Selling a business
GETTING the right price for your business when you decide to sell is a little different to putting a price on your house.
Conny White, of Benchmark Business Sales, says every business owner needs an exit strategy to achieve maximum sales value in the current market. ‘‘ The lack of planning can cost a business owner hundreds of thousands of dollars,’’ she says.
‘‘Setting the right price is critical, and estimating the business value is a skill. This is not what you owe the bank or what you paid for the business; the business ‘asking price’ is generally calculated by multiplying the adjusted net profit (pre owner drawings) by the current market return, known as return on investment (ROI).’’
Ms White cites an example of a business with a $200,000 a year net profit at 40 per cent ROI, to be valued at $500,000 total purchase price (including goodwill, plant and quipment and stock).
In the current market purchasers are demanding a higher return on investment (ROI) due to bank lending or the declining profitability of many businesses.
There are three essential requirements for the potential purchaser:
A profile of the business providing sufficient details of how the business operates, bearing in mind purchasers may be interstate.
Sufficient financial details for the purchaser’s accountant to undertake due diligence.
The business profile and financial details provides the purchaser’s financier with sufficient information about the business to consider a lending package depending on the purchaser’s financial standing.
A business profile is an overview of the business detailing the sector - for example, importer, wholesaler, retailer and so on, the product or service provided, how long the business has been established, and future prospects. It should include: 1. A copy of property lease documentation, assignment documents and last rental statement.
2. A staff schedule showing staff positions, salary package and length of service.
3. A schedule of any leased or hired equipment or any free on loan equipment.
4. Stock value with comments regarding seasonal variations
5. Copies of any licences, franchise agreements or agency agreements, where applicable.
6. Information relating to competition, areas of potential risk etc.
A business profile is the window of your business, providing basic details for the purchaser to decide if they have an ongoing interest or not. It is this document that gives the investigating accountant and financier an idea of what the business is about.
It’s important to remember that they usually do not visit the business, and so it’s crucial the business profile is professionally prepared and signed off by the vendor.
The investigating accountant requires certain information to make an informed decision about the financial position of the business.
It must be remembered that a purchaser is purchasing future profits of the business based on previous trading results and if all the necessary information is not provided it is unlikely that the accountant or the financier will give a favourable due diligence decision.
Other important documents include, tax accounts for the last three years (profit and loss statement and balance sheet), management accounts for sales to date, BAS statements for last 12 months and year to date, and current depreciation schedule or asset schedule
The accountant may request additional i nformation as required, such as bank statements, explanations as to certain income or expense items.
Given the extensive information required, a business broker is professionally qualified to undertake the task of preparing an information memorandum or business profile, know the current market, have access to comparative sales and know the returns required to sell the business - that is, the asking price in the current market.
A broker would know the most common problems with business sales and how to avoid or address them.
Conny White is a senior broker with Benchmark Business & Commercial Sales, one of the largest national business brokerages with offices in Brisbane, Gold Coast, Melbourne and Sydney. She is based in the Cairns email@example.com
The bank manager will want to see a detailed profile of the intended business purchase