Getting Cheated when Buying a Business

Buyers walk into traps frequently when buying a business. In this post, we identify the biggest, most heartbreaking mistakes Buyers make when buying a business.

  1. Don’t secure Clients/Suppliers – the Sale Contract should be conditional upon the Seller transferring existing Contracts/Agreements with key Clients/Suppliers if not all of them. If the Contracts/Agreements are not worth the paper they’re written on, then look at writing into the Contract of Sale a “performance based” buy-out with a lump sum payment at Settlement and the balance paid upon satisfying the performance criteria.
  2. Don’t secure the Seller – the Sale Contract should be conditional upon the Seller, and specifically the Director/s of Company/s agreeing to complete satisfactory handover training. In particular, if the business’ success is largely dependent of the Seller, then look at withholding a “retention” amount from the Settlement amount to secure the Seller’s handover training/performance over a certain period.
  3. Don’t secure a Non-Compete Agreement – the Sale Contract should have a strong non-compete clause to prevent the Seller and specifically the Director/s, Shareholders, and Unit Holders etc. of the Selling Company from establishing competition within a certain period and radius from the Business. This should also include soliciting staff, clients and suppliers of the business. Penalties should apply where a breach occurs. Without a written agreement in place, you won’t have any recourse.
  4. Don’t secure Confidentiality – the Sale Contract should have a Confidentiality or Non-disclosure agreement which protects the confidential information of the Business. Once the Seller moves on, you do not want them to use the confidential information or reveal the top secrets of your success to others!
  5. Don’t Review BAS Statements or Accountant Financials – Do not buy a business until you see at least one of these reports! Figures punched into a spreadsheet or notebook can be falsified. Tax Invoices can be falsified. Even figures produced from Accounting programs such as MYOB, Quickbooks, and Xero can be falsified. You need to review the financials which are declared to the Tax Office!

If you liked this Tutorial, please SHARE with others and we can bring you more great Tutorials. Likewise, if you have any burning topics you’d like us to cover, we welcome your suggestion. Just send us an email or message and we’ll take it on board.

DISCLAIMER
The information contained in this post is an opinion based on past experience. Do not take this as financial or legal advice.

Leave a comment

Shock Buyers – Destroy their Trust!

Nothing scares a Buyer off quicker than financials riddled with Income and Expenses from other entities that you operate!

Why?!

  1. your Business (or the entity that owns the Business), is also paying the bills for your other activities…therefore, “are you also propping up the sales through cash and/or income injection from other sources?”;
  2. significant savings/privileges available through your “buying/selling power” may be lost when you sell the Business; and
  3. auditing and verifying Income and Expenses (and adjustments) from your other trading activities is near impossible, if at all!

If there’s substantial questions surrounding the financials, and Buyers have no clear evidence that the Business makes what you say it makes, then don’t be surprised if you don’t hear from them.

Even clean figures showing a low profit will be enough to entice a Buyer to make an Offer to buy your Business as they feel safe in knowing what their expected return on investment and risk is.

If you want to sell your business for a fair price and within a reasonable time frame, then be prepared to put in the hours to clean up your figures and/or be prepared to open up your records to verify the true trading performance of the Business.

A possible quick fix is to go through your Income and Expenses and remove all items or in some cases, the portion of the total item that is not directly related to the Business you’re selling. Once you’ve separated out these items, re-produce your Profit & Loss Statements and show this report to Buyers. Do not put this in the “too hard basket” as avoiding this task may see you with an unsaleable Business from anywhere between 6 months to 3 years!

If you liked this Tutorial, please SHARE with others and we can bring you more great Tutorials. Likewise, if you have any burning topics you’d like us to cover, we welcome your suggestion. Just send us an email or message and we’ll take it on board.

DISCLAIMER
The information contained in this post is an opinion based on past experience. Do not take this as financial or legal advice.

Leave a comment

How to prove Cash Sales when Selling or Buying a Business

A Business with a large number of cash transactions will probably use a Cash Register. If you are selling your Business, you should keep copies of your “Journal Tapes” also known as X-Tapes and Z-Tapes as evidence of Cash Sales going through your Business.

The X-Tape should show a prospective Buyer a continuous record of each transaction recorded with a Total (basically a running tally). This Till Tape reading should identify the type of payment received (e.g. Cash, EFT, Cheque etc.), and the type of purchase (i.e. Cost of Sales e.g. grocery, liquor, coupons etc.).

This type of reporting is valuable in proving to a Buyer the Sales put through your Business as it can be generated at any time without affecting your Z-Tape (end of period Til Report).

The Z-Tape should show a prospective Buyer a summary of the accumulated Total Sales for a certain period (e.g. daily, weekly, monthly, yearly). Once the Z-Tape is produced/printed, the register is reset/closed off and therefore offers a reliable record of previous sales as it can no longer be changed (much like your end of year Tax Report).

Most Businesses will run a Z-Tape at the end of each week or month to help track how the Business is travelling from week to week or month to month. This type of reporting is valuable to a prospective Buyer as it can show them your weekly or monthly Sales including any Cash Sales recorded.

Without the Til Tapes as evidence, a Business heavily made up of cash sales will need to be prepared to verify their Sales by way of a weekly “Trial” of Gross Sales. This means the prospective Buyer is able to come into your Business during the Trial Period and observe the Sales Transactions. This is generally permitted under a Contract of Sale. Note: a Buyer is not permitted to interfere with the Business during this period.

If you have a Cash Register, this is a time when you should keep Til Tape records. If you don’t have a Cash Register, then you will need to keep other accurate records (e.g. “Day Book”) and substantiate this against Invoices/Receipts for Cost of Sales during the respective period. A prospective Buyer should be able to extrapolate from your Cost of Sales the amount of Gross Sales that should have been produced during the period against known Gross Profit Margins.

Nuts and bolts? If you expect more for your business, then be prepared to prove that the sales exist.

If you liked this Tutorial, please SHARE with others and we can bring you more great Tutorials. Likewise, if you have any burning topics you’d like us to cover, we welcome your suggestion. Just send us an email or message and we’ll take it on board.

DISCLAIMER
The information contained in this post is an opinion based on past experience. Do not take this as financial or legal advice.

Leave a comment

The Silent Killer in your Business

We’re going to identify the silent killer in your business and show you some easy tricks to help make it work for you!

What is it?
||
||
||
||
\/

It’s your Gross Profit Margin!

We reckon 90% of Businesses we assess are trading poorly or drowning against their Competitors when comparing Gross Profit Margins; and the Owners are shocked to hear when we tell them there is a 5% to 10% further profit available when we crunch the numbers with them. On a $1million Sales Income you could be throwing away $100,000 of free money which could go straight to your Net Profit! This could also mean the difference between trading with profit and trading without!

If you’re struggling to find extra money in your business then this is the first place you should look. Let’s crunch some numbers and show you!

Image A shows you the effects of working with what you’ve already got and simply reducing your Cost of Goods. For a business such as a Café, any savings in Cost of Goods should instantly go straight to your Net Profit as all your other major operating expenses, such as wages and rent, should stay relatively the same! Depending on what industry you’re in and how you scale your business, this should also apply to other Businesses.

When there’s a downturn in Sales, your willingness and diligence to monitor and control your Cost of Goods should give you some breathing room when times are tough (refer to Image B).

So here’s four easy tricks to help increase your Gross Profit Margin and make the silent killer work for your Business:

1. Stop selling your low profit margin lines and focus on the ones that make you more (this includes focusing on the customers that bring you more money).

2. Make sure you are paying the best prices for your goods. Staying with one Supplier for too long can make you complacent. If you are on the best payment terms with your Supplier, then why not pay your Suppliers early or “on-time” to receive their “Early Payment Discount”; or pay with Cash if a discount is offered.

3. Increase your prices. You may lose some customers but they were probably the customers who always had something to complain about and were worth little to your Income. If you’re too scared to increase your prices across the board, try doing it to just 80% of your product range (e.g. your least popular lines). See what happens when you increase your prices – refer to Image C and D.

4. Stop discounting! Refer to Image C and E and see what happens when you discount – you might think twice next time!

If you liked this Tutorial, please SHARE with others and we can bring you more great Tutorials. Likewise, if you have any burning topics you’d like us to cover, we welcome your suggestion. Just send us an email or message and we’ll take it on board.

DISCLAIMER
The information contained in this post is an opinion based on past experience. Do not take this as financial advice.

Leave a comment

How to Sell your Business for MORE, Today!

In this Business Sale Tutorial, we’re going to show you how you can turn an unprofitable business, worth nothing on paper, into a business with a great Sale Price in minutes!

Forget if your business has “plenty of cash”, or “it has so much potential”, or “you’ve spent millions on it”.

The fact is two Rules come to the top every time:

(1) you need to show a profit which is more than the average wage that your prospective buyer can earn, and

(2) you need to offer a good Return on Investment (ROI) in line with similar businesses.

Every business is different and needs to be assessed on a case by case scenario so we want you to be able to filter what we show you in this Tutorial and apply what is applicable to your own business.

If you’re still scratching your head afterwards, just give us a call or flick us an email and we can help you personally. That’s not a problem.

So, let’s show you how to put profit back into your business.

Grab your Trading Account, also known as your Profit & Loss Statement for the past 3 years. If you haven’t traded for at least 3 years, then grab the last 1 or 2 years. These should have already been prepared by your Accountant (see “Image 1”).

Now, grab your internal Management Trading Accounts or internal Profit & Loss Statements for the corresponding periods (see Image 2).

Now, grab you Payroll Summary for the corresponding periods. It should show the wages and superannuation paid to each employee on PAYG (see “Image 3”).

If you look at your Management Accounts, you’ll probably see that it itemises your Income and Expenses in more detail than your Accountant’s set of Accounts.

In your Income section, identify any items where you have entered Income that was generated from non-business, or non-trading activities. This might be items such as Interest earnt or rental income from another property.

If these items have been included in your Accountant’s set of Accounts then these should be removed from your Trading Income as they were NOT Income derived from your normal trading activities, and will NOT or are UNLIKELY to appear again in a normal trading year  A new Owner will not benefit from this Income so it should be removed to appreciate the true trading performance of the business in a normal trading year.

Now we need to go through your operating Expenses. Look at your Cost of Goods, Cost of Manufacturing, and your other Expenses. Identify all the entries that were put through the books that were not necessary in the operation of the business.

In other words, if you had NOT spent that money and you did NOT need to spend it to run your business, then in their absence, it would NOT have affected your operations and did NOT bring in Income.

These might be personal, once-off, or discretionary expenses such as personal overseas travel, personal Motor Vehicle, or donations. If you think removing it might be contested, you’re better to leave it in.

If you spent money on a failed advertising campaign or hired staff that are now redundant, then unfortunately, these must remain on your books as even though in hein site you feel that it was a waste of money and bought in no Income to the business… it was still money you spent to run your business with the intention of bringing in Income so you can’t do anything about that. Leave it there.

Now, run through your Payroll Summary and identify anyone who is a non-working Owner or non-working family member receiving a wage. These people can be removed from your operating expenses as they have nothing to do with running your business.

Now look for wages made for one working Owner. You can also remove this from your operating expenses. What we want to see is how much profit the business makes before paying one Working Full Time Owner working a normal 38 hour to 40 hour week.

If we leave the wage for one working Full Time Owner, we are effectively showing a profit to the business run under management as you are in fact allowing wages to be paid for someone to work the Owner’s role. So in order to appreciate the trading profit to one working Full Time Owner, you need to take out their wage.

Once you have identified all the Income and expense that are personal, once-off, discretionary, or non-trading you can now produce a Special Purpose Report called a Bridged or Normalised set of Trading Accounts or Profit & Loss Statement which shows only the Income and Expenses relevant to the business.

This allows us to appreciate the true trading position of the business to one Working Full Time Owner. It’s best your Accountant produces this Special Purpose Report for greater credibility.

The other option is to produce an Addback Schedule which is set out like your Profit & Loss Statement itemising each adjustment and the amounts for each (see Image 4). You can do this yourself. Both will have the same effect.

If you have no adjustments to make to the Income and/or Expenses then unfortunately your Net Profit position will be unchanged.

However, if you have removed more Expenses than Income, then your Net Profit should now be higher than your reported Profit, and you can now apply a valuation formula to your business that results in more than zero and higher than a Fire Sale!

If you’re not sure if this is legal or acceptable Accounting practice, then just ask your Accountant. What you need to be mindful of is not getting carried away with the amount of expenses you remove from your financials. Too many adjustments that you can’t substantiate with accurate reporting can look dodgy and scare off buyers.

If you don’t want to provide a Special Purpose set of Accounts to a Buyer then unfortunately, you will have to rely on the ones you have prepared for the Tax Office and BAS Statements.

Every business is different and you can’t make an adjustment for one business and necessarily apply the same adjustment for another.

Sadly not all Accountant’s understand how to make proper adjustments for sale as they can be influenced by pleasing their Client (the Seller), or simply have little to no idea of what is acceptable and non-acceptable for THAT business; so they make adjustments that, when reviewed by the Buyer’s Accountant or Lender, are rejected.

If you would like us to help you prepare an Addback Schedule which is in line with market expectations, or want to have a no obligation chat with one of our Consultants, please get in contact with us by email at sales@businessforsaleqld.com.au (you can still run it past your Accountant for their final tick of approval but let’s see if we can save you some time, money and embarrassment by getting your ducks lined up first).

If you liked this Tutorial, please SHARE with others and we can bring you more great Tutorials. Likewise, if you have any burning topics you’d like us to cover, we welcome your suggestion. Just send us an email or message and we’ll take it on board.

DISCLAIMER

The information contained in this post is an opinion based on past experience. Do not take this as financial advice.

Leave a comment

Ending your Lease when selling a Business

The WORST mistake Sellers make when they have less than 3 years remaining on their Lease is to do nothing as they don’t want to be stuck with a long Lease if they re-sign for another Term. The other mistake they make is, not knowing what to do about their Lease!

If you’re selling your Business, you need to look at increasing the saleability of your Business:

  • Make sure you have at least 3 years remaining on your Lease
  • Find out whether the Landlord anticipates to exercise any Demolition clauses, is planning to sell the Premises, plans to increase the Rent, Security, and/or Outgoings amount; and establish if the Landlord is open to negotiations if these changes will significantly impact your Business negatively
  • If you have less than 3 years remaining on your Lease, you need to ask your Landlord if they would grant a further Lease Term, add a Lease Option to the current Lease, or grant a New Lease on the same terms and conditions. This is extremely important for three main reasons:
    1. The Buyer needs to have enough time to make their return on investment, make a profit, and repay any loans to the Bank if purchasing the business using finance;
    2. The Buyer knows that if their circumstances change and they need to sell the Business, then they can subsequently offer the next Buyer something to buy; and
    3. If seeking finance, the Banks will need to assess the serviceability of the Loan. Generally 3 years minimum is sufficient provided the Business has the capacity to service the Loan and your Buyer has financial strength behind them otherwise, 5 years is your best bet as it’s considered a lower risk investment for the Lender; and a “no-brainer” for your Buyer.

The longer a Buyer has to make a return on their investment and turn a profit, the greater the SALEABILITY of your Business and the HIGHER the Buyer is prepared to pay for your Business.

Selling a Business requires the Landlord to assign the current Lease to your Buyer on the same terms and conditions (hence it’s called an “Assignment of Lease”).  Provided the Lease provides for an assignment to take place, the Landlord cannot unreasonably withhold an assignment so you aren’t “stuck” with a long Lease at all.

Nuts and Bolts…don’t hold back on signing a new Lease, exercising any Lease Term Options or asking for a further Lease Term. Buyers will not look seriously at your Business, or at all, if the risk of being forced to close their door in 1 or 2 years is “Guaranteed”.

If you have any questions relating to this Article and would like to chat with one of our Consultants about how your Lease may affect the sale of your Business, please get in contact with us by email at sales@businessforsaleqld.com.au. Always happy to chat!

If you liked this Tutorial, please SHARE with others and we can bring you more great Tutorials. Likewise, if you have any burning topics you’d like us to cover, we welcome your suggestion. Just send us an email or message and we’ll take it on board.

DISCLAIMER

The information contained in this post is an opinion based on past experience. Do not take this as Legal advice.

Leave a comment

Email Marketing Works! We’ll tell you our tricks!

Email Marketing is one of our biggest selling tools here at Business for Sale QLD and we’d like to share our experience with you on what works.

We use it regularly because it’s not only cheap and cost effective, but generates an overwhelming response from our database of buyers and sellers. The people who are receiving our Emails are people who have agreed to receive marketing information from us. They are telling us that they want to see more from us! So, give them what they want!

Quick Tips:

  1. Make it visually appealing but be mindful of using large images as it may take longer to load on the reader’s screen and, if you DO use an image at the top of your email, we find it works to include a short text overlay to make the image relevant and add content/meaning to the image.
  2. Make sure the first part of the screen that your reader sees is relevant. Remember back to when your reader initially agreed to receive marketing material…what was the initial trigger? For example, our Buyer’s subscribe to receive “email alerts on other business opportunities”. So, in our Email we would open up with something like, “Hi David, just thought you might be interested in our latest business opportunities.”
  3. Make sure the Subject line is relevant and clear of “Spam” words or it will automatically be blocked by your recipient’s Email system or ignored/deleted by the reader (see list of Notorious SPAM words below)
  4. Personalise your Email. It’s as simple as using their Name!
  5. Give your readers a “Call to Action” even if it’s not to buy from you today, drive them to your website or share/like something that you’re posting.
  6. Make it “responsive” which, in IT terms, means that the screen automatically adjusts to the reader’s device. This generally means using HTML rather than normal Text Emails. You may be able to do this quite easily with your existing Email system or use a third party website. We like using HTML EMAIL to generate free Text to HTML (including images) which allows us to use our existing Email system with no extra cost!
  7. When your readers FIRST SUBSCRIBE to receive Emails from you, encourage them to check their Spam/Junk mail and “white-list” your Email (which just means that they “tell” their Email system to accept emails from you).
  8. Give them an Opt-Out at the bottom of your Email. This makes them feel in control of receiving Emails from you (plus is a legal requirement in Australia).
  9. Don’t kill them with too many Emails or they will quickly get sick of receiving them!

We hope this has been helpful? Enjoy!

THE MOST NOTORIOUS SPAM FILTER TRIGGER
Source: Web Marketing Today, Spam Assassin, Andrea O’Neill, MailChimp

$$$
100% free
Act Now
Ad
Affordable
Amazing stuff
Apply now
Auto email removal
Billion
Cash bonus
Cheap
Collect child support
Compare rates
Compete for your business
Credit
Credit bureaus
Dig up dirt on friends
Double your income
Earn $
Earn extra cash
Eliminate debt
Email marketing
Explode your business
Extra income
F r e e
Fast cash
Financial freedom
Financially independent
Free
Free gift
Free grant money
Free info
Free installation
Free investment
Free leads
Free membership
Free offer
Free preview
Guarantee
‘Hidden’ assets
Home based
Homebased business
Income from home
Increase sales
Increase traffic
Increase your sales
Incredible deal
Info you requested
Information you requested
Internet market
Leave
Limited time offer
Make $
Mortgage Rates
Multi level marketing
No investment
Obligation
Online marketing
Opportunity
Order Now
Prices
Promise you
Refinance
Remove
Reverses aging
Save $
Search engine listings
Serious cash
Stock disclaimer statement
Stop snoring
Thousands
Unsubscribe
Web traffic
Weight loss

If you liked this Tutorial, please SHARE with others and we can bring you more great Tutorials. Likewise, if you have any burning topics you’d like us to cover, we welcome your suggestion. Just send us an email or message and we’ll take it on board.

Leave a comment

How to stuff up finance when buying a business

How to get banks to approve a bank loan when buying a business or freehold commercial property?

Unless you’re a mega brand floating golden arches, banks simply will not lend on a business. So, how do you get a loan application to go through? We face this problem every day and hear first hand from lenders how buyers can stuff it up!

Firstly, Golden Rule No.1 “the bank will place ZERO value on a business’ goodwill unless you’re a mega brand” despite how long the business has been trading, or whether it’s under management, or whether it’s got contracts with mega clients and mega suppliers, or whether sales are trending upwards with profits like you wouldn’t believe! Banks will NOT lend on a business unless you are a mega brand.

So how do you get finance when buying a business? You need to be able to pay for the business with Cash. If you don’t have enough cash then you need to have the loan secured against assets of value such as property, plant & equipment or motor vehicle.

But what about all the income that the business you’re buying is showing? Why can’t the bank lend against that? Simple answer: “because that’s  what the current owner is making, not you”.

This takes us to Golden Rule No. 2 “You have no history of running the business“. Lenders may ask for trading reports of the business but this is simply to assess the serviceability of the loan rather than to actually lend against the business. They may also ask you for a resume/CV outlining your experience and/or business plan but this is to comply with their requirements under “responsible lending”.

So, how does this information help you? Well, look at the risk that you are projecting to the lender. If you have zero to little relevant experience in the business that you are buying then you can bet that you’ll get knocked back on finance. We have seen buyers with over 50% cash and 50% equity available in property get knocked back because they “don’t have enough experience” and this is for a business run Under Management! If you don’t have relevant experience banks will severely penalize you and can outright refuse you finance under their “responsible lending” criteria. They see this as “buying yourself a job”. So, how can you get over this hurdle?

A couple of ideas that can work:

  1. get the Owner to agree to stay on for 6months to 12months or as long as you can until the banks are satisfied that this is long enough; and
  2. buy under two owners so that one stays on as a working owner and the other stays employed in their current job hence reducing the perceived risk of you running the business and not being able to service the loan.

Golden Rule No. 3 “Don’t buy a business with freehold property unless you can pay for the business in cold hard cash and have at least 50% cash to pay for the property “. So, we’ve ruled out getting a loan for the business ’cause it’s not going to happen. Now, you need to come up with finance to purchase the freehold property. Lenders are offering 50% to 60% LVR on commercial or industrial property in QLD. If the property offers “limited use” and/or “low return on investment” then you would be lucky to get 50% LVR.

You need to demonstrate to the lender that the property has not hit it’s maximum potential use and offers a high realisable return on investment particularly if you are already pushing your luck to come up with 50% cash to purchase the property. This gets back to your Business Plan and Cash Flow Budget. Consider what’s happening in the business/area/industry that can increase sales? Can you subdivide or are their other development approvals that can increase your rental yields? This will get you out of the “waste basket” and offer some chance of getting a “yes”.

Golden Rule No. 4 “use an experienced finance broker who has completed a similar transaction“. A good finance broker has access to an incredible range of lenders from the majors to independents to private lenders. If you have a favourite lender, firstly, tell your finance broker. Don’t assume that just because you’ve been banking with your favourite bank since you were 10 years old and  have bought properties through them that this will win you any favours. This is probably one of the worst mistakes a buyer makes when going for finance to buy a business. Firstly, unless you are happy for your bank to drill down into EVERY account you have with them and can see how you spend your money then proceed with caution.

An experienced finance broker probably knows more than your local bank manager and generally has access to “wholesale packages” that are not generally promoted within a bank. This could mean the difference between whether or not you can get a loan that you can service. If you still want to go through your favourite bank, then make sure your application is presented in its best possible light (some things seem harmless at the time but actually destroy any chance of getting your loan approved). Once you stuff it up, then you can bet other finance brokers and lenders will know about it the next time you go for a loan!

This information is intended to be a guide only based on our experience with lenders. We are not Financial Advisors. To speak with a financial advisor please refer to our Recommended Contacts for a list of Financial Advisors.

If you liked this Tutorial, please SHARE with others and we can bring you more great Tutorials. Likewise, if you have any burning topics you’d like us to cover, we welcome your suggestion. Just send us an email or message and we’ll take it on board.

Copyright. Business Classifieds Pty Ltd t/as Business for Sale QLD

Comments Off on How to stuff up finance when buying a business

How to maximise the sale price of your business

Selling your business is a detailed and strategic process and if planned and executed properly, can lead to achieving the highest possible sale price for your business. Here, we briefly explore the key issues which we consider to impact on your ability to attract prospective buyers and more importantly, seeing your business sale through to settlement!

DIVERSIFY YOUR CUSTOMER BASE
If a large percentage of your current business is concentrated on a small percentage of customers, this can have a negative impact on the perceived future trading ability of your business and can lose buyer interest very quickly in the sale of your business! The concern is that if the owner leaves and the major customers leave, the business could lose a substantial amount of its income. It’s no surprise then if none of your customers accounts for more than 10% of total sales, this can be viewed as a real advantage and makes it easier for you to sell your business.

If you find yourself with a customer concentration issue (or a strong reliance on a small number of customers) and are planning to sell your business, start focusing on a program to diversify. A quick fix would be to make an acquisition of a competitor or synergistic business with customer diversity, integrate them and then put your business for sale.

MANAGEMENT DEPTH
If your business relies on you to run its day to day operations then this may work against you when a buyer looks at buying your business. Many owners don’t realise that although a buyer may look to work in the business themselves and may have their own ideas on how to run it, they will ultimately want to know whether they’ll have a “business” to run should you leave tomorrow. That is, if a buyer perceives that the business’ success has been largely due to your skills and knowledge and your relationships with your clients and suppliers, then chances are that your business will walk out the door with you. This is of little or no value to buyers. A buyer will look at the quality of the management staff and employees as a major determinant in business sale price.

A key in preparing your business for sale is to develop your people so they can run the business after you’re gone. You should make the move of assigning your successor at least 6 months in advance of your scheduled departure date. If you have no one that you feel has the ability to run the business, then you need to hire someone that can. If you have a strong management team in place and you’re anticipating an exit, you should try to implement employment contracts, non-competes, and some form of phantom stock or equity participation plan to keep these stars involved through the transition and this will reward you with more potential buyers and attract a higher selling price for your business.

RECURRING REVENUE
Guaranteed or recurring income streams are always more attractive to potential buyers than new sales or sales forecasts. If your business for sale lends itself to the possibility of contracted income streams such as licensing fees, retainers, or other contractual arrangements, you should make a concerted effort to lock-in clients before putting your business for sale. The result is increased leverage during the negotiation phase because instead of dealing with possible income figures, you’re dealing with hard numbers. It’s all about risk. The higher the risk (future possible sales) the lower the return. The lower the risk (guaranteed or contracted revenue stream) the higher the return.

BARRIERS TO ENTRY
Owning hard to get permits, zoning, licenses, or regulatory approvals can be worth a great deal to the right buyer. Your business opportunity may be able to secure approvals on the local level that a national player may have difficulty obtaining. If your product or service applies and you can break through the barriers, you become a more attractive business to buy. One strategy for penetrating these accounts is to ask the buyer to identify the best salesman that calls on him and hire that salesman to sell your product to that account.

PRODUCT/SALES PIPELINE
For a selling company that has a large sales pipeline, the buyer is not anxious to pay for that pipeline at closing and the seller wants to delay his business’ sale until the next big deal. An intelligently structured sales contract with a contingent payment based on closing accounts in the pipeline is a great solution.

PRODUCT DIVERSITY
A smaller business that has a quality portfolio of products but may lack distribution can become a valuable asset in the hands of the strategic buyer. A narrow product set, however, increases risk and drives down value. If you’re planning to sell your business, review your product portfolio. Are there obvious gaps that could be filled quickly? How about buying a small business with a few complementary products? What about buying a product line from a company? Have your customers been asking you to develop a new product? Spread out your product risk as a value enhancing strategy.

INDUSTRY EXPERTISE AND EXPOSURE
This activity is often overlooked because it is difficult to measure its direct returns. We find that it is a value driver when it’s time to sell your business. To the extent possible, encourage your staff to publish articles in industry magazines and newsletters. Get exposure as a presenter at industry events. Encourage local and industry reporters to use you as the voice of authority with industry issues. Your business is viewed in a more positive light, you may get more business referrals, and a buyer from your industry will remember you favourably and is more likely to consider you as a business to buy.

WRITTEN GROWTH PLAN
For any business in any stage, this is a valuable living document to guide you strategically. A growth plan helps create a process that will allow you to break big strategic plans into executable tactical activities. What additional markets could we pursue? What additional products could we deliver to our same customers? What segments of my current market offer the most growth potential? Where are the best margins in our customer set and product set? Can we expand in those areas? Can we re-purpose our products for different markets? Are we getting the best return on our intellectual property? Can we license our technology? Do strategic alliances or cross marketing agreements make sense? Capturing this on paper as part of your exit plan will increase the likelihood that an acquiring company will view you more as a strategic acquisition. It demonstrates that you have identified a path for growth and it may identify opportunities that the buyer had not considered. Those opportunities can add to the purchase price of your business.

PROPRIETARY PRODUCTS/TECHNOLOGY
Strategic acquirers buy other businesses to grow. If they believe that a new technology can be acquired and integrated with their superior distribution channel, they may value your business opportunity on a post acquisition performance basis. The marketplace rewards effective innovation. Continue to look for ways to innovate in whatever industry you’re in. Your innovation should not be limited to product improvements. The marketplace values innovations in distribution systems, collaborative product design process, customer service and other functional areas that can provide a competitive advantage.

EFFECTIVE USE OF PROFESSIONALS
Reviewed or audited financials by a reputable CPA firm are quite valuable in the eyes of a buyer. Professional financials cast a positive light on your approach to controlling your business while at the same time reduce the buyer’s perception of risk. Bring a good outside attorney into the mix, and the risk drops even more. The thought process is that this attorney has been giving his client good advice for years on protecting the business from litigation. A strong professional team is a great asset in growing your business and in helping you obtain maximum value when you sell your business.

If you liked this Tutorial, please SHARE with others and we can bring you more great Tutorials. Likewise, if you have any burning topics you’d like us to cover, we welcome your suggestion. Just send us an email or message and we’ll take it on board.

Copyright Business Classifieds Pty Ltd T/as Business for Sale QLD

Leave a comment

Best housekeeping tips to prepare your business for sale

Sellers can be confronted with buyers who one minute seem interested in their business for sale and the next, go stone cold. Our experience suggests that sometimes the fastest way to deflate a buyer’s enthusiasm, is simple house keeping. Selling your business is probably the biggest sale you’ll ever make and it’s important that we prepare our business for sale just like we would when putting our property on the market.

MAINTAIN UP-TO-DATE FINANCIAL INFORMATION
Buyers like to see up-to-date data usually no more two months old so it’s good practice to keep on top of your financials including records of your sales pipeline, debtors and creditors. This will show a buyer how your current and future trading is likely to pan out and whether the sale of your business has affected anything. It will also reflect on how you manage your business. Accurate and up-to-date information indicates that you are running a smooth operation and makes a buyer feel more confident in being able to step in without having to tidy up first.

MAINTAINING PRODUCTIVITY AND NORMAL BUSINESS HOURS
Prospects must see your business at its best and most productive. There is a tendency for some sellers to lose focus or wind back their operations when they have their business for sale. Buyers need to see that your business is busy, making money, and generally moving forward. They aren’t likely to want a business that is losing income, its competitive advantage or any of the things that attracted them to the business in the first place. It’s extremely important that you continue to run your business with growth in mind and make the most of your decisions based on the best interest of the long-term objectives of the your business; as if it weren’t for sale. Buyers are more likely to scramble over themselves to buy your business and where there’s competition, there tends to be a bidding war for your business for sale! Don’t forget to keep your normal operating hours.

CONFIDENTIALITY
Our experience suggests that confidentiality can achieve a much better result when selling a business. Avoid telling anyone that your business is for sale. Key employees might leave reducing productivity and perceived value to a prospective buyer. Employee theft may occur. Suppliers might lose confidence and go to someone else. Competitors can use this information against you. Customers may leave and sales will drop. You need to protect your image and confidentiality is important in building the image value of your business to prospective buyers for your business.

HOUSEKEEPING
Just like preparing your property for open homes, look at cost effective ways to dress up and organise your business without over capitalising. Repair signs, replace lights, clean the premises, remove dust (including dust on stock), organise and label things, remove clutter, dress up your presentation and know where everything is (including your financials) in case you need to quickly access or point out anything. Your business must look its best and any negative features need to be eliminated before an inspection.

INVENTORY
Unless advised otherwise, you should maintain your inventory at a normal level, keep it fresh, clean and properly displayed. If possible, remove any items that aren’t included in the sale of your business.

BUYER/SELLER MEETINGS
No one knows your business better than you do, so if using a broker and where indicated by your business broker, please help in physically showing your operation. Answer the buyer’s questions and be prepared to discuss the day-to-day operation. Ask your business broker advice on how best to conduct yourself and respond to questions. DO NOT discuss the purchase price or terms; defer these questions to your broker. Tell the prospect, “My Broker knows what I am asking and the terms I want. He/she will discuss them with you after our meeting”. DO NOT meet with the prospect without your Broker present as this can put you in a compromising position. Business brokers are bound by Australian legislation and the PAMD Act to work in the best interest of their clients and achieve the maximum sale price for their business. Their job is to get you the best deal and you need to put faith in your broker.

UNESCORTED BUYERS
Buyer inspections should be conducted by appointment and conducted at an appropriate time when you can give them your full attention, control what they see and who they speak with. Try to organise the inspection at a time when the business can be seen in its most attractive light. This may not always be possible especially without staff and customers to keep the business looking busy. Try to be clever with your reasons why you have a visitor in the premises. Buyers turning up unannounced can usually be an effort to catch you off guard and “back door” the process when using a business broker. In any case, it is usually an attempt to drive your price down. If a buyer turns up unannounced, tell the buyer that employees do not know that your business is for sale and you will be happy to meet with the buyer at a more convenient time. Be polite, but forceful about this point as you show them to the door.

OFFERS TO BUY YOUR BUSINESS
Experienced buyers will usually make low initial offers to ensure that they are going to get the best possible price and terms. Do not feel insulted by low offers; this is just a starting point. The prospect that makes a low offer may be the prospect that eventually buys your business. Follow the market and listen to advice given to you by your business broker (if you’re using one). They will know what businesses are selling for and have feedback from buyers who are considering your business amongst others they have seen. Start to think about what price you’re prepared to sell your business for and if that price is not out there, think about whether you’re prepared to spend anymore time and money on your campaign to sell your business.

BE PREPARED TO CLOSE QUICKLY
Once an agreement is reached between buyer and seller, buyers generally want to settle as soon as possible and you should be prepared to close quickly too. Key staff, customers and competitors can react in different ways when they hear your business is for sale or under contract. The sooner the new owner takes over, the sooner some of these fears and anxieties will go away and the less impact the sale of your business has on your business itself. If there are actions that you have deferred such as, maintenance or repairs, you should take care of them at once. There will be a lot to do as settlement approaches so everything that can be done in advance of your business sale should be done now.

If you liked this Tutorial, please SHARE with others and we can bring you more great Tutorials. Likewise, if you have any burning topics you’d like us to cover, we welcome your suggestion. Just send us an email or message and we’ll take it on board.

Copyright. Business Classifieds Pty Ltd t/as Business for Sale QLD

Leave a comment
Style Selector
Select the layout
Choose the theme
Preset colors
No Preset
Select the pattern