Preparing for Sale

Good planning, careful preparation and good professional advice can overcome, however, any feeling of uncertainty and produce a positive life changing result for all concerned.

 

Most owners do not consider selling their business when it is doing well - they wait for a crisis. Selling is fraught with danger and many businesses sell (or just close down) for less money than they could have achieved in happier times. Crises can be caused by a multiple of factors like erosion of capital, poor health, divorce, absence of management evolution strategy, sudden industry downturns, stock or debtor issues and a multitude of others including the economy as a whole. Timing is crucial in achieving the best selling price, as is knowing the value of your business in the current Market at any one moment in time. Understanding Sales cycles and Industry trends are important indicators which can also help you create a strategic exit plan that will maximise your companies value.

 

The fact is that every business owner at some point will decide to exit. How and when this is done is best determined through planning, timing, knowledge and a thorough understanding of your company's market value at the time you decide to sell.

Selling a business is a specialised complex process that requires considerable experience in a number of areas. Just as you send your legal work to your lawyer and you accounting work to your accountant you should seek professional advice and assistance when it comes to selling an asset as important as your business.

 

In addition to the considerable time spent in interviewing and qualifying buyers which detracts from the time spent by the owner in running the business so that the business continues to perform at optimal levels (a key factor in determining the eventual sale price) is the difficulty in maintaining security over the confidential nature of the business sale.

Businesses can be terminally affected if Key Employees, Suppliers or Customers find out that the business is on the market which can often happen when Owners deal directly with Buyers.

 

Experienced Business Brokers are an excellent source of information about SME businesses and the business buying and selling process. They can advise you on current market trends, pricing and local issues. Business brokers generally have a network of allied professionals and can, in addition to handling most of the details of the business sale (including dealing with the prospective buyer's lawyers and accountants), guide you or a motivated buyer, in the right direction to tap in to their contact base if the need arises.

During the Selling process it is the Brokers job to confidentially market the business by advertising the business, finding and screening and evaluating buyers, educating them in all aspects of the business, negotiate the price and terms of sale to be acceptable to the Seller, facilitating the flow of information between Lawyers and Accountants and provide a buffer for the emotional highs and lows that come with the life changing decision to sell. Whilst the Broker works for the Seller of the Business to maximise the sale price, both Buyer and the Seller benefit because the Broker has pre-qualified the business before listing and should know almost as much about the business as the owner. This helps motivated Buyers who have been pre qualified by the Broker (for financial ability, capacity to run the business and intent) to make a well informed decision on their level of interest in the business.

The Broker should have also prepared an in depth profile of the business and be aware of most if not all aspects of the business operations including the financial implications of the business for confidential discussion with Buyers.

 

For the seller this document presents their business in the best possible light and a business profile constructed by a professional broker will go on selling well after the inspection of the property has finished.

 

For the buyer this document will be a supporting document when they apply for finance, have their accountants and lawyers advise them of their possible future.

A sale has to be done for the right reasons to have a successful outcome. Good reasons include:

When financial consideration are the driving force, the sale, if it happens at all, can take longer to occur and frequently settles for a price considerably less than the asking price. Inevitably, when owners try to sell for financial reasons alone, they are almost always unrealistic about the worth of their business. It’s fair to say in these circumstances the marketplace will just pay them what they are asking. In situations like this it is even more important to be honest and up front and engage the services of an experienced business broker and listen closely to their advice.

Most buyers will be attracted to your business by how closely it fulfils their needs and the opportunity for growth that they see in the business. However, they will value the business on how much profit it makes now. Few buyers will pay large amounts of goodwill for potential profits that may not materialise.

 

Most businesses are sold on a multiple of the earnings capacity of the business. The earning capacity is then multiplied by a figure that recognizes the "risk" and the opportunity for the new owner. You will hear this talked about by accountants in terms of "Capitalisation Rate", "Return on Investment" or sometimes "Earnings Multiples".

 

What we're talking about here is NOT the net profit figure that is shown on you tax return. Many expenses are not really necessary business expenses but are legally paid by the business having the effect of reducing the taxable income of the business. In addition there are non-cash expenses such as depreciation that lower the profit on which tax is paid. All of these charges can mask the true earnings ability of the business. So the profit figure we're talking here is the total profit that the business generates that is available for the owner to both live on and pay back any loans taken out to buy the business.

 

This profit figure is generally referred to as Adjusted Net Profit, Discretionary Cash Flow (DCF) or Proprietors Earnings Before Interest and Tax (PEBIT). It is the net profit BEFORE deductions for items that are not really necessary business expenses, owner's salary, non-recurring or personal expenses (personal computer upgrades, home office, home repairs, etc) depreciation and amortization, interest expense and any other items that a new owner would incur as a true business expense.
The Adjusted Net Profit gives a much more accurate accounting of the profit generating ability of a business than does the normally reported bottom line for tax reporting and payment purposes.