Brindabella Business Brokers

After you have made the hard decision and decided to sell your business, the next step is to understand what a fair market price is for your business.

 This is the time to be realistic about what a buyer will pay for your business.  To determine a realistic market price you must take all of the following into consideration:

 All of the above impact the market price you place on your business.  Each of the above can be discussed in greater detail. To get started, lets discuss assets of the business and their condition.

 If you have a business which has significant assets like equipment for manufacturing, fit-out of supermarket, cafe or restaurant or a fleet of vehicles, these assets will form part of your market price for your business- without them your business cannot operate.

But you need to be realistic about the asset sale prices.  The depreciated value in your financials may help with the value, but not always.  You need to understand your assets are used and have a finite life.  If I am a business buyer, I am looking at your repairs cost and if they are becoming regular and significant, the assets may have little value.  Lets consider two examples – a manufacturing business and a cafe. 

Manufacturing Business

A strong manufacturing business wants to sell and if you tried to replace the current equipment with new equipment, it would cost you over $1m.  However the current business equipment is over 10 years old but still in really good condition.  Has been fully depreciated.  So what is it worth? 

On the open market sold, without the business, it has little value due to its age.  However with the buyers looking at this business, they will be considering when the equipment needs to be replaced.  If this equipment has a 20 year life span than it still retains some value, but if it needs to be replaced in less than 5 years, the buyer knows that in the next few years they will need to outlay $1m to purchase new equipment, dispose of the old equipment and allow for downtime for this to occur.

 Cafe

Brand new fit out, 2 years old and situated in a location with high traffic and captive audience.  If the business is strong the fit out will not be worth its new price but it  may not be worth half its price either.  You will notice the business needs to be strong to justify the fit out cost.  If the business is not successful, it does not matter if you spent $1m on the fit out, it has little value unless a successful business can be established.

A common question I am regularly asked is do I tell my employees I am selling the business?  As usual there is no simple answer.

Most business owners I talk with expect the worse, i.e. their key employees will leave as soon as they advise them they are selling the business.

So what should you do?

From experience, businesses that are selling who have told their employees have found they do not leave the business.  Reason being it is explained to them that they will play a large part in helping the business sell.  Buyers want to buy strong businesses with hard working employees.  The new owner is purchasing based on past performance and this performance i.e. profits, have been achieved because of key employees.

However if you have been rewarding your employees through other means you may find these employees will move on if you are selling the business, as they will be concerned the current arrangements will not continue.

So even before you are ready to sell your business.  Start making talking with your employees and let them know how important they are to the business.  When you make the decision to sell again you need to ensure your employees understand how critical they are to the businesses success and buyers will notice this as well.

Selling a business and selling a house is like apples and oranges – they cannot be compared to each other.  However a lot of buyers and sellers approach business sales as if they are one in the same.

 Statistics show that real estate agents sell 8 out of 10 houses they list.  Whilst for business brokers this number reduces to 3 out of 10.  To take it one step further, if a business owner lists their own business for sale this ratio moves to 1 out of 10.

 So why is there is such a difference?  The three main factors I see are finance, price and patience.

 Finance:  Obtaining finance for a house is much easier than obtaining finance for a business.  Banks have strong processes in place to allow money to be loaned on a house and hence their level of comfort is easier to meet.  However when it comes to business loans, the level of information required and understanding the bank requires can take some time.  Then there is the equity you need put against the business loan as in a majority of cases the bank will not loan against the business.

 Price:  Most buyers and sellers can look at past house sales to determine the sale price for their house.  But for businesses, you can have two very similar businesses, but the price can vary substantially.  For sellers of businesses it can be hard to put a value on their business as they have put a lot into it emotionally and financially.  So it important to come to common ground so both the buyer and seller agree the price is fair.

 Patience:  The movement of house sales can occur very quickly and it not hard to see the under offers on properties you seen only listed a month ago.  A seller of business see all the under offers on houses and think the same occurs for business.  Business sellers must understand they are trying to find buyer in a much smaller pool of buyers, who have finance approved and agrees that the price for your business is fair.  It is a large decision for a buyer to understand the business the business owner has built and be confident they can continue to experience the success already enjoyed.  Business still sell but at a much slower pace to houses – so patience is the key to ensuring it occurs.

 Businesses are selling and all it takes is one buyer to make this happen.  But be patient when it comes time to sell as takes time to educate the market why your business is the one for them.

You have made the biggest financial decision you will make – you have decided it is time to sell your business.  Now what is the market going to give you for all your time and hard work?

 Before you can determine what price to put on your business, you first need to understand what category your business falls into:

1. Fit out – business formula does not work i.e. not profitable, the business has limited financial information or the financial information just does not make sense.
2. Business is a job – your business provides you a good salary but like a job, if you are not there it makes nothing.  You are the business.
3. Business with owner involvement – owner works in the business however profitable enough to pay the owner a good salary and still show excellent business profits.  Could be changed to run under management.
4. Run under management – owner works on the business and not in it and profitable.

 It is really important you classify your business and be true to yourself as to what you have to sell.  You will see as you step down the categories you would expect the market price achieved for each business would increase.  But like anything that is for sale, you are selling what you can show the market now and not what the business potentially could be.

No business will sell if it does not have potential; however potential in the majority of cases does not increase the sale price you will achieve.  Reason being the potential will only be achieved by the buyer who invests their own money and hard work and there is no guarantee of success.

If the business has been good to you and your family, you need to ensure that you leave enough on the table for the next buyer.  If you try to price your business in a category above what it is now, buyers are going to continue to look at your business but move onto something else, as the numbers simply will not add up.

In last months article you would have seen the following:

 From 1 July 2012 until the year 2029, there is going to be a constant supply of businesses on the market.  The first of the baby boomers turned 65 years old in 2011 and population statistics show the birth rate of baby boomers growing every year for the next 18 years.  Therefore it is going to be a buyers market for sometime.

 Armed with this knowledge sellers need to ensure they structure their business properly to give it every chance of selling.  This includes pricing the business accordingly, financials up to date, secure leases, openness during the sale process and understanding what is motivating the buyer to consider your business.

 Good businesses will sell.  The market will play a role in the price you achieve, however what influences the sale price and time to sell the most is how presentable, desirable, marketable and financeable you make it for buyers.

Brindabella Business Brokers Sales 2012 financial year

Even though it is a buyers market, it just means you need a broker that will work hard to sell your business.  To give you some indication, Brindabella Business Brokers achieved a total of $2.9m in business sales for the 2012 financial year.  These sales did not come easy, but in the end we had happy sellers and happy buyers.

This level of achievement was brought about by ensuring businesses are presented properly, talking with buyers on a regular basis, being available to talk on short notice and ensuring we are armed with the knowledge buyers/accountants are looking for – financials and income tax returns.

Talk with your Accountant Now

If you are currently selling your business or thinking of selling your business you need to let your accountant know immediately.  Anyone looking at buying a business will put more weight towards one that has its financials up to date i.e. 2012 financial year completed.  Therefore you need to advise your accountant you require your business financials and income tax returns completed sooner due to you selling your business.

If you leave it until you have a buyer, you may pay the steepest price of all, losing the buyer as you were not prepared to sell your business.

The less risk you present to the buyer – the increased chance you will have of selling.

Following on from Part 1 – The End Game – Selling your Business, a part of this article stated “the market plays a role in the price you achieve, however what influences the sale price and time to sell the most is how presentable, desirable, marketable and financeable you make it for buyers”.

Lets be honest, what buyers see on news each night will be influencing their decisions.  The constant barrage of negativity has to have some impact and therefore they start believing it blindly without actually questioning it accuracy.

So when a business ready to sell they need to take what is happening in the market seriously – even if it has not impacted your business.  If buyers are being influenced by the bad news, you need to have responses to the following:

• Is the current market impacting your business?
• How has it impacted your business?
• Can you clearly support what you say with facts?

Buyers do not mind if the market has impacted your business as it is expected.  However what they are interested in is the level of impact and how strong your  business is to survive through it.

With the above in mind, sellers need to understand the current market is the smallest of their concerns when selling.  The biggest impact is not what is happening in Europe, the retail vs internet or even the Australian dollar.  These are just hiding what is coming next.

From 1 July 2012 until the year 2029, there is going to be a constant supply of businesses on the market.   The first of the baby boomers turned 65 years old in 2011 and population statistics show the birth rate of baby boomers growing every year for the next 18 years.  Therefore it is going to be a buyers market for sometime.

Armed with this knowledge sellers need to ensure they structure their business properly to give it every chance of selling.  This includes pricing the business accordingly, financials up to date, secure leases, openness during the sale process and understanding what is motivating the buyer to consider your business.

Good businesses will sell.  The market will play a role in the price you achieve, however what influences the sale price and time to sell the most is how presentable,
desirable, marketable and financeable you make it for buyers.

Before you talk with friends, family, mentors, accountants etc, the first person you need to talk to is yourself.  Selling your business is the most important single financial transaction of your life – even more important than your home.  You need to have it clear in your mind as to why you want to sell.  Once the decision has been made to sell, you need to change hats and look at your business from a buyer’s perspective.  Selling your business is much more than a transaction – it is the end game.

How many times have you watched your favourite sporting team come so close to beating the top of the ladder team to only make a few mistakes in the last 5 minutes of the game to lose.  That 5 minutes is equivalent to you selling your business.  Everything you have achieved to date comes down to the final 5 minutes.  The sale price achieved, how quick it sells and the conditions placed on the sale are all going to occur in that small amount of time.  Your business may be entering its 10th year of operation, but it could be sold within 3 months.  It is scary to think this only represents 2.5% of the total business life but it influences a lot of decisions you make going forward.

Do not get me wrong, the end game of selling is very important, however it is just that, the final stage.  To get to this stage you have had to step through all the other phases which will influence the end game.  Once you make the decision to sell, from that point on, you should be preparing for the end game of selling.

So what should you do to make your business ready to sell.  Simple.  To receive the most value when you want to sell, do everything you should be doing
anyway to make your business more successful.

If you are a buyer and comparing two like businesses – which one would you consider more valuable?   The business that requires the owner to be present all of the time or the business that allows the owner to take holidays whilst the business still operates.  The business that has documented all procedures or the business where all the knowledge is limited to the owner.

The market plays a role in the price you achieve, however what influences the sale price and time to sell the most is how presentable, desirable, marketable and financeable you make it for buyers.  So when you have made the decision to sell, you need to begin working toward the end game and the price achieved is
dependent on how well you play that last 5 minutes.

Recently I have been in discussions with potential buyers who are looking at two restaurants I have for sale.  As buyers are aware, Brindabella Business Brokers provides enough financial information and detail about the business to allow them to make an informed decision on whether they want to enquire further.  However there seems to be a very strong focus on turnover without understanding the other aspects of the business.  The focus has been so strong around turnover that buyers are not interested in anything else about the business and simply say – business is too expensive based on turnover.

Today I am going to discuss one of the other aspects buyers need to consider – the age of the refurbishment.

Let’s use an example of two businesses for sale.  They prepare similar food, have similar turnovers, similar rents and the area they are located in is also similar.  However Business A is selling for $140k whilst Business B is selling for $250k.

If you base your purchase decision solely on turnover you would go for Business A as it cost $110k less.  Therefore how do you justify the $110k difference for Business B?

Business A has been open for 10 years and requires a refurbishment.  The ovens are 10 years old, exhaust system is 10 years old, the cash register 10 years old, tables 10 years old – you get the picture.  Therefore whoever buys this business needs to understand more money is required to be spent on this business and it may be required to shut the doors  to do this work.

Business B had a refurbishment 3 years ago that cost $300k.  They put in new ovens, benches, bar area, tables, cool room etc.  They have noticed an increase in the number of customers coming through the doors as the decor is more inviting.  Also they are quicker at getting the orders out as the new kitchen is purpose built and the staff enjoy working with the equipment as it makes their life easier.

Business B may cost $110k more however you in fact are saving yourself $190k ($300k – $110k) as the refurbishment has already been completed.  Business A will need to go through this same process of undertaking a refurbishment. It may not cost $300k, however $110k difference between the two businesses will not go far if you are buying new ovens, benches etc.  Also you need to factor in planning approvals, builders, plumbers, electricians and lost revenue from being closed.

What the above demonstrates to buyers is if focus strongly on turnover you may think you have saved yourself $110k, but in fact it may cost you more in the long run.  Business B is now ready to undertake the next step in growth whilst Business A will be held back by using equipment that is 10 years old.

Do not get me wrong, turnover is very important.  However turnover is only one item you need to consider and there are a number of other items you must look at before you make the decision – will I buy Business A or Business B?

It still amazes me that businesses are still reluctant to spend money on technology for their business.  After visiting numerous businesses when undertaking an appraisal of its value, the first thing I notice is the lack of spending on hardware.  This lack of spending only brings down the value of the business as buyers want a competitive business not a business still operating as if it 1980.

Big corporations continually update hardware and software on a scheduled basis, however small businesses see this as an expense they can save on.  Small business owners nearly wait (or wait until it is too late) until their computers are dead and then decide to update it.  Do not get me wrong, I am not saying that as soon as new computer comes out you need to purchase it, however it is a business owner’s responsibility to ensure their business is successful and part of this is achieved by having strong infrastructure being their computers and software.

You will see that I am not referring to computers as a capital investment.  This is accounting terminology.  This is how we recognise it in the balance sheet.  From a small business owners view the computer should be seen as the hub that joins all the other parts of the business together to work efficiently.

So why are business owners so reluctant to purchase computers and software?  It appears it can be put down to two reasons.  The first is the computers are seen as an item that works in the background.  99 times out of 100 we turn it on and it does what we want it to do.  It requires little maintenance and does not show wear and tear.

If you compare this to your motor vehicle – it requires regular maintenance and attention.  If you do not maintain the vehicle it will have a short life.  It also shows signs of wear with fading paint; dents and scratches and requires tyres.  Then there is the repayments due each month and usually once the repayments are all made, it is time to replace the vehicle.

When we look at the vehicle and compare it to the computer – which one produces more for your business?  Without the vehicle you can not get to appointments.  Without the computer, you can not prepare the reports or bill the client.  The vehicle lets employees deliver products.  The computer makes sure the employee is going to the right place, at the right time and with the right product.

It is obvious you need both however the service the computer provides to your business pays back in excess of the vehicle when you compare their costs.  Overall computers make the business more efficient and effective in how it is managed.

The second reason why owners do not spend on computers and software is they do not put the cost into prospective.  Using the example of an employee paid $50,000 a year or $250 per day.  So a computer costs around 6 days of an employee.  If your employee is unproductive or slowed down – there cost to the business will exceed the purchase price of a computer.

Therefore it only makes sense that a computer is critical to the success of your business and its overall cost is minor.  Over three years, the computer only costs approximately $2 per day and it works 24 hours a day – 7 days a week.

Big corporate know the pool of staff available is decreasing and the cost of staff is increasing.  If you are trying to run a successful business you must maintain and regularly update one of your most critical assets – your computers and software.  If you are trying to extend the life of computers and software each year by delaying their updates, you are probably wasting more in salary than actually replacing them.

In summary – do not skimp on one of the most important tools for your business.  Use the technology to generate efficiencies in your business and its pay back period will be very quickly recovered.

When you are asked what you like most about owning your business, the majority of business owners put “freedom” at the top of the list.  You might describe it in a number of ways – working for myself, being my own boss, making my own hours, but it all leads to the same outcome – freedom.

When you are asked what you dislike most about owning your business, the answer is usually about workload or the weight of responsibility, long hours, too much risk, too many tasks, an inability to balance work with personal life and too much stress.

So how do these dislikes lead to freedom?  Are you contradicting yourself?  Is the vision that by living in your business you are actually free?  What does freedom mean then to a business owner?

Your employees will never understand or fully appreciate you and your business.  When you are ready to sell your business, non business owners will often say “I have sold my house, it must be just like that?”

Hardly!!  Unless you built your house one room at a time over many years – it is nothing like selling a house.  To compare a house to a business would mean you designed the house yourself, dug the foundations, poured the concrete, grew the trees to make the wood for the frame, cut the wood, erected the frame etc.

Undertaking all these tasks is what it is like to build a business.  If you started it from scratch , you would have worked hard to get your first customers; designed the products and services you would offer; hired the employees; made all the decisions on the direction of the business; been responsible for the polices….nearly everything has been attended to personally by you and has your stamp on it.

Therefore business owners do not equate freedom with the high level of work required.  If anything you believe it is your right to work as hard as you want.  When you were in a job, it meant a lack of freedom, as someone else controlled your level of work and limited your earning potential.

Many businesses reach the their ultimate goal by starting the business from the family table at home to no longer being required in the business as it manages itself.  But when a business owner reaches this level, you know what they usually do – start another business and work hard again.

Therefore freedom in business is not defined by how hard you work.  Each business owner has made the decision to trade in their job of security and normality for this type of freedom.

Freedom to a business owner is to act.  To act is to do something, take action, take steps, proceed, be active, perform, operate, work, discharge duty and accomplish.  To accomplish your goal for your business is freedom to you and all the hard work makes it worth the effort to achieve it.