Selling a Business

Is it time to sell?

Selling your business is a major decision! You have devoted your time, money, and energy into building, running, and operating your business. It may well represent your life's work. If you have already decided that now is the right time to sell, you want the very best professional guidance you can get. This is when working in tandem with a professional Business Broker can make the difference between just getting rid of the business and selling it for the very best price and terms!

If you've gone this far, then selling your business has aroused enough curiosity that you are taking the first step. You don't have to make a commitment at this point; you are just getting informed about what is necessary to successfully sell your business. This section should answer a lot of your questions and help you through the maze of the process itself, and following are some of the most common topics and questions frequently brought up by Sellers. If you have any questions that we have not covered, please don't hesitate to contact us.

- The first question almost every Seller asks is: "What is my business worth?" Quite frankly, if we were selling our business that is the first thing we would want to know. However, we're going to put this very important issue off for a bit and cover some of the things you need to know before you get to that point. Before you ask that question, you have to be ready to sell for what the market is willing to pay.
If money is the only reason you want to sell, then you're not really ready to sell.


- The second question you have to consider is: "Do I really want to sell my business?" If you're really serious and have a solid reason (or reasons) why you want to sell, it will most likely happen.

You can increase your chances of selling if you can answer yes to the second part of this question: "Do I have reasonable expectations?" A yes answer to these two questions means you are serious about selling.

The first steps

Okay, let's assume that you have decided to at least take the first few steps to actually selling your business. Before you even think about placing your business for sale, there are some things you should do first. The first thing you have to do is to gather information about the business.

Here's a checklist of the items you should get together:

- Three years' Trading and Profit & Loss Statements, Balance Sheets, Tax returns & Depreciation Schedules
- Three years' BAS statements
- Three years' monthly turnover sales
- List of all plant and equipment
- The premises lease and lease-related documents
- Copies of equipment leases
- List of the loans against the business (amounts and payment schedule)
- Copy of any franchise / licence agreements
- An approximate amount of inventory (stock) on hand
- The names of any outside advisors

Notes: If you're like many small business owners, you'll have to search for some of these items. After you gather all of the above items, you should spend some time updating the information and filling in the blanks. You most likely have forgotten much of this information, so it's a good idea to really take a hard look at all of this. Have all of the above put in a neat, orderly format as if you were going to present it to a prospective purchaser. Everything starts with this information.

Make sure the financial statements of the business are current and as accurate as you can get them. If you're half way through the current year, make sure you have last years' figures and tax returns as well as year-to-date figures. Make all of your financial statements presentable. It will pay in the long run to get outside professional help, if necessary, to put the statements in order. You want to present the business well "on paper." Ensure however that the Accountant provides a detailed profit and loss not an adjusted P&L. As you will see later, pricing a small business usually is based on cash flow. This includes the profit of the business, as well as the owner's salary and benefits, the depreciation, and other non-cash items. So don't panic because the bottom line isn't what you think it should be. By the time all of the appropriate figures are added to the bottom line, the cash flow may look pretty good.

Prospective buyers Accountants eventually will want to review your financial figures. Buyers want to see income and expenses. They want to know if they can make the payments on the business (more on this later) and still make a living. Let's face it, if your business is not making a living wage for someone, it probably can't be sold. You may be able to find a Buyer who is willing to take the risk, or an experienced industry professional who only looks for location, etc. and feels that he or she can increase business.

Who are the Buyers?

Who are the Buyers?
Buyers buy businesses for many of the same reasons that sellers sell businesses. It is important that the Buyer is as serious as the Seller when it comes time to purchase a business. If the Buyer is not serious, the sale will never close. Here are just a few of the reasons that Buyers buy businesses:

- Laid-off, fired, being transferred (or about to be any of these)
- Early retirement (forced or not)
- Job dissatisfaction
- Desire for more control over their lives
- Desire to do their own thing

A Buyer profile

Here is a look at the make-up of the average individual Buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. Chances are he is a male (however, more and more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. The Buyer will never have owned a business before, and most likely will buy a business they had never considered until being introduced to it.

Their primary reason for going into business is to get out of their present situation, be it unemployment or job disagreement (or discouragement). Prospective Buyers want to do their own thing, be in charge of their own destiny, and they don't want to work for anyone. Money is important, but it's not at the top of the list; in fact, it probably is in fourth or fifth place in the overall list. In order to pursue the dream of owning one's own business, the Buyer must be able to make that "leap of faith" necessary to take the risk of purchasing and operating a business.

Buyers who want to go into business strictly for the money usually are not realistic Buyers for small businesses. Keep in mind the following traits of a willing Buyer:

- The desire to buy a business
- The need and urgency to buy a business
- The financial resources
- The ability to make his or her own decisions
- Reasonable expectations of what business ownership can do for him or her

What Buyers want

This may be a bit premature if you have not have decided to sell, but it may help in your decision-making process to understand not only who the Buyer is, but also what they will want to know in order to buy your business. Here are some questions that you might be asked - and, should be prepared to answer:

- How much money is required to buy the business?
- What is the annual increase in sales?
- How much is the inventory?
- What is the debt?
- Will the Seller train and stay on for awhile?
- What makes the business different / special / unique?
- What further defines the product or service? Repeat business?
- What can be done to grow the business?
- What can the Buyer do to add value?
- What is the profit picture in bad times as well as good?

Buyers want cash flow

The first thing to keep in mind is that the vast majority of Buyers want to buy cash flow. Sit down with your Accountant or Bookkeeper and begin to get your financial statements in order, with cash flow the order of business. Cash flow is not the same thing as profit. Most Buyers look at the profit and loss statement or tax return. Buyers will also look at large, one-time expenses such as a new computer system or remodelling. They will consider non-cash items like depreciation and amortization. Interest expenses will be reviewed, as will owner prerequisites. These are items that a professional Business Broker considers when advising a selling client on a selling price.

What Can You Do?

Appearances Do Count

The time to replace that old worn-out piece of equipment is before you decide to sell. Don't assume that a new owner will want to do it or that the price will just be slightly lower because you haven't replaced it. The time to "spiff up" the business is now, even if you aren't selling. Fix the sign, replace the carpet, paint the place - make it look good. Even if you're not selling, it's just plain good for business, and you never know when the time to sell will occur. Keep in mind that anything that increases sales also increases profits and the all-important cash flow!

Everything Has Value

There are other things that add value to your business. Don't discount the value of customer lists, proprietary products and/or techniques, well-maintained equipment, secret recipes, customized software programs, or good employees. These are termed "off-balance sheet items," and although not used in most pricing models, they add to value. Look at your business very carefully so you don't overlook those items that make your business more attractive to the Buyer.

Eliminate the Surprises

Long before you put your business on the market, eliminate the surprises! Review every facet of the business and remedy any problems that could appear during the sale process. No one likes surprises - most of all potential Buyers. Whether legal, accounting, environmental, or anything else - solve it now.

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While on the market

We look forward to working with you in finding a suitable Buyer for your business. You, as the Seller, are an integral part of the total marketing program. Below you will find a few friendly recommendations that will help in our marketing efforts when you decide you are ready to sell.

- Keep normal operating hours. There may be a tendency to "let down" when you put your business up for sale. However, it's important that prospective Buyers see your business at its best.
- Repair signs, replace outside lights, etc. You don't want your business to look as if it has been neglected.
- Maintain inventory at a constant level. If you let your inventory slide, your business will look neglected. If anything, increase it so your business will look busy.
- Remove items that are not included in the sale and unnecessary items, especially if inoperative.
- Repair non-operating equipment or remove it if you are not using it.
- Tidy-up outside premises.
- Spruce-up the inside of the business.etc.

It might also be helpful if you took a good look at your business from the perspective of a Buyer. Try to put yourself in the place of a prospective purchaser of the business. What would you do to make it more attractive or more saleable? Obviously, the financial records of your business are critical to the sale of your business, but how it looks is also important. First impressions really count! If a potential Buyer doesn't like the appearance of your business, the rest of it may never get a chance. If you have any questions, please don't hesitate to call us. We look forward to hearing from you!

Call 07 5477 5000 or email welcome@bizbrokers.com.au

January 2013

Advertising

An essential ingredient to the sale of a business

Many business owners object to advertising their business. To a professional business broker this means:

- They can't afford to advertise their business;
- They don't believe in their business; and or
- They don't believe in advertising.

When you appoint a professional business broker to act for you he or she becomes your adviser. It's the job of the broker to ensure they advise you of the best possible way to affect a sale.

A trend is emerging whereby sellers are thinking the internet is replacing the print media. Nothing could be further from the truth. The internet is a very small part and in fact most unqualified buyers are from the internet!

Advertising is a necessary and fundamental part of the sales process. After all just locally we are all driven nuts by Harvey Norman and Joyce Mayne ads aren't we? The trouble is, park in their driveway on a Saturday or Sunday and watch the people flock there, whereas some other retailers complain they aren't busy and losing money. They don't advertise.

If you want to achieve the maximum price for your business and have the least amount of conditions you have to create pressure on the buyer to act! Even when the business is under contract you still should advertise. Why? Here's an example you may yourself have faced. You see a property and you place a contract on it, everybody's happy. But wait next Saturday the property you think you are buying is advertised again and people are inspecting. All of a sudden you realise you might well and truly lose the property to another buyer if you have to ask for an extension say on finance or another clause. More so with businesses, if we have a backup contract on a business you should see how people get into gear and act quickly for fear of losing the business they so want.

Advertising is an investment in your business and has to be marketed to the masses to achieve a good result; the old saying "you can't sell a secret" is spot on. Don't fall for the trap of not advertising, trust your broker he or she are the experts.

Regards
Chris Greenfield
Former Principal - Bizbrokers Business Sales

Marketing

A FEW WORDS ON PRICING

Do NOT always list with the business broker who gives you the highest price. If you brought BHP stock 5 years ago and wanted to sell it today, would you call your stockbroker and tell them that you insisted on selling at a 200% profit, or would you ask them to tell you what the market price is? This is the same principle with the Bizbrokers team of specialists and their market analysis on your business.

A sound and realistic strategy in setting your price can ensure you will be more likely to obtain your asking price (or close to it) and you'll get it sooner. Through local knowledge we can help you establish a realistic price for your business, but do avoid the temptation to be influenced
by the experiences other people have had in the sale of their business. No two businesses or buyer/seller relationships are ever the same. The true value of your business will ultimately be determined by the buyer or the market price.

THE BUYER / SELLER PSYCHOLOGY

In any buyer/seller relationship it's normal for the seller to ask themselves, "I wonder if we
could have asked for more?". On the other hand the buyer may question whether they could have paid less. The professional art of negotiating the best price is a skill that the Bizbrokers team has mastered. One way of obtaining a speedy, successful sale is to start with a realistic price, and remember, like you, we have a keen interest in getting the best possible price for your business. Sound, up-to-the-minute market experience will help you achieve the right price for your business.

OVERPRICING CAN BE COSTLY

Business Brokers are working with buyers who have seen what is currently on the market and are waiting for something new to be listed. Therefore, most activity will take place in the first 90 days of listing. Your business will most likely receive its highest and best offers during this time.

After this initial period, the only people to look at your business will be new buyers in the market place and buyers brought through to compare to other businesses. If you business is overpriced it makes other businesses appear 'bargains'.

The chart below shows the relationship between the amount of activity and the amount of time a business is on the market.

The chart below shows the relationship between the amount of activity and the amount of time a business is on the market.

HOW YOU CONTROL THE SALE OF YOUR BUSINESS

There are 6 reasons a business sells:

- Location
- Price
- Condition
- Marketing
- Up to date information
- Business Broker

Location: You have no control over the location of your business, but its location helps determine its value.

Price, Condition & Marketing: You control these. The right price can only be determined by a well researched computerized marketing evaluation. As a business seller, you should get a market analysis comparing your business to similar businesses that have recently sold and are currently on the market.

You business' Profit & Loss, Plant & Equipment and Lease/s are vital to a sale. A clean, well-maintained business enjoys a competitive edge over all others in the market. You'll sell faster and at a high price if you present your business to enhance its appeal and utilize our professional marketing campaign and strategies that will reach the widest buyer audience.

Business Broker: The business broker advises you on market conditions, pricing, contracting, financing, appraising, marketing and closing the sale of your property. Just as you insist on an experienced well-prepared doctor to treat your family, you want a business broker with a proven track record who does all the homework representing you in the sale of your business.

Broker Pricing

What do Brokers Charge and Why

Today I'd like to talk about brokers fees and charges; a subject I'm certain will attract a lot of debate. Before I do that a big congratulations to the Liberal National Party on their crushing win to form Government in Queensland. All Queenslanders are hoping and praying this newly elected Government will succeed in boosting the economy and create a strong and vibrant Queensland. Back to Brokers. Let's start from the beginning. A business broker must be licensed under the property and motor dealers act administered by the Office of Fair Trading. Once licensed he or she can either work for an established company or set up a business brokerage firm.

If the licensed agent commences their own practise they usually arrange for a Trust Account to hold deposit monies for the sale of businesses and advertising money. The Trust Account by law must be audited four times per annum at an average cost of $700.00 to $1,000.00 depending on the amount of transactions.

Employing three to four salespeople, two admin people and all the other considerations when operating the business, it's all adding up. As brokers we can only charge a success fee when a business has settled. Our only source of income is selling businesses.

So how do we charge you the seller. Most of the dedicated business brokers charge a fee of around 8 to 9% with a minimum fee of $12,000 all plus GST. This is based on risk and return. If we take on a business for sale and it doesn't sell we lose money; it's as plain as that. So we operate on risk and return, meaning we have to charge a higher rate to cover us for the risk. Solicitors that act on the same (no win no fee) basis charge 30% or more + gst of the total amount . Auctioneers charge 17.5% minimum + gst so the fee we charge is relatively small. There is debate about whether we should charge by an hourly rate but consumer sentiment supports a success fee when the business settles.

Sellers of businesses can place their business on the market for a very small fee which includes uploading to many websites, window displays, editorials, information memorandum on the business, mass mail out to our databases, dealing with buyers that telephone or call into our offices and so on. There are no further charges unless the business sells. So all in all business brokers operate on a very fair fee and work extremely hard to achieve a result for the seller all at the risk of the broker and the agency principal.

Seeing an Accountant?

Are you going to ask your Accountant about a Business that interests you?

By Sharon Garland
(CPA) (Certified Financial Planner)
Bachelor Business (Accountancy)

Here's some tips that may assist you in your discussions with him / her.

Tip 1. Decide why you are seeing an Accountant.

(a) It should be to discuss the best entity (structure) to purchase the business in, Sole Trader, Partnership, Company, Trust and so on; and

(b) to verify the financial statements in respect to the business.

If you are seeking advice about purchasing the business other than the above matters ask what experience your Accountant has with dealing in business advice and what facts the Accountant is basing his statements on particularly if he enters into the are of price.

Does the Accountant you are dealing with own the business or has an financial interest in it. If the Accountant is "a worker" you may question his advice and knowledge of commenting on owing a business.

Valuing: An Accountant should accept the valuation that is the agreed contract price. This is standard practice and accepted by Licensed Valuers in the Real Estate Industry and the banking Industry.

If you ask your Accountant to value the business you are purchasing then ensure you ask him to value it as a seller and a buyer - you will be amazed at the huge difference.

Accountants do not deal in the buying and selling of businesses market and to ask what a business is worth is like asking an Engineer what your house is worth.

Lastly, understand your motivation for buying a business and accept that like anything there are risks. Some people fail, most do not. If you are confident about owning a business and prepared to "stick it out" chances are you will succeed.