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How to
get the Best Price when Buying or Selling a Business - Nine
Step Formula
by
Ray Earl Licensed
Estate Agent
All Businesses Sell, Sooner or Later. The trick is to ensure that
you sell it for what it is worth and not less than it is worth.
When is the best time to Sell Your Business for the Best Price?
Certainly not when you are under pressure to sell or the economic
climate is suffering. When you go into business you should have a
planned exit time, e.g. 5 years. In this way, you will be able to
plan the marketing strategy for the sale and harvest with the
maximum profit possible. Keep emotions out of the process, if you
get emotional, you will not achieve the Best Price.
Step 1. There's an old saying: “If you don’t plan, you plan to
fail.” And so with this in mind, it is imperative that you plan the
harvest of the business in advance. Before placing on the market,
visualise the business from a buyers perspective, ensure that the
financials are up to date and accurate, the equipment is working
correctly, excess inventory is reduced, business is clean and
presentable (including staff). Also think about the legal aspects,
financial and emotional aspects, get your partner involved and
build a contingency plan on what you will do if the business does
not sell or in fact if the offers are lower than you expected.
Step 2. Your books must be accurate. In cash businesses it is
not uncommon to see financial statements which do not represent the
actual turnover. The problem with this scenario is that most
businesses are valued on the proven earnings. If your profits are
extremely low, this will reflect on the sale value. Fix it now and
start to build proven profitability in the business, the business
must be made attractive to sell for the Best Price.
Step 3. Have your business analyst prepare a Professional
Business Profile. This document is used to solicit interest in the
business. It describes the business history, key investment
features, financial performance, lease details, equipment and other
important factors. This is what I call ‘the invisible business
agent’ and can be used by the seller to provide to banks,
solicitors, accountants, prospective purchasers. Note: If you
cannot supply accurate and relevant information to prospective
buyers, you will not get the Best Price. Skynet produce commercial
grade business profiles from $1,500 plus GST.
Step 4. * What is the value of your business? There are more
than 20 different valuation techniques. Quick honestly, the
business is worth what someone is willing to pay and so in placing
a value on the business you should look at the particular industry
and then research what is the standard. e.g. Post Offices use the
earnings multiple method of valuation. If the business is earning
$150,000 adjusted net before tax, then the value is the industry
standard which is 5 multiplied by $150,000 which equates to a value
of $750,000 + SAV. Know your industry values. Skynet can help you
with completing an expression of market worth for your business or
a business you are looking to buy, we can tell you if you are in
fact paying too much or it is a bargain.
Step 5. Can a Business Broker help you when buying or selling a
business? As in all industries, there are good and bad people. I
have owned and operated more than 12 businesses in the last 25
years and I must admit that I only bought one business and sold two
through a broker, noting that I would always develop a business
profile to provide to prospective purchasers or their
advisors. I would suggest that you firstly investigate the
agents history and ask for testimonials to validate their
claims.
Step 6. A business being sold for a price of $350,000 or less
(exc stock), must provide to a prospective purchaser a Section 52
Statement (this is a reflection of the financials of the business,
prepared by an accountant). If a Section 52 Statement is not
provided, the purchaser is not bound by the contract of sale. Some
vendors decide that they will not provide a Section 52 until the
business has a ‘real buyer’ at this stage they approach their
accountant to find that the lead time is 2 weeks and during this
time the prospect had gone COLD. Therefore, make sure you have a
Section 52 created when you list your business.
Step 7. If your business is not growing it is surely dying. With
this in mind, you should continually look for new innovations,
products, services to bring into your business. Think outside the
box. Just because you are selling the business does not mean that
you have already sold it… Keep building the business, show the
prospects that there is potential for future growth.
Step 8. Some purchasers will ask the vendor to ‘run the stock
levels down’. In some instances this will have a dramatic negative
effect on the cash inflow of the business, customers will notice
that stock is low and certain items will not be available to
customers when requested. This may cause damage to the business and
should be avoided at all costs.
Step 9. If you are not prepared to spend significant time with
prospective buyers then you should consider retaining the services
of a Business Broker. Yes, the fees can be high even up to 10% on
the sale price, but if you have the right broker then this price is
low in comparison to the time you will spend dealing with tyre
kickers. If you are considering selling through a broker, please
call Ray for more information.
* Note: Market worth and multiples of earning ratios may change
with time and economic circumstances. The data presented here might
be out of date. We accept no responsibility for the accuracy of any
data depicted in this two page document. Call your local broker or
Ray for up to date data, Thank you.
The 6 Reasons Businesses Might ‘Not’ Sell (not exhaustive):
- The Business has been Misrepresented in some form.
- The Business is Not Marketed adequately.
- The Business is Over Priced.
- The Business has a Minimal Lease Term and the landlord is very
unreasonable.
- A Major Competitor is planning to enter the market.
- The vendor has Partnership Issues, i.e. one partner wants to
sell-the other does not.
For a totally confidential and obligation free chat about
Buying, Selling or Growing a Business, please contact Ray on
0409 855 986.
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2009 All rights reserved
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