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Before you sell your business, take a little time to consider your options. There are resources available that can help you maximise the price you receive for the sale of your business, as well as minimising the costs associated with the sale. Taking the time to figure out these things can be the key to selling your business with a minimum of stress that won’t leave you feeling rushed to accept the first offer you receive. Instead, you’ll feel confident to consider the offers you receive rationally because you’ll be more prepared for the entire sale process. This could end up saving you thousands of dollars in commissions and help you receive a better overall gross sale price for your business in the end. This eBook is designed to help you work your way through some of the things you should consider before you sell your business.
VALUING YOUR BUSINESS
If you know you’re ready to sell your business, you will need to find a way to determine an accurate valuation estimate. After all, without knowing what your business could realistically be worth, it will be very difficult to set a price that will be reasonable to a potential buyer. Unfortunately, there are several different methods for valuing a business. It actually comes down to the type of business you intend to sell and the size of the business and its cash flow that will determine the method that works best for your own situation. In many cases, buyers may view the recent year’s profits as being a basis for valuing a small or medium sized business. Some buyers of larger businesses may want to calculate an average of the previous two or three years’ profit margins to determine a more realistic figure. However, there are other considerations that can come into play. Here is a quick overview of some of the differing valuation methods you may encounter:
Asset Based Business Valuations
An asset based valuation is most often deployed for any business where the profit currently reported by the business isn’t in line with the actual amount of capital invested in the business with regard to stock or plant equipment. Rather, these businesses may be valued by the value of the assets within the business. Sales of businesses priced by Asset Valuation should contain no goodwill component. The value shown is predominantly derived from the value only of the plant, equipment and stock being sold with the business. These costs are usually determined at market value.
Book Value/Asset Value Business Valuations
Many accountants may choose to use the “book value” of a business, which is based purely on the accounting books kept by the business. Ideally, this is a simple equation that is: Assets less liabilities equal owner’s equity value. Unfortunately, this method of using accounting values to determine a business’s value may not always be an accurate measurement of the value of the business. It may not also take into account the realistic value of the assets within the business. Some accountants may use different types of ‘book value’ to work out an estimated business valuation. Tangible Book value works out calculations based on deducting any intangible assets from actual assets. Intangible assets include things like capitalised start-up expenses, goodwill costs, or deferred financing costs. Economic Book value will adjust any assets within the business to their actual market value. This type of valuation will allow for goodwill, inventory, real estate and any other assets within the business.
Discounted Cash Flow Method
Many accountants prefer to use the discounted cash flow method to determine a valuation for a business. This method is an attempt to place a more accurate value on future cash flows within a business. This type of business valuation is based on the idea that any business’s true value is dependent on the future net cash flow of that business, and then discounted back to a present dollar value at a discounted rate. There are two primary elements present in this type of valuation:
Net revenue generated by the business annually Net cash anticipated from sale of the business. Larger companies with stable revenue figures are more likely to use this type of valuation method.
Return On Investment (ROI) Method
The Return on Investment business valuation method is one of the more common methods for determining a business’s true value. This figure is actually more like an amount that is based on a return to the owner prior to him drawing a salary. The figure given on the ROI method reflects a percentage amount that will be returned to the purchaser on the capital investment made in the business. When the ROI method is used, an accountant will determine a net profit amount taken from the Profit & Loss statement, and then adjust those figures to add back various deductions and write-offs to come up with a figure that more accurately represents the real return to the purchaser. Essentially, the calculation will come up with a figure designed to represent the return to the purchaser prior to interest, tax, depreciation and any salary drawn on the profits. There are other considerations that may come into play with this method of determining a business’s value. These will include any stock, goodwill, equipment, intellectual property or work in progress. They will not include the vendor’s debtors, which are retained by the seller, who will be expected to pay these out from the proceeds of the sale.
EBIT Valuation Method
EBIT actually stands for earnings before interest and tax, although most accountants will extend this to include earnings prior to interest, tax, amortisation and depreciation. In most cases the EBIT figure is used as a base denominator to determine the total value of the business. For example: if the earnings before interest and tax (EBIT) comes to $1 million and the multiple used is 2, then the value of the business will be $2 million. This is meant to represent the true value of the business assets, which include stock, plant, equipment and goodwill. Any debtors or creditors of the seller aren’t included.
Sales Multiple Valuation Method
One of the most widely used calculations to determine business value is the sales multiple valuation method. This simply takes a measure of the level of annual sales and multiplies is by the amount prescribed by the industry in which the business is in. This is a very easy method to use and is often used as a benchmark to determine the value of a business. For example: the sale multiple for a particular industry may be 2: 1. This means a small business with sales figures showing annual gross sales of $100,000 will be valued at $200,000.
Price to Earnings Method
The price to earnings method was once a very popular method for determining the value of larger, public companies. Essentially, this method is the same as the EBIT method, with the exception that the after-tax profit will be used in calculations, so an alternative ratio is used to compensate for this. These days, this method is primarily used for public companies with a value exceeding $2 million.
SETTING YOUR PRICE
With so many variables inherent in setting a sales price for a business, it’s logical for most business owners to discuss this figure with an accountant first. However, before you simply trust your accountant’s figures, always speak to a professional regarding the actual market value of your business. There is always a noticeable difference between the determined value of a business that an accountant arrives at, and the market value of a business that a buyer is willing to pay. The easiest way to gauge a more accurate figure for the sale of any business is to contact an impartial company, such as www.ForSaleForLease.com.au, that will give you a more realistic idea of how much you should ask for the sale of your business.
Seek a Professional Valuation
Seeking out a professional valuation for the sale of your business may incur a cost, but you should find this cost is well worth the expense. This is usually because a professional business valuer will be well aware of the exigencies that may exist that can influence the sales price of a business. This means they’ll consider all assets and liabilities. They’ll take cash flow and revenue into account. They’ll look closely at any assets attached to the business, along with any liabilities, outstanding orders, unpaid invoices, work in progress and other aspects that can affect the overall value of your business. A professional will take all these things into account and come up with a figure that is highly representative of your business’s true value.
PREPARING YOUR BUSINESS FOR SALE
Prospective buyers for your business will be very interested in your business financial documents, prepared by your accountant. They will want to look at your total business turn-over, along with any costs associated with generating that turnover amount. They may also look at any other extraneous factors that could be reducing or increasing the revenue shown on the financial documents you provide, but they will also be interested in the business itself. A prospective buyer will want to walk through the business, so ensure that the first impression is welcoming and inviting. This means clearing away any clutter, rubbish or other things that may make your business premises appear less-than inviting. The outside of the business premises should be clean and freshly painted, if required. Keep any areas outside the business neat and clean up any areas that may detract from the overall appeal of your business wherever possible. The inside of the business should be welcoming and enticing to prospective buyers. After all, they’ll be looking at the business as though they were customers coming in for the first time. Look at your business premises objectively and see if there are any areas in which you can improve a prospective buyer’s opinion. If you were walking into your business for the first time, what would you think about the organisation presented to you as being for sale? First impressions really do count.
LEGAL DOCUMENTS OF YOUR SALE
When you’re selling your business, you will find there are two primary legal documents that will concern you. These are:
- Contract of sale
- Vendor Statement
Your contract of sale contains the information regarding the purchaser, the vendor, the agreed sale price and settlement date. It will also contain any covenants relevant to the purchase that may or may not include any fixtures or fittings to be included in the sale. The Vendor Statement is usually the Section 32 of the Sale of Land Act, which contains all the information pertinent to the actual property being sold. This includes very similar information as the contract of sale, but is usually slightly more detailed. This means information such as:
- Vendor Information.
- Title information.
- Information pertaining to any building permits issued for the premises within the prior 7 years.
- Information regarding any mortgages of debts held over the land being sold Details of any easements, covenants or restrictions placed over the title.
- Council zoning information and planning usage, where zoning restrictions may apply to land usage.
- Notifications regarding any notices received by authorities pertaining to fencing, sewerage or future changes to the property, such as widening of roads.
- Any information pertaining to services connected to the property.
- Details of any outgoing costs payable by the property owner.
The Vendor Statement must be provided to the purchaser before any contracts are signed. It’s not always necessary to have a commercial estate agent prepare these documents for you. Rather, a conveyancer or commercial solicitor familiar with commercial property sales can draw these legal documents up for you relatively easily. Just ensure that the conveyancer or business lawyer you’re dealing with has an understanding of commercial business sale procedures.
LISTING YOUR BUSINESS FOR SALE
Once you’ve determined your preferred sale price for your business and you’ve spoken to a conveyancer regarding your contracts of sale, think about promoting your business to as many prospective buyers as possible. By this stage, you should have discussed your intentions with your accountant and come up with an estimated value for your business that you can use as an asking sales price for your business, Marketing a business for sale has much to do with getting your details out in front of the eyes of those who are most likely to be interested in what you’re offering. This means finding sites like www.ForSaleForLease.com.au that can promote your website to best advantage to those people who are seriously considering purchasing a business. What’s more, listing your business for sale on a dedicated website that specialises in promoting businesses for sale can increase your exposure and actually help you find the right buyer for your business.
NEGOTIATING A SALES PRICE
Regardless of the sales price you have listed on your business sales listing, and despite the amount of information you provide about your business’s cash flow and net profit amounts, you will still receive some negotiation on the sales price you’re asking for. All buyers will try hard to see if they can get even a small discount on the amount you’re asking for the sale of your business. As long as you expect this kind of negotiation, you’re in a position to counter it with your own negotiations in return. The majority of negotiations are a series of offers on your business and counter offers from you that are designed to help you reach a sales figure that is agreeable to you and to the buyer simultaneously. Before you can agree to any negotiations, it’s imperative that you understand what your minimum asking price is and how much you need ideally to cover the cost of repaying any creditors you may have within your business. Don’t be intimidated by buyers who threaten that their offer is only valid for a limited period of time. Their intention is to get you to agree to an offer based on emotion rather than accepting through logic and business sense.
Be firm in saying that you need more time to consider the offer given and that you’ll give your response in some time. Then leave the buyer to think about things while you work out your negotiation strategy. The key is to never rush into an agreement, even if the offer you receive is very close to your original asking price. You also have the option of requesting formal offers be submitted only in writing. This gives you a form of protection against that prospective buyer backing out of an offer part-way through negotiations. There are also situations in which your buyers may be very slow to respond to your negotiation tactics. Allow that buyer time to consider options. You don’t know what’s going on behind the scenes with the buyer’s financial situation or with their own personal queries with their accountant. Don’t give in to temptation and pester your prospective buyers to give you an answer. This kind of pressure simply makes you look more eager to sell, which can trigger a response in many buyers to negotiate a little harder before settling on a price.
ACCEPTING AN OFFER TO PURCHASE YOUR BUSINESS
If you do receive a verbal offer from a buyer to purchase your business, you will need to think about whether that purchaser is able to put up a sufficient deposit and what happens to this money between the contract signing date and settlement date. In the vast majority of cases, you won’t need to hold the deposit amount yourself. In fact, most conveyancers or solicitors will hold it for you in their own trust account until settlement day, when all funds from the proceeds of sale are disbursed properly to their intended destination.
SETTLEMENT OF YOUR BUSINESS SALE
Once the sale contracts have been signed by the seller and the purchaser, and the deposit has been paid to your conveyancer or solicitor, it’s time to sit back and wait for the agreed settlement date to arrive. This is the date your purchaser would have indicated was preferable for coming up with sufficient funds to complete the sale and settle on ownership the business. Prior to settlement date, the purchaser may request an inspection of the business premises at any time. This is logical and should be acceptable, as the purchaser is trying to ascertain whether the business is still in the same condition as it was on the day of the purchase, so facilitate this inspection in any way possible. On settlement day, the purchaser or the financier funding the purchaser will forward sufficient funds to your conveyancer to complete the purchase of the business transaction. Once the conveyancer or commercial lawyer you’re dealing with has received those funds, the title of any land owned as part of the business will be transferred to your purchaser’s name or company name. Settlement is the day that the new owner of the business takes over operations and responsibilities for the operation of the business.
Conclusion
No matter what type of business you’re selling, the basic underlying principles will remain the same. It’s still crucial to spend time estimating a realistic value for your business and discussing different valuation options with your account to ensure that you’ll receive an amount that is commensurate with the true worth of your business. When you’ve done this, advertise your business on a dedicated website that showcases business for sale, such as www.ForSaleForLease.com.au and increase the level of exposure your sales listing receives. Be prepared to negotiate on your sale price, but always be aware of the very minimum amount of money you’re able to accept in order to represent a profit for you. Only then is it worth agreeing to negotiations and allowing your conveyancer to formalise any sale arrangements you’ve made by putting them into a sales contract.
