How to get the Best Price when Buying or Selling a Business - Eight 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.
The Eight Step Formula
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.
Step 4. * What is the value of your business? There are more than 20 different valuation techniques. 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. For example, Post Offices use the earnings multiple method of valuation. If the business is earning
$220,000 adjusted net before tax, then the value is the industry standard which is about 5 multiplied by $220,000, this equates to an expression of market worth of $1,100,000 + SAV – and this may
change. Therefore, 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 whether you may
be paying too much.
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 10 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 agent’s history and ask for testimonials to validate their claims.
Step 6. 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 7. 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 8. 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.
Please Note: I am not a broker and do not give advice on selecting brokers.
* Note: Market worth and multiples of earning ratios may change with time and economic circumstances.
The data presented in this document might be out of date. We accept no responsibility for the accuracy of any data depicted in this document. We recommed that you do not accept any advice without
firstly consulting your solicitor and accountant.
The 6 Reasons Businesses Might ‘Not’ Sell (not exhaustive):
1. The Business has been misrepresented in some form.
2. The Business is not marketed adequately.
3. The Business is over Priced.
4. The Business has a minimal lease term and the landlord is very unreasonable.
5. A major competitor is planning to enter the market.
6. The vendor has partnership issues, i.e. one partner wants to sell-the other does not.
If you would like us to produce a commercial grade business profile to help you in marketing your business, contact Ray for a brief chat on the requirements.
Skynet Business Consultants produce commercial grade business profiles from $3,750 inc GST.