FAQ When Selling a Business

Q. How is a Business Broker different from a Real Estate Agent?A. Real estate agents do a fantastic job at selling properties but don’t generally have the training, knowledge, expertise or skills required to negotiate and fully understand the financial and legal aspects of selling businesses. The whole procedure from start to finish is much more complex, even in the simplest of businesses. A Business Broker will understand the legalities of a contract and the ramifications to both parties if not followed through correctly with precision and accuracy. Also, the market is constantly changing and by choosing to use a qualified business broker, you can be rest assured that your business will be appraised accordingly for today’s market, an essential component to consider as an overpriced business will simply not sell and to under-price your business will cost you valuable dollars!Q. How do I know if my business is saleable?A. Your Business Broker should offer all the help and advice that is needed to get your business ready for sale. By providing them with the information requested and answering a few questions, you should be given a written appraisal in a relatively short timeframe outlining the basis on which the appraisal has been completed. Most businesses are in fact saleable it’s just a case of determining the correct sale price in the current market. An overpriced business will not sell and of course by selling your business below the market value you will be doing yourself an injustice.Q. What is consider when appraising my business?A. There are many factors considered when appraising your businessNet profit (before & after adjustments)
Gross Profit %
Turnover Fluctuations in all the above
Age of the business
Location of the Business
Lease agreement
Staffing structure
Role of the owner
Intellectual property
Written contracts/agreements
Barriers to entry
Potential for growthThese are a few but not all the factors considered. All businesses are different and each one is assessed individually.Q. Can you give me a ‘ball park figure’ if I don’t supply written information to you?A. No, this would be a disservice, the appraisal could be severely over or under valued without all information considered. One tiny difference in the information supplied could mean thousands of dollars in the value of your business.Q. What is the ROI?A. The ROI stands for RETURN ON INVESTMENT. This is the way that most, although not all businesses are valued here in WA. Essentially it means the percentage of the purchase price (if run at the same sort of profit) that the buyer would expect to get as a return each year exclusive of his personal drawings. For example if he were to buy a business at a 50% ROI that would mean he would be likely to get 50% of his initial purchase price back in the first year effectively taking two years to get it all back. The reasoning behind the ROI difference is the risk attached to each particular business. The heavier the risk – the higher the ROI therefore the purchase price is lower in relation to the net profit. Because it is % based, you will see as the figures get higher, the monetary difference is huge.Remember…the stronger the business, the lower the ROI and the riskier the business, the higher the ROI!For example if we take a retail business, 7 days per week, short lease, lots of staff, reliant on location:Net profit $100,000ROI 70%Sale Price $142,857Wholesale business, 5 days per week, long lease, easy product lines, barriers to entry and low staffNet Profit $100,000ROI 30%Sale Price $333.333The reasoning behind the ROI difference is the risk attached to each particular business. The heavier the risk – the higher the ROI therefore the purchase price is lower in relation to the net profit. Because it is % based, you will see as the figures get higher, the monetary difference is huge. There are many points considered when arriving at the ROI to be used in our calculations, they are pretty much the same as how a business is valued (see above)Q. How does the breakdown work?A. Once you have been presented with your written appraisal, you will see that the suggested selling price is inclusive of all the Plant, equipment and also stock. The value of the plant & equipment is decided on and the stock value is taken as an average over the yearFor example Let’s say the sale price is $1,000,000 Stock $180,000 P&E $300,000 Total $480,000 Then the goodwill would be $520,000Q. What are add backs or add ons?A. When you look at your profit & loss statement in your accounts, at the bottom you will see your net profit. This is the end result and what you are left with after all the expenses of the business have been paid. As part of the expenses, many (but not all) business owners may choose to run several private expenses through their accounts and the final figure may not be a true representation of the business, therefore adjustments must be made to show exactly what profit the business is in fact making.For example: The net profit as per accounts shows $150,000 Within the expenses there may be an expense of $20,000 for accountancy but the business owner may have several investments that his accountant takes care of on his behalf and the entire bill is paid through the business whereas realistically, the normal cost for the accounting in this particular business should cost approx. $4,000 therefore we would do an add back of $16,000. This would then effectively increase the net profit to $166,000.On the other side of the coin, the current owner may own the property he is operating the business from and not pay himself a rent for the property. This has the opposite effect and effectively artificially increases the net profit therefore we must do an add on (or a negative add back).For example: The net profit as per accounts shows $150,000. Within the expenses there is no expense for any rent allowance. Therefore you must ascertain what the fair market rent would be to an incoming purchaser and make an adjustment accordingly. So, if the rent for the property were to be set at $60,000 per annum inclusive of outgoings then this must be deducted from the net profit effectively reducing the actual net profit to a new owner down to $90,000There are many different add backs and add ons all with different reasoning behind them. It is essential that all adjustments are provable during the course of the due diligence as the net profit of the business is one of the major factors in the valuation method right from the start.Q. What if the stock value is different than we have included at stock take?A. The stock can obviously vary throughout the year therefore quite often there will be an adjustment at settlement. The purchaser has no legal obligation to take any additional stock however it may be that an order has just arrived and pushed the levels higher and in most cases the purchaser will need it anyway and an agreement shall be arrived at between both parties as to how this additional stock shall be paid for. If the stock is lower than as agreed on in the contract of sale, then the amount shall be deducted from the price. You would be advised that the stock level be kept as close as possible to the agreed amount in the contract of sale as much as possible.Q. Can I use management accounts (i.e. MYOB) for the appraisal?A. You can use the management figures initially but you’d be better advised to use audited figures prepared by your accountant. The reason for this is to ensure that you are using the same figures that a buyer will be using when conducting a due diligence. Management figures can often be incorrect and adjustments are still yet to be made. The last thing you want to happen is to set any doubt in a buyer’s mind as to the legitimacy of the accounts.Q. Can you sell the freehold along with my business?A. Yes you can list it at the same time. It often works very well. In some cases, the buyers are adamant that they will only buy the business if they can get the freehold at the same time.Q. What is a due diligence?A. A due diligence is carried out by the buyer as a condition of the contract of sale to satisfy them that the information we have provided to them is a true representation of the business they are buying. It can vary in timeframes according to the size and complexities of each business. It is generally conducted by their accountant although it can be carried out by the buyer themselves, bookkeepers or financial advisors etc…Q. How can I be assured of confidentiality?A. All potential purchasers should be made to sign a Confidentiality Disclosure Agreement (CDA) prior to receiving any information on your business.Q. What about Work In Progress?A. Not all businesses will have work in progress but for those who do, a formula must be agreed on as part of the due diligence process to decide the best way to calculate the work in progress which is acceptable and fair to both parties and this shall be paid in addition to the agreed selling price.Q. If my business isn’t ready for sale, what will happen?A. Depending on the reason, you will be advised the best steps to take to help you to achieve the maximum selling price for your business later down the line. It may be a few months or it may be in a couple of years.Q. How important is it to have accurate information?A. Accurate information is vital. It is extremely important In all business sales, it is imperative that the procedure is followed through correctly to not only avoid the sale falling from through but to reduce the chance of the purchaser coming back to you down the line and starting any sort of litigation proceedings. This is why you should produce a full written document outlining all that the business entailed, the roles of the owner and the staff members, the products and services, past history, suppliers, stock, plant and equipment, target market, positioning and strategy, barriers to entry, differentiation and competitive advantage, lease details, what was to be included in the sale, the owners obligations both pre and post sale and also how the sale would be documented. Of course there is also the financial side of the business and the necessary financial statements should also be provided with an emphasis on confidentiality between all parties maintained at all times.Q. What are your top tips for preparing my business for sale?A. It is wise to consider all the above information when you first start thinking about selling but basically, right from inception, you should consider at least the following:-Meet with your business broker to ascertain the current value of your business and get tips on whether the business needs to make any changes prior to going onto the market.
Ensure you have clean, precise and accurate financials.
Try to keep add backs to a minimum as a healthy “operating profit” is good to see.
Have your systems and procedures well documented.
Try to keep the business as un reliant on the owner as possible.
Ensure the premises are clean and presentable. If possible, try to have a reasonable length lease in place (if leased premises).
Ideally just one working owner is advisable if possible.
A well documented report outlining exactly what is being offered for sale will eventually be prepared by your broker with information provided by you so ensure this is all correct.
Obtain a justified business appraisal that has been priced accordingly in the current market
Ensure you understand and agree with explanations of any add backs, or add ons, it is generally a good idea to let your accountant have a look over these too.
Any business that shows a gradual increase in turnover and profits each year is going to be desirable to potential purchasers, if we have a decline in either turnover, profits or both we need to have an explanation as to why this is, sometime it may be that this industry is in a general decline and probably one that will be hard to sell purely due to that point.