The financial realisation of all the effort invested in your business, an investment often of years of sweat and tears, emotion, money and countless hours, is your reward. It is then you can see your investment’s return to you - and your family.
To see a complete change, look at the finer points first. An integral factor of business is human nature. And human nature dictates that virtually everyone owning and running a business will come to the realisation that the next step forward is not perpetually onwards, but sometimes aside. To realise the years of effort they have invested in enterprise by seeking a fair return for the sale of their business. To see change.
But after years of hard work, building and running their businesses, many owners fail to achieve the best possible price as a return for the time and money (not to mention blood, sweat and tears) they have invested. Many do not appreciate until the time comes that to optimise the price for their business when it comes to that point requires a well-thought strategy to be put in place beforehand.
When is the best time to sell?
Quite simply, the best time to sell is the as per the timing the vendor has long since planned to sell. In other words, a time of your choosing working to an “exit strategy” plan you have implemented. Usually the best time to obtain the highest price occurs when sales and earnings are good and trending upward. This enables a buyer to pay a higher price and still meet his return on investment criteria. A history of good performance also gives the buyer confidence in projected future earnings.
Market conditions also significantly affect saleability. Today’s market is buoyant due to a large number of serious buyers in the market, more readily available bank financing, and the reduction in capital gains taxes which nets the owner more cash at settlement.
Who would buy it?
Identifying potential buyers is a key element of any selling planning. For most companies, there are several categories of prospective buyers. The most obvious are other companies in the same industry for which the acquisition would be a logical expansion with potential economies of scale. Consideration should also be given to suppliers and customers of the business.
However, based on experience, approximately 75% of the prospective buyers are individuals who want to control their own future. To see a change in their own lives fulfilling a lifelong dream of shifting from employment to running their own business.
Your business checklist
The following information is necessary to help determine an appraisal of your business’ worth:
- Financial statement
- The last three years Profit and Loss Statements and Balance Sheet
- Turnover figures for the current year to date
- Summary of proprietor drawings and director’s fees
- Leasing information
A current Business Premises Lease and any Plant and Equipment including motor vehicles on lease or commercial hire purchase
- Plant and equipment
A full inventory showing the depreciated value of all plant, equipment, furniture, fixtures, fittings and vehicles which are to be included in the sale of the business
- Sale of freehold property (if applicable)
A current written or estimated valuation of the land and buildings included in the sale
How much is your business worth?
A business enterprise, like any asset, is worth what a buyer is willing to pay. Scrutinise your business from a buyer's perspective to get an appreciation of what factors a cautious buyer will factor into an asking price.
To accurately determine the true worth of your business, the company’s accounting reports, prepared for tax purposes, must be restated to reflect the true financial performance of the business usually in the form of a one-page Financial Summary.
This first step has a twofold benefit. It helps determine the true performance of the business for prospective buyers to understand the reasons for the stated value, taking into account operational capabilities, intellectual property and future maintainable earnings. This will also help you to realise a Market Appraisal for your business.
A market appraisal of a business consists of three basic core elements, the key considerations of interest in a buyer’s mind:
- Operational side of the business, its organisation and assets
- Financial performance to date
- Future maintainable earnings (the “potential of the business”)
The appraisal formula many business brokers use combines two factors:
- The “going concern” or “replacement value” of the business assets
- A multiple of the Earnings Before Interest, Taxation, Depreciation & Amortisation (EBITDA) is calculated by taking the operating net profit of the business, then adding back those amounts which represent a personal reward or remuneration for ownership of the business
The figure will always include:
- Interest payments - buyers make their own arrangements financially to suit their own tax requirements
- Taxation - the business’ taxable income will be dealt with to reduce tax liability in a number of ways by business owners
- Depreciation - the depreciation is an intangible charge against the assets of the business to allow a tax advantage for business capital investment
- Amortisation - spreading of one large payment - such as a business acquisition - over a number of years for tax benefit
The total of the net profit and the “Add Backs” will be your EBITDA figure. Buyers will generally not consider cash components unless they can be substantiated through dockets, accounts or a trial period to establish a level of turnover. Add Backs include:
- Owner’s salary
- Owner/Director’s fees
- Owner’s superannuation
- Owner’s vehicle expenses non essential to business operation
- Other personal owner remuneration items in the business accounts
- Non-recurring or exceptional items
This appraisal involves determining sustainable “investment returns” - the bottom line return a business generates after deducting all reasonable expenses including a fair “personal exertion return” to any working owners. In appraising most SMEs a multiple of up to two times EBITDA (plus business assets) is common. This however is by no means a benchmark as every business in every category must be considered on its individual merits. Often the importance of the owner in the business, personal reputation and customer value is a critical issue.
It is important where the owner is intimately involved in running the business, to put a fair value on the “personal exertion return” (the all-up return available to the owner from his/her personal involvement in the business). It is this return along with other expenses that are deducted from revenue to get an “investment return”.
The key in selecting a realistic “personal exertion return”, is to think about what a new owner would have to pay someone else to do the same work that you currently perform. Expressed in another way, buyers are looking for a reasonable future income stream (buying direct income in return for physical work).
In addition to a Financial Summary you should consider support documentation. This can be a Market Report, a factual appraisal of your business, what it has to offer and how to maximise its potential. For businesses looking to attract a “corporate” buyer with a board-level decision making process this would require an Information Memorandum, a much more comprehensive document.
Selling the business
To prepare your business for sale there are various components to consider.
It is also at this point that you need to consider whether to enlist the services of a reputable business broker to assist you in the process. Factors for this would include:
- Time - do you have the time to contact, screen and qualify a large group of prospects to find a qualified buyer who is serious and will offer a fair price?
- Expertise - do you have the experience, knowledge and skills needed to sell efficiently and for the best price, particularly in a highly emotional negotiation where the buyer’s objectives are opposite yours?
- Confidentiality - can “news” of your sale be used to your detriment by your competition?
The selling process
Once buyers are introduced, talk positively yet realistically and accurately about your business. Remember it is all about accuracy and transparency. If there are major anomalies in your stated figures, be prepared to explain them in detail. The easier it is for the buyer to see the true performance of your business, the more willing he is to go the next step.
It’s important to keep the lines of communication open and clear, between the two sets of accountants and then - equally importantly - between the solicitors acting for both sides of the negotiation. Once these lines of communication become clogged, the process stalls.
Finally, be prepared to say goodbye. There are times when walking away seems the most attractive proposition of all! But when the time comes, the emotional investment you have made in your company becomes an integral part of the process. It is something both parties have to recognise but it is something only the vendor has to deal with going forward.