Selling a Business

When is the best time to sell?

You can sell your business when the market is low or when it's high. So.... The question is, how do you feel the market is right now?

Be careful! Try to avoid having to sell when the market is down. Get out on top!

Selling a Business

If you watch TV, you will have seen the 'reality' TV shows like 'Hot Auctions' and 'Backyard Blitz' where cosmetic makeovers are performed to property at lightning speed to prepare a property for sale or improve the value of the property by adding value to the "street appeal".

You can see the tensions on the owners face as the property goes to Auction or the tears of joy as the new makeover is revealed. No one doubts that the emotions are genuine because for the participants the added value of the makeover is tied in with their emotional feeling about the property - in many cases their largest "investment" and the security for their "old age". Selling a house or having a lifestyle changing blitz done to your backyard are events heavily charged by a persons emotions because of the element of uncertainty and fear of the unknown, after the event.

The decision to Sell a business on the other hand is less emotionally charged and may be more factually based, but there are nevertheless some similarities.

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

Why should you consult a Business Broker?

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 your 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.

Sell for the Right Reasons

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

A desire to move on to another challenge
Health concerns or problems
Family or similar commitments
Separation or Divorce
A desire to Retire
Death of a Spouse

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. Its 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.

What Factors Determine the Value of your Business?

Most buyers will be attracted to your business by how closely it fulfills 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 materialize.

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 "Capitalization 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.

How to Maximise the Price Paid for your Business

Maintaining honest, accurate and up to date financial records are the most important single item that will truly reflect the value of your business. Minimising tax liability by adjusting records or hiding income to reduce profits (and therefore tax paid) can come back to haunt you when its time to sell your business.

Another area that some 'cash' businesses employ to reduce their tax liability is the practice of "till skimming" by the owner. In addition to being illegal and therefore subject to hefty fines if caught (how do you know that the 'buyer' who approaches you directly is not from the tax office) it puts you in a particularly difficult position when it comes time to offer your business for sale.

To get the price you want for your business you have to offer the buyer the best possible profit position because, as discussed earlier, buyers are looking at an ongoing income stream to base their decision to purchase on. If you cannot prove the "off the records" income to the buyer (or more importantly their bank if finance is involved or their accountant) then you cannot claim this as income for setting the price of the business. With professional liability issues impacting heavily on accountants and financial advisors even a second set of 'off the records' books will not sway their due diligence evaluation of your business.

The impact of "till skimming" on the sale price of a business cannot be over emphasized - If you pocket $1,000 per week with a combined income and GST rate of 40% you will save about $20,800 in taxes. Since businesses are valued and sold on the basis of multiples of cash flow, the $52,000 off the book income is unable to be used in the valuation calculation. Assuming the business would sell at 2 times income the owner looses out on the difference between this income ($104,000) and the tax not paid ($20,800) ie. A net loss of $83,800.

Clean up any "off the records" income to put is back in the books as part of your long range planning for at least a year prior to offering the business for sale to reflect the true cash flow of the business.

Please contact our office for a copy of a fuller, more descriptive version of this document on disc.

Qualifications

All Benchmark Consultant Brokers are Licensed and Accredited and most are member of the Business Broker's chapter of the Real Estate Institute of Queensland. Benchmark has been a member of the REIQ since establishment and our Consultant Brokers regularly attend training and refresher courses at the Institute in order to keep abreast of legal and legislative changes and ongoing requirements. As such we strictly abide to the Code of Conduct for Agents laid down by the REIQ and the mandatory requirements of the Property Agents and Motor Dealers Act 2000 Code of Conduct.

We offer our clients the following services as part of the Selling process:

Confidentiality from Staff, Suppliers, Competitors and Customers.
No Obligation Business Assessment
Current Market Status Report
Pricing Advice of Business/Property Sale
Creation of a Professionally presented Confidential Business Profile
Design and Implementation of a unique 3 Phase Marketing Plan
Qualification of all Buyers for Intent, Ability and Financial Resources
Arrangement and Tutoring for Business Inspections
Management of the Buyer through Negotiation of Terms, Contract Preparation, Due Diligence, Financial
Approval to successful Settlement

Gold Coast
Suite 104,
Bermuda Point
1 Lake Orr Drive
Varsity Lakes 4227
T: 07 5562 2711
F: 07 5562 2744

Brisbane
3374 Pacific Highway
Springwood, Qld 4217
T: 07 3387 7722
F: 07 3387 7783

Sydney
1 Trott Street
Parramatta 2150
T: 02 9683 8788
F: 02 9683 8799

Melbourne
105 Dutton Building,
9-11 Claremont Street
South Yarra VIC 3141
T: 1300 366 521
F: 03 9094 3820

Brisbane Web Design by Kintek


Name:	Email:	Phone:
			I am a: Seller Buyer