Sell Business Canberra

Selling - Process

Many people expect buying and selling businesses to be like buying and selling a home - but that's not true.

The process of buying and selling a business is one where the business presented has to match a buyer's interests, skills and income expectations.  There is a lot of criteria for the buyer to examine in detail, hence the higher the skill level of the business broker, the easier the process. By being highly selective during the process of carefully matching a buyer to a business, Brindabella Business Brokers saves everybody's time.

Most importantly, Brindabella Business Brokers matching skills limit the number of people who gain access to a business's private information.  This protects the interests of the seller and of course is very much in the interests of the eventual buyer.

Detailed below is an overview of the business sale process:

Sell Business Canberra


Selling - Preparation

If ever there is reward proportional to effort it is the returns that often come from pre-sale input before starting the process of selling a business.

It should never be forgotten what a business buyer is seeking, how the buyer's accountant will view the business and what is needed to satisfy the lenders who will finance the transaction.

The following are some of the factors for achieving a full value successful sale:

  • Sales trending upward.
  • Been established for at least 3 years.
  • Have full financial records & tax returns for at least 3 years.
  • Profit margins meeting or exceeding industry standards.
  • Cash flow steady or improving.
  • Solid reputation for quality and service.
  • Solid management and staff.
  • Favourable lease and/or location.
  • Good computer, accounting and reporting systems in place.
  • Products and/or services which are well established or in demand.
  • Well trained employees and low staff turnover.
  • Not be dependent on personal relationships established with the principal.

Do not worry if your business does not meet all the above as every business is not perfect.  By identifying your strengths and weaknesses helps to determine the market value of your business to allow the buyer to be aware of improvements that can be made.


Selling - Why use a broker

The most common argument against using a business broker is “I know my business best”.  This is usually then followed by “A broker will not know what is important to tell potential buyers” and “I am going to have to make all the decisions in negotiations anyway”.

This is all correct – however selling your business is probably the single most important financial event of your life.  You would not even consider representing yourself in a litigation case without a solicitor, or completing a complex tax return without the help of a professional accountant.  Why then do business owners feel that they can sell their business without the help of a professional?

Just as you are a specialist in your business, a business broker is a specialist in selling businesses.  Ask yourself why you are reluctant to contact owners selling their own homes, when you are looking to buy a home.  The reason – it is easier to deal with a real estate agent then the actual owner.  When you are looking for your next home, do you look at real estate listings first or the ones for private sale by owners?  The same applies to businesses for sale – buyers are more comfortable purchasing from a broker than directly from the owner of the business.

A good business broker provides the following in a sale:

Access:To multiple avenues and methodologies for marketing your business

Confidentiality:  Brokers do not put a “for sale” sign on business windows so everyone knows it is for sale.  That can upset employees, vendors and customers.  How would you interact with prospective buyers without revealing who you are?

Objectivity:  Selling and buying are both emotional decisions.  The broker does not have your same attachment to the business.

Familiarity with the process:  What do you do when a buyer asks for more information?  How do you counter a buyer’s claim of reduced value?  A broker has seen and heard these questions before and will know how to handle the situation.

Positioning:  The broker can help you to present the business in the best light, and target the right buyers.

Distraction:  The sale process is time and attention consuming.  Many owners have let their business slide while being engaged in negotiations, and then seen the buyer reduce the price or walk away.

Some of the downsides for a business owner representing themselves in the sale are as follows.

  • An owner representing himself cannot maintain anonymity and the lost confidentiality could seriously hurt the business.
  • An owner may not be knowledgeable in current areas of law, accounting, taxes, and marketing of businesses.
  • An owner typically does not have the ability or 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.
  • A third party can become very useful, especially at the peak of negotiations, when a deal can fall over without experienced negotiators in charge.  A skilled broker will often see the sale process continue.
  • An owner's talents are much more effectively utilised in running the business than in trying to sell it.
  • An owner generally would not have the experience, knowledge, and negotiating skills needed to sell his or her business efficiently and for the best price, particularly in a highly emotional negotiation such as the sale of a business where the buyer's objectives are totally opposed to those of the owner.

Brindabella Business Brokers is knowledgeable and skilled in business sales and can make the sale of your business a reasonably stress-free experience.


Selling - The market price

Business brokers and other professional intermediaries use business valuation rules of thumb to help sellers price their businesses for sale.  These "rules" are very useful for appraising nearly every small business, however they are gross simplifications and should only provide a general idea of a suitable price range for a particular business.  If a rule of thumb is used to value a business, some type of earnings multiplier makes the most sense to prospective buyers. It directly addresses the buyer's motive to make money to achieve a return on investment. Sales multiples mean nothing unless they can be translated into earnings.

Two areas of confusion are inappropriate comparisons to investment real estate or to stock market earnings multiples.  For example stock market prices are often as much as, or even more than, 20 times earnings. Comparisons to real estate and stocks do not work for small businesses primarily because the risk of owning a small, closely-held, privately owned business is thought to be much higher than owning either real estate or publicly held stock.  A business has lower liquidity than real estate and stock, and running a small business is also a lot tougher than managing an office building or a stock portfolio.

To determine an appropriate earnings multiplier, the following questions must be taken into consideration:

  • How is the business doing in terms of earnings?  What are the average earnings per year in the last three to five years?  What are the future projected earnings?
  • How is earnings calculated?  Should it include or exclude the owner's pay and perks, interest expenses, depreciation, and taxes? What about those one-time expenses that may be on the books?
  • How do you choose the right earnings multiplier to value the business?  What is the multiplier based on?  Most people can agree that the multiplier varies based on the risk of the business, but how can risk be measured?
  • What about the various tangible and intangible asset values?  Do we include the real estate, equipment, vehicles, and inventory?  Is there a separate value for a seller's agreement to consult with the new owner after the sale?  What about non-compete agreements?  What about patents, franchises and other extraordinary intangible assets? Is "value" defined as fair market value or a specific value for a specific circumstance?

As you can see, determining an appropriate earnings multiplier is fairly subjective.  The reality is that it is very difficult to estimate the market value of a business because a marketplace of buyers and sellers cannot be easily observed.  In fact, there are not many buyer prospects for a given small business and the result is that buyers pay prices that are unique to their circumstances, sometimes considerably above or below any so-called "fair market value".

A buyer must use common sense and remember that potential buyers create the market. Determining an earnings multiplier can be difficult, and the following six guidelines could be used to help calculate earnings:

  • Examine the most recent year's earnings on the seller's latest tax return. It would make sense to look at the last three years, but remember as a buyer you are buying the future and not the past.  Use these figures to determine projected annual future earnings with you as the new owner.  Do you have experience in this type of business?  Can you perform the duties and responsibilities of the seller?  Will you be able to maintain sales at their current levels?
  • Look at the tangible and intangible assets. They often seem to have a value separate from the business. Is there real estate and inventory for re-sale included in the sale? Real estate and inventory for re-sale is theoretically less risky than owning the other assets of a business because it is believed that real estate could be easily sold on the open market and inventory for re-sale could be easy to liquidate if the business failed.  Generally, inventory is valued at cost. These assets may be valued separately from the business, and then added back to the multiple-derived value of the business.  Aside from real estate and inventory for re-sale, other assets should already be included in the multiple-derived business value as they are needed to generate the projected future earnings.
  • If there is real estate involved but it is not for sale, a real estate rent expense must be subtracted from the earnings figure.  The seller did not have to pay rent if he or she owned the property where the business is located, but this would not be the case for you as the buyer. You must take future rent expense into consideration.
  • Owner's salary, perks, and certain one-time expenses should be included in the earnings calculation. If these expenses were subtracted from profit on the tax returns, they should be added back in your earnings calculation.  Businesses tend to maximize deductible expenses to minimize taxes.
  • Depreciation / amortization is a non-cash expense, meaning the owner does not have to pay out of pocket each year.  If these expenses were subtracted from profit on the tax returns, they should be added back to your earnings calculation.  Earnings = Net Profit before taxes + Owner's Salary + Fringe Benefits + Depreciation / Amortization.
  • Generally, intangible assets such as an owner's agreement to not compete, or to consult during a transition period, are included in the value of the business derived by using a multiple of earnings, even though such assets may well be treated separately at a business closing for tax purposes.

Once you have calculated projected annual future earnings, also known as Earnings Before Interest and Taxes  (EBIT ) by accountants and is an understood norm, consider the risks involved in owning the business. How much are you willing to pay for the business given the risks involved?  The right earnings multiple really depends. For most businesses, it's somewhere between 3 to 5 times EBIT.  But, the multiple is less when there are few tangible assets and more when the business is uniquely attractive.

In summary, the rule of thumb to use to value a business is based on an earnings multiple.  The right multiple is, in the eyes of buyers, a matter of assumed risk.  Buyers feel better about buying tangible assets that they can appreciate with their five senses - things like real estate and equipment.  On the other hand, buyers are also enticed when there is a clearly attractive opportunity to make money, regardless of the tangible assets included.


Selling - Protection/Confidentiality

When a business is listed for sale, the seller needs to ensure that information disclosed to potential buyers is not used to the detriment of the business, causing it to lose value.

It is therefore imperative that a Confidentiality Agreement (or non disclosure agreement) is put in place as soon as possible when negotiating the sale of the business. Security over your confidential information is fundamental to our business practices.

Brindabella Business Brokers will vet the respondents to assess whether their interest to buy a business is serious and relevant, and we inquire about their financial capacity. If we believe a respondent may be an existing or potential competitor we refer the contact to our client before proceeding further.

If we are satisfied to that point, then we secure the signatures of their principals, and if relevant, key managers or advisers, to our confidentiality agreement. This agreement specifically binds the recipients of the information package.  They must not only refrain from divulging that the business is for sale but also must not approach the employees, customers or suppliers of the business without the approval of our client.  Potential buyers of a business should understand the need to have a confidentiality agreement in place.  Signing such an agreement demonstrates not only goodwill but strong interest in buying the business.


Sell Business CanberraLooking to Sell a Business in Canberra?

Brindabella Business Brokers can assist you with all your needs if you are looking to sell a Business in Canberra. Contact us today for more information, or to get started.