Industry disruptors, cyber security, Amazon, artificial intelligence (‘AI’) – the world has changed a lot in the last ten years, and continues to change at a rapid pace. Much of that change significantly impacts small business.
When it comes to selling a business, factors impacting the result include:
- The increasing difficulty of obtaining third party financing for small business acquisitions;
- Greater awareness in the business community of the large number of baby boomers preparing to exit their businesses; and
- A new generation of business owners (think ‘millennial’) in the marketplace who are very different to the entrepreneurs of the last forty or fifty years.
Importantly, the environment of selling a business has also changed. The internet has made research and information about both buying and selling a business far more accessible. A buyer can quickly access hundreds of prospective acquisitions that meet certain selected criteria, a seller can advertise their business for sale nationally, and internationally, within a few hours.
Selling a small business has become both easier and harder in some ways. But fundamentally, selling any business is a process, and to achieve the best outcome possible for a business sale, preparation and planning are paramount.
The first step a business owner should take towards planning for the sale of their business is understanding the process. This involves, amongst other things:
- Valuing the business
- Setting the asking price
- Defining the sales strategy
- Preparing the information package
- Advertising the business for sale
- Dealing with interested prospects
- Negotiating an offer
- Satisfying finance and due diligence
- Closing the sale
A professional and competent business broker or accountant will be able to detail each step of the process outlined above, and facilitate the process from start to finish.
Selling is much more than a transaction. The transaction phase is the end game, not the whole game. Preparing a business for sale is the process of making the business presentable, desirable, marketable and financeable. It’s knowing who the buyer is and how much they can pay. It’s understanding what’s valuable in a business, and what isn’t. Some basic questions a business owner may want to ask themselves when preparing their business for sale are:
- Would you pay more for a business that depends on the owner for every decision, or one that doesn’t?
- Would you pay more for a business that has every procedure documented, or one that doesn’t?
- Do you place more value in a group of employees who do only what they are told, or ones who make prudent day-to-day decisions in the absence of the business owner?
- Are you more likely to buy a business that has strong financial statements, or one where the owner can verbally describe (wink, wink) the profitability and all the “off the books” takings?
- Would you prefer increasing or decreasing margins?
- Would you place more value on a diversified customer base, or one big customer that dictates all terms of trade?
The answers to the above questions appear straight forward, however many business owners fail to consider them when preparing for the sale of their business.
The presentation of a business is also most important, and is something every business owner can and should focus on when preparing their business for sale.
Physically, the business needs to present well. An organised and efficient looking workplace/ retail outlet/ café/ warehouse will assist in making a good first impression.
Separate to the physical presentation of the business, the quality of historical financial information is the one single factor with the highest impact and influence on the business sale process and outcome. Solid, professional-looking, verifiable financial information results in a more trusting buyer, easier communication with the buyer and their advisors, a smoother due diligence period and (often) quicker financing. Inaccurate, inconsistent or unreliable financial information creates uncertainty in buyers and ultimately leads a buyer to offer a lower price because of a perceived higher risk.
The simpler the information about a business is to understand, the more willing a buyer will be to buy a business. Focus on and highlight the positives, but don’t hide the negatives. Be open about and discuss future growth strategies, but be careful about providing any projections or forecasts.
Having supporting information prepared and readily available during the sale process (or more specifically the due diligence process) builds buyer confidence. This might include:
- List of assets used in the business, and included in the sale
- Employee payroll information
- Equipment and property leases
- Distribution or franchise agreements
- Supplier and customer contracts
- Accounts receivable and payable details
- Customer lists, breakdown of sales by customer
- Sales history, breakdown of sales by product
- Inventory turnover and ageing
As a business owner, every major decision requires careful thought, planning, and preparation. Selling a business isn’t just a major decision, it is often the most important single financial transaction in a business owner’s life, and therefore good planning and preparation are key to achieving the best outcome possible.
If you’re interested in selling your business, Cameron Ryan – Director of Boyd Ryan Business Sales & Consultants – can help you. Cameron has facilitated the sale of over 100 small businesses and understands all the ins & outs of the process. You can contact Cameron on 0411 145 114 or via email.