The good news is, negotiating is a skill which can be learnt.

We don’t recommend you launch your negotiating career with your first business sale, but with practice, trial and growth, negotiating a sale can be less complicated than you might imagine.

Good negotiators are:

  • Flexible
  • Creative
  • Aware of themselves and others
  • Good planners
  • Honest
  • Win-win oriented
  • Good communicators
Negotiate sale

Planning is everything

Planning is vital in sales negotiations. Decide your minimum accepted outcome, your anticipated accepted outcome, and your ideal. Also, decide on your ‘option B’ if negotiations fail.

Clear planning comes from knowledge and insight, so research the buyer thoroughly and take the time to meet with them personally throughout the due diligence process.

When it comes to negotiations, have a clear idea of the other party’s expectations and desires.

Be clear

Turn up to any negotiations with an agenda and present it calmly and concisely. Be clear about what you are offering and what you need from the other party.

Think about what the other party needs from the deal and take a comprehensive view.

Strive for mutually-beneficial solutions

Negotiating is about preparing for compromise. By asking lots of questions and paying attention to all details, you can negotiate a sale that is mutually beneficial.

The first offer/proposal is rarely the one to accept, so be sure to discuss compromises and make and receive concessions.

On average, you can expect to say no three times before saying yes.

It’s all about closing the deal

As you negotiate your sale, be aware of the signs that your deal is reaching its conclusion.

The other party’s counter-arguments may lack energy, they may exhibit tired body language, such as a weary lean at the table, or you may discover there is a convergence on the position you are both taking.

This is a great time to introduce closing statements, put decisions in writing, and follow-up quickly on any commitments made.

What if negotiations fail?

From your initial planning, you ought to have your minimum acceptable sale outcome.

However, if that isn’t met, it’s wise to have a plan C. In the trade, this is known as your ‘best alternative to negotiated agreement’ or BATNA.

Use this back-up plan as a place from which you can brainstorm to keep the negotiations going. Remember the focus is to do with outcomes not disagreements.

There is also great power in walking away – or, if you’ve reached the limit of your negotiating skills, you can invite a third-party mediator into the sale.

When you’ve agreed initial terms, the only thing that stands between you and a successful sale, at the price agreed, is a smooth due diligence process.

The Due Diligence Process When Selling Your Business

Mutual trust established during negotiations can easily collapse when the buyer begins trawling your accounts, speaking to customers and auditing employees. Here’s how to navigate due diligence safely.

A thorough buyer will conduct due diligence to confirm information presented in the initial sales pitch and identify any red flags (all the more reason to prepare your business for sale properly). Being prepared for questions a buyer might have, and having all supporting documentation ready, will greatly aid the process.

Just put yourself in the buyer’s shoes and be prepared to answer the questions you’d want answered.

What to expect during due diligence:

An investigation into business history and trends

The purchaser will want to look at sales targets, profit margins, overheads and working capital, to see if there is consistency in the numbers and if any areas can be improved.

If there have been irregularities – perhaps there was a downturn in numbers for a short period – a purchaser will ask for explanations.

Talking to customers

The best way for a buyer to rate products and services is to talk to current customers.

How long have they been a customer? Do they use the competition and, if so, why?

The buyer will also assess your relationship with the customer, the impact a change in ownership may have, and gauge how much they want you to help post-sale in order to effect a smooth transition.

Talking to suppliers

Similar to the customer conversation, due diligence will also uncover outstanding debts, how the business is perceived by its suppliers, how it compares to any competitors with whom they have a supplier relationship, and if a change of ownership would impact on supplier agreements.

Investigating and comparing financials

Due diligence allows a potential buyer to check that sales forecasts and projections are realistic.

Any customer and supplier comments could be tallied against information supplied by the business itself and any industry benchmarks available. Are the pictures being painted similar?

Balance sheets will be compared and the buyer may request a comprehensive audit and assess whether any outstanding debts are manageable.

Talking to and auditing employees

A buyer will audit employees against any industry pay agreements – are they above award rate? They will also check employee turnover against industry norms.

Employees may be asked if they will stay or leave following a change of ownership. A buyer will also want to know which employees can help them most in effecting a seamless transition.

How you can smooth the due diligence process

Due diligence pays off, with angel investors reporting that those who invested 20 hours or more in due diligence were five times more likely to get a return. So it’s worth taking a few steps to pre-empt due diligence in order to achieve the best sale negotiation.

Set up a digital due diligence folder

Create a digital folder – using a cloud storage provider like Dropbox or Google Drive – containing documents related to your company and requests made in the due diligence process. You can then share this folder in response to a due diligence request.

In the form of documents, organised into folders, this online repository of information allows you to define information flow in advance rather than prepare each piece on demand. It also makes you look professional to your prospective buyer, helping to solidify their initial interest.

And preparing ahead of time forces you take a hard look at the inner workings of your business before you sell and gives you time to make any necessary adjustments.

Typical things requested from sellers as part of a due diligence checklist:

  • Organisational charts
  • Past financials and projections
  • Management reports
  • Stockholder communications
  • Customer and supplier agreements
  • Credit agreements and loan obligations
  • Partnership or joint venture agreements
  • Articles of incorporation
  • Shareholder arrangements
  • IP-related agreements
  • Government authorisations

And preparing ahead of time forces you take a hard look at the inner workings of your business before you sell and gives you time to make any necessary adjustments.

Other useful, customised documents you may wish to include:

  • Customer acquisition channels
  • Case studies of key customers
  • A list of customers in your sales pipeline
  • A spreadsheet with your company’s key metrics: your revenue, users, growth rates, customer acquisition cost, lifetime value, etc
  • A financial plan for the next three years

Other useful, customised documents you may wish to include:

  • Customer acquisition channels
  • Case studies of key customers
  • A list of customers in your sales pipeline
  • A spreadsheet with your company’s key metrics: your revenue, users, growth rates, customer acquisition cost, lifetime value, etc
  • A financial plan for the next three years

It may appear overwhelming, but being prepared saves you time and gives you a better chance of sales success.

If due diligence proceeds without a hitch then you can finalise the sale with the help of a solicitor with expertise in business sales.

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