Obtaining the best price for your business requires more than just luck and good timing. According to the Australian Institute of Business Brokers (AIBB), sellers of small to medium-sized enterprises are still facing a buyer’s market in which maximising value requires careful planning. A members survey conducted by the AIBB in 2012 found signs of improvement, but with pricing and activity still well below their levels prior to the global financial crisis.
“The biggest three challenges for selling a business continue to be access to vendor finance expectations, access to finance and economic conditions,” the institute said. It noted that 43 per cent of vendors “either overvalued their business by more than 25 per cent or had no idea at all on value”.
Despite some reports, overseas buyers generally remain in the minority. According to an AIBB survey released in July 2012, only 2.6 per cent of businesses sold by its members were acquired by foreign buyers or overseas-based entities.
Do your homework
Small business owners should start the planning process at least a year or two prior to putting the “for sale” sign up, according to business advisors.
“Policies and procedures need to be put in place that essentially remove the owner from the business, but ensure it remains profitable,” says Richard Wheeler, principal at Moore Stephens Queensland. “The checklist includes solid employment arrangements with key staff, good internal controls and the transitioning of key relationships to a number of different individuals, as well as having a broad client base.”
For valuation purposes, it is important to ensure the business is operating at maximum profitability by reducing excess assets and cutting costs before the planned sale.
Intellectual property (IP) is a key asset for many businesses, particularly technology and other IP-intensive industries, making it vital to secure all IP rights. Many business owners make the mistake of assuming that they own IP created by an employee. However, an IP assignment is required to ensure that any IP created by contractors, such as graphic designers or software developers, is owned by the business.
Sellers need to give comprehensive warranties to the buyer that suitable protection has been sought for all IP, including logos, brands, designs and trademarks, according to IP lawyer Malcolm McBratney. Potential purchasers will also need substantial information about the business for their due diligence process, including lease agreements, employment contracts, financial statements for the past two to three years and all legal documentation. The Australian Taxation Office provides a checklist for owners to tick off when selling or closing a business, including such issues as GST, capital gains tax, superannuation and other employee obligations.
Being “sale ready” requires stable earnings growth, robust management, quality financial information and the right structure, along with engaging suitable advisors. It is also important to understand the key valuation drivers of the business and its competitive advantage.
Don’t sell the business yourself
Tonkin Corp’s Kenelm Tonkin suggests impartiality is essential and that owners should never conduct the sale transaction.
“There is nothing to suggest people who run businesses know anything about selling them,” he told Australian Financial Review readers in a May 15, 2012 article.
Tonkin suggests business owners seek advisors with experience in the same industry and with businesses of the same size. He advises speaking to referees concerning the advisor’s record and negotiating suitable terms, which usually include a success fee.
Putting the right structure in place can also make a big difference when it comes to tax. In one example, the owners of a Perth family business that sold for $8 million were left with a $1.5 million tax bill, which reportedly could have been avoided had the business been structured differently.
Prior to launching negotiations, ensure the business broker has a signed non-disclosure deed from the prospective purchaser and that the buyer is not simply a competitor seeking proprietary information. It may also be possible to find the ‘right’ buyer by demonstrating to a larger company how the integration of your business could deliver it even bigger profits and revenues than those currently being achieved.
By preparing carefully, having realistic expectations and obtaining employee buy-in, it is possible to achieve the best price for your business, even in an uncertain economic environment