So after putting blood, sweat and tears into your business it’s time to transform your efforts to a dollar result. How do you make sure that figure is as high as possible?
People sell businesses for all sorts of reasons, from retirement to illness through to needing a change of pace – but whatever the reason there are some golden rules to follow to get the best price for your business.
Simon Bedard, Exit Strategist and Director at Buy, Build, Sell told The Pulse that one of the common mistakes business owners made was the assumption that their business was the bee’s knees.
“A lot of business owners tend to overestimate the value of their business because it’s their baby. Everybody thinks their child is the most beautiful thing in the world,” he said.
“The questions going through [buyer’s] minds are: how much profit have you booked in the past, what profit are you likely to book in the future, and how reliable are those numbers?”
He also said a lot of business owners tend to underestimate the amount of time needed to prepare for and to close a sale.
Bedard said smaller businesses typically take three to four months to be sold once on the market – but there’s a lot of preparation needed to get it to that point.
“Every business is different,” said Bedard, “but starting 12 months in advance is a good starting point. But I’d advise that if you’re even thinking about an exit, start as soon as possible.”
A thorough due diligence process is needed to spot potential red flags (from a buyer’s point of view) before the business is listed for sale.
“I always try to explain to business owners that every single thing you can imagine will come out in due diligence, including things you didn’t think of,” said Bedard.
“You’d rather address a problem up front and be able to address it on your own terms rather than things popping up.”
He also said a thorough and independent investigation of your business (with professional help) could help turn up key issues which may put a buyer off and lower the potential sales price of your business.
For example, one of the things vendors don’t think about, said Bedard, was the effect business owners not paying themselves a wage could have on the valuation of their business.
Let’s say your business makes a profit of $100,000, but the owner doesn’t draw a wage.
“If they were to step out of the business, they would presumably hire somebody to replace them in the job – so how much is that wage?” Bedard asked.
“So let’s say that number is $80,000. That means the real net profit is only $20,000. If you’re using an EBITDA multiple to value your business, that can have a real effect.”
Bedard also said looking closely at the business’ systems and processes can help maximise a sale price.
Earlier this week Perth-based accountant Tracey Loubser said processes within a business could be a huge factor for a buyer, and this was something Bedard backed.
“What buyers want to see is that the business isn’t totally reliant on you as an owner. If it is, then people aren’t going to pay a lot for that business because there’s key-man risk there,” he said.
If key decisions can’t be made without your input, then there’s going to be a discount on any sales price the business may attract.
“We would take a look at their business and see what systems or processes we could put in place that’s going to help remove the business owner from the core functions in the business,” said Bedard.
He also said showing a potential buyer that you have diversified revenue sources would help with the sales price.
“Does your main customer make up more than 15 or 50 percent of your revenue? Does your main supplier supply 15 or 50 percent of the goods you sell? All of those factors carry risk,” said Bedard.
“Often those things will be factored into a valuation.”
Cash flow issues can have a massive impact on how much a business owner may ultimately receive for a sale.
“How you manage cash flow, and how you manage chasing invoices, can have a big impact on valuations,” said Bedard.
“For example, you may have a buyer willing to spend $1 million and you may want to sell it for $1 million, but that buyer needs to come in and then throw another 200-300 thousand into working capital.
“Guess what? The buyer’s still willing to spend the $1 million, but now they’ll only give you 700 thousand.”