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 business

Net 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
Competition
Potential for growth

These 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 $100,000

ROI 70%

Sale Price $142,857

Wholesale business, 5 days per week, long lease, easy product lines, barriers to entry and low staff

Net Profit $100,000

ROI 30%

Sale Price $333.333

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. 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 year

For 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 $520,000

Q. 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 $90,000

There 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.

Prior to becoming a Business Broker several years ago, Helen has been involved in and owned several businesses both here in Australia and over in the UK. She has been involved in many business transactions ranging from $150,000 up to several millions.

The Biggest Myth About Business Success: Part One



Last week I attended the Business North West 2012 event at G-MEX Manchester. As I listened to one successful entrepreneur after the other gave what they considered their motivational messages about how it is possible for anyone to establish and run a successful business, an odd question popped into my mind. The question is this: is it possible for just anyone to start a business and succeed?

My answer to this question is simply no!

As I listened to many of those successful entrepreneurs giving their woe-to-win stories explaining how they overcame obstacles to succeed. I detected one similarity in all of their stories; not a single one of them explained how they did it.

It is easy to pump people up with motivational bla bla bla about how it is possible to achieve greatness bala bo balaba but without telling them how to do it, the cause is lost from the onset.

The biggest myth in the world of business is this: business is common sense. That is the biggest BS going around in the business world that is causing people to mortgage their homes and the future of their families to plough the funds into business ventures that are certain to fail.

If you attended the Business North West 2012 event or you have attended any event recently where you heard successful business people tell you that all that is required to succeed in business is to have belief and balls. Before going to tell your boss and telling him where to stick his job or mortgaging your house read the rest of this article.

Trust me on this one, just hold your fire until you have read the rest of this article because those guys did not tell you the full story.

Business is not common sense. I will repeat this point: business is not common sense. Business is a skill and a profession like any other profession; it must be learnt. The likes of Steve Jobs, Bill Gates, Richard Branson or Donald Trump did not start their business from literally nothing to multibillion businesses just by having common sense. What I keep telling all of my clients is this: the gap between one thousand pounds and a million pound is just a single idea or getting a single decision right.

However, you need to have that single idea or you need to be able to get that single decision right. The idea and the ability to get that single decision right do not only take common sense.

There are four elements responsible for the success of any business, whether it is the HSBC bank in the City of London or a toilet cleaning business in a dusty New Delhi.

The four elements are:

- Visionary leadership
- Good people
- Good system
- Good marketing system

There is a fifth element which is the glue that holds all of them together:

- A good business model

A friend of mine just received half a million pounds from his father to invest in any business he pleases. He identified three businesses and called to ask my advice as to which one would be the best one to invest in. I told him that he could invest in any of them and succeed. He tried explaining to me that one of them seems to have a good profit margin, the other was a cash cow with low profit margin and he was not very sure about the third.

What I told him was this: every business has a hundred percent chance of succeeding or a hundred percent chance of failing. Success or failure in any business is not the function of the type of business, the location, the economy or the product. Success or failure in any business depends on those four elements especially the fifth one.

Before Facebook, there were many social media sites. Why did Facebook manage to dominate all of them? Before Google, there were other search engines, today Google is synonymous is search engine; how did it happen? Is Microsoft successful because they have the best operating system in the world? Windows is probably the least secure operating system in the world, yet Microsoft dominates its rivals.

Facebook and Google are successful because from the onset their founders made the crucial decision of making their services free and then found creative ways of making money from their services. Microsoft's success stems from their ability to form alliance with other big corporations and governments.

What I have tried to demonstrate with the above examples is that success in business does not occur as a result of common sense or big balls, but the result of the above five elements that all of the successful entrepreneurs at the Business North West 2012 event failed to point out. Inevitably, it can be deduced from this article that, it takes more than common sense to succeed in any business venture.

Business - How To Be Set Free From Delays, Difficulties and Dead Ends

When I talk to potential business owners and even those who have been in business for at least 3 years it's interesting to hear them say how challenging business ownership is and that they thought it was going to be easy. Even though they have heard the statistics that start-up businesses don't survive the first two years of business and that data shows that only 5 out of 10 new businesses survive for 5 years, many are still convinced that it's a pretty easy road to tow. What they fail to realize is that ALL businesses, start-ups and existing, will face 3-D (delays, difficulties, and dead ends). One characteristic you must have as an entrepreneur is PERSEVERANCE because you will face many unexpected challenges in business and you must be prepared to handle them and set free.

Let's look at some examples of 3-D that businesses face and some ways they can be delivered.

DELAYS: You have been diligent in putting your business plan together and ready to take it to the bank for funding. Eager to get the business up and running the bank is requiring additional paperwork, financials, etc. So the funding process has been delayed from 2 weeks to 6 weeks.

DELIVERY: Be proactive and eliminate the delay. Make sure you have all your financial documents prepared. Ask the bank their requirements beforehand so you are not scrambling to find the information. Usually, they request the following:

Balance Sheet

Income Statement

Cash Flow Statement

Business Documents

Detailed list of assets and proposed collateral

Personal Financial Statement

Credit Reports

3 years of personal tax returns

Business Tax return (existing businesses)

Business Plan and Marketing Plan

Sources and Uses Plan

Loan Request Package

DIFFICULTIES: A common problem for many business owners is that they think they can do everything on their own. They use the excuses of "I can't find qualified people" or "Nobody can run my business like I can. I don't trust anyone with my baby" or "I can manage this alone until business grows". This "one-man band" strategy may seem like a way to keep costs low at first, but it's not the smartest way to ensure long-term success. They become the little rat on the wheel that is going nowhere. Business operations become more difficult to control as time progresses. Plus being a "one-man band" does not give you the opportunity to work outside the business because you are inundated with handling the day to day operations.

DELIVERY: Utilize your network of contacts or social media to find referrals for qualified, professional employees. If you cannot afford to hire a lot of employees contact trade schools, colleges or universities for interns. They may be available for free or a small stipend.

DEAD ENDS: The business is at a standstill, sales have declined and the need for your product or service has diminished. Your business has come to a dead end.

DELIVERY: A few options come to mind. First, revisit your business plan! It is your roadmap and could offer suggestions on next steps. If you don't have a business plan-WRITE ONE! This may be the reason your business is in the situation it is because there was no plan of action. Second, consult with a business advisor to assist in identifying the problem and consider solutions. Do you need to target different customers, change your pricing structure, leverage the existing infrastructure, etc.? Third, see if there is an opportunity to change directions and create a derivative (a specialized company created out of a broader company). For someone who has a computer sales business the derivative might be a computer repair and maintenance business.