I want to sell my business soon, but don't know where to start. What steps should I take to get my business ready for sale?
Anyone interested in buying your business isn't going to take your word for its worth, so make sure the business's financial background is in order. This means getting your payment history, bank statements and any other paperwork ready for scrutiny.
The next step should be housekeeping - take stock of your assets, including the business's intellectual property. Also, have an up-to-date and accurate list of all your current supplier contracts as well as your customers.
People who are selling their small business may be eligible for concessional capital gains tax treatment under Division 152 of the Income Tax Assessment Act. This can be a significant break, so it's very important to talk to your accountant to see if you qualify and are structuring the sale correctly.
Sometimes employees are as valuable as the business itself, so if that's the case with you, be certain to have a retention strategy for your staff. The best way to do this is through goal alignment. Your staff will be more likely to stay on board if they believe their goals will still be met by the new business owners. Keep an open line of communication with staff, and if keeping them on board can make or break the business deal, consider giving them a piece of the pie.
If you only have one person interested in buying your business, create some competition to optimise your position. Identify multiple purchasers, even if one of those people is you. Everyone wants to feel like they're picking up a hot commodity and creating an auction environment with multiple bidders might get you a better offer.
Finally, speak with your potential buyer to share future ideas and opportunities for the business. If you know of a possible deal or potential for growth through a new channel, it's worth selling it to the interested party.
What are the different methods of valuing my business, and how do I know which is the most accurate?
In addition to industry rules of thumb there are three methods that are often used. As a logic check it's always prudent to compare the results of the method you choose with at least one other and be able to rationalise the difference.
The first method often used is the market value method, which there is no real formula for. It's a "beauty in the eye of the beholder" valuation where your business will go for what someone feels it is worth. It can go a number of different ways - an existing player in your industry can take on the sales and delete your systems and staff, or someone new can come in and buy the lot. It really depends on the situation but overall it's the luck of the draw depending on the market, what's out there and what your potential buyer is willing to pay.
The second method is on the basis of the present value of net earnings. This is calculated by applying required rate of return to anticipated future cash earnings. This varies and is very dependent on the industry the business is in and the specific nature of the business. The determinant is usually risk-based. If you perceive a higher risk then you want more reward thus a higher rate of return on your investment and therefore a lower value. So if you're a newsagent or a chemist, you probably have a licence and barriers to entry. This means there is less risk than say a convenience store, so the business is likely worth more. The present value of net earnings method is formula-driven and a more scientific and logical and less emotive than the first method.
Finally there is the Net Tangible Assets method which simply places a value on the bricks and mortar and plant and equipment. It doesn't apply any value for goodwill or intellectual property because they're not tangible. This is a commonly method used when a business is winding up and assets are liquidated.
When it comes to valuing your business, the real value is little other than what someone is willing to give you for it. Everything else depends on variables that can't necessarily be controlled.
Mark Bouris is executive chairman of Yellow Brick Road, a wealth-management company and small-business adviser that sells products and services for home loans, financial planning, insurance, superannuation, investments, accounting and tax. His advice here is intended as guidance only.
If you have a question for Mark Bouris, email it to Max Mason at max.mason@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
How should I prepare my business for sale to attract serious buyers?
Start by getting your financial background in order — payment history, bank statements and any paperwork a buyer will want to scrutinise. Do housekeeping: list all assets (including intellectual property), and have up-to-date supplier and customer contracts ready. Clear, organised records make your business easier to value and sell.
What financial documents and records do buyers usually want to see when buying a business?
Buyers typically want payment histories, bank statements and any supporting financial paperwork. Also prepare an accurate list of assets, contracts with suppliers and customers, and records that support earnings and performance.
Can I get concessional capital gains tax treatment when selling a small business?
Some small-business sellers may be eligible for concessional capital gains tax treatment under Division 152 of the Income Tax Assessment Act. It can be significant, so speak with your accountant to see if you qualify and to ensure the sale is structured correctly.
How can I retain key staff during the sale of my business?
Treat employees as part of the business value: keep open communication, align goals so staff see how their objectives will be met under new ownership, and consider retention incentives — including giving them a stake in the business — if keeping them on board is critical to the deal.
What are some ways to create competition among buyers to get a better sale price?
Identify multiple potential purchasers and create an auction-like environment so buyers feel they’re bidding for a hot commodity. Even listing yourself as a potential buyer can help create competition and improve your negotiating position.
What are the common methods used to value a business?
Three common methods are: (1) the market value method — based on what a buyer is willing to pay and often subjective; (2) the present value of net earnings — a formula-driven approach using anticipated future cash earnings and a required rate of return (risk-based); and (3) the net tangible assets method — values physical assets but excludes goodwill and intellectual property.
Which business valuation method is most accurate for my situation?
There’s no single ‘most accurate’ method — each has strengths depending on your industry and business specifics. Compare results from at least two methods and be prepared to rationalise differences; ultimately the real value is what a buyer is willing to pay.
Who provided the advice in this article and how can I ask further questions about selling my business?
The guidance comes from Mark Bouris, executive chairman of Yellow Brick Road, a wealth-management and small‑business advisory firm. His advice is offered as guidance only. If you have a question for Mark Bouris, email Max Mason at max.mason@fairfaxmedia.com.au.
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