Your Business Sale
PASSPORT
Your Business Sale Passport. Copyright 2009 by Phil Mussett. All rights reserved. Printed in Australia. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of a brief quotation embodied in critical articles and reviews. For information address BizAus Pty Ltd 800 Blackgate Road Mount Duneed Vic Australia 3217 BizAus books may be purchased at www.bizaus.com.au. For more information please write: info@bizaus.com.au or mail to BizAus Pty Ltd 800 Blackgate Road Mount Duneed Vic Australia 3217 Third Edition This book is dedicated to the people in Australia known as small business owners.
Contents • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •
Welcome to “Your passport to a better business sale” What is your business worth? Controlling the sale and avoiding the stress You’ve worked hard! Why do businesses sell for less than they are worth? Value is dynamic How do you get the best price? You only get one chance to make a first impression Documents covering the business, financials trading area and the industry Business is also numbers Buyers like to see potential Add back statements Add back example You tell us What is the best way to advertisie a business for sale? The result Why page 1 is so important Advertising reports What is due diligence? What is risk analysis? Typical risk analysis subjects Typical Risk analysis results Negotiating the contract terms and conditions Before you start negotiating Will I pay tax on my business sale? Do you feel “stuck in your business?” Are you ready What could I pass on from 40 years experience? Your business sale contacts Your buyer enquiries
• Notes
page 1 2 3 4 5 7 8 9 10 11 13 14 15 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 33 34 35
Welcome to “Your passport to a better business sale” Your passport to a better business sale is your guide to our ever expanding range of services and support programs to get the most out of your business sale. You’ll find it easy with our help and assistance.
We like what we do. Every service that we provide is designed to achieve the best possible selling price. I trust you will benefit from reading these articles as much as we enjoy bringing them to you. This passport is unique with many affordable services designed to give small business owners in Australia more affordable options when selling their business.
Activate your passport when ever you are ready. Until then keep your passport in a safe place, it’s a valuable reference guide. 1
What is your business worth At some stage every business owner asks this question. Understanding what creates value can help you develop “a value improvement plan” that can enable you to achieve a substantially better sale price. One of the biggest elements effecting the value of a business is its current and recent profit history. Another element of the value of a business is “future risk”. It is an assessment of the probability that the profit of the business will be maintained or grow. Factors to be considered in assessing this risk are included on page 21 and 22 in this passport. Factors like strong your business having a strong presence in the market, external factors like strong population growth in your area. For example if you have a business in Torquay: Torquay population is expected to almost double in next 10 years • 2013 28,276 • 2021 36,212 • 2031 44,786 Factors like this enhance the sale price of a business. When we produce your business documentation we include research and statistics to support your business. Phil Mussett 0417 113 473
www.bizaus.com.au 2
Controlling the sale and avoiding the stress Selling a business can be a stressful task. For many small business owners their business represents a significant part of their wealth. This can create pressure, resulting in stress to get the sale process right. A business sale mistake can take years to recover from. Whenever you are dealing with the market, it is wise to accept that markets go up and down. This is a reality that you can't control. Whilst you can't control the market you can control the sale process if you are aware of the business sale success principles. The first, most important principle of a successful business sale is preparation. If preparation is not done correctly, a business sale is well on the way to a predictable failure.
Phil Mussett 0417 113 473
www.bizaus.com.au 3
You‘ve worked hard! When it comes time to sell, it is only reasonable to expect that your business is sold for what it is worth. Yet many businesses are sold for less. It is vital that the effort applied to sell a business is the same as that applied to build the business. Your approach to putting together the information that presents your business in the best light is the key to you receiving just reward for all the years of hard work you have put in. Remember the day you started your business. On that day you had a dream that you would take the risks and work hard because your efforts would pay off handsomly when you sold. Now is the time to reflect on this and put the extra effort into the sale of your business. As this passport has been prepared without considering your financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances.
Phil Mussett 0417 113 473
www.bizaus.com.au 4
Why do businesses sell for less than they are worth? In many cases, the owner or those who represented the owner, did not put in the appropriate time and effort to prepare the business for sale properly. Depending on the business, preparation can take as little as a few weeks, that’s not significant when compared to the time you have put in to building the business. Applying the same effort to sell as you have to build your business is very important. You must present your business in the best light if you are to get just reward.
What is your business worth? The best price formula is: Low risk + profit = a better selling price Simple really. Look at what you can do that shows the risk is low, then look at how you can make the business attractive. By doing so you put your business in the best position to achieve the best price. Phil Mussett 0417 113 473
www.bizaus.com.au 5
If I had six hours to chop down a tree, I'd spend the first hour sharpening the axe. Abraham Lincoln
Value is dynamic Small business values are not static nor do they constantly rise year after year. There is no consistent multiplier for a business such as multiplying the net profit by 2 or 3. For a range of reasons, the multiplier can be 1 in one location and 3 somewhere else, or 2 today and more or less in six months time. This can be due to interest rate movements, the value of the Australian dollar, the national economy, the local economy and the list goes on. First and foremost, an independent, frank and realistic business evaluation needs to be done. You can engage a certified business valuer or call us at BizAus and we can assist you with this process. To get a true value you need your financials. Otherwise its simply guess work. You need the truth and sometimes brokers over value businesses because they fear the truth will cost them a listing, so be careful. Just as large public listed company values rise and fall based on results or the economic environment so to do small businesses. The ratio used to multiply profit to sale price is in a constant state of change. Phil Mussett 0417 113 473
www.bizaus.com.au 7
How do you get the best price? Public listed companies use a corporate prospectus to explain their business to potential investors. In a small business it is also essential to explain your business to potential buyers. At BizAus we refer to this document as “Your Business Story”.
What is in a Business Story? It includes your business history and all the positive reasons that will motivate people to buy your business. “Your Business Story” may explain why you are selling and the reasons you think the business will thrive with a new owner. It can demonstrate in detail how they can benefit from your hard work. Every Business Story is unique. They are written by our business consultants who have years of experience and can identify aspects of a business and demonstrate the value. “Your Business Story” provides potential buyers with a clear understanding of the business and includes quality information.
Phil Mussett 0417 113 473
www.bizaus.com.au 8
You only get one chance to make a first impression. So many businesses simply don’t sell for a fraction of what they really are worth due to the quality and the aesthetics of their presentation. Design of presentation material is one of the most under-rated investments a small business seller can make, mostly because it’s so difficult to measure the return. The power of first impressions some key points Your documentation simply the demonstrates how you care and are proud of your usiness ... this supports its value. Your presentation represents the standards you set throughout your business. Buyers have third party advisors who gain their impressions from your business documentation, if it impreses them it increases the likelihood of positive advice, a sale and it supports your asking price. Colors, images and design play a vital role when it comes to creating favorable responses. 9
Documents covering the business, financials, trading area and the industry.
Business is also numbers Buying a business always involves numbers and the preparation of these numbers can result in a good or bad offer. This is not to say that numbers can be manipulated because that is illegal. Numbers analysed properly can reflect business trends and if presented skillfully may result in a higher selling price. For example, a business owner may show a buyer the financial statements of the last three years and the buyer bases an offer on these statements. Your accounts may include expenses that do not effect the cash position of your business and some expenses may not be incurred by a new owner. In the State of Victoria for businesses being sold for $350,000 (excluding stock) or less, the vendor is requred by law to provide the buyer with a Vendor’s statement signed by the vendor and the vendor’s accountant. In this satement the accounts are summarised in a prescribed format. For more details go to www.business.vic.gov.au Phil Mussett 0417 113 473
www.bizaus.com.au 11
When ability matters more than size
Buyers like to see potential Everyday millions of dollars change hands at stockmarkets and buyers buy shares because they estimate the business will be worth more at some point in the future. A business owner should provide the financial statements for the last three years and also document the future work scheduled that has been secured for the next twelve months. The owner should then include a forecast financial statement to demonstrate a lower risk proposition. The future estimates may be based on contractual agreements and the buyer sees the business in a whole new light, with low risk and the sale price increases accordingly. The end result of properly prepared Facts and Figures is a better price.
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Add-back statements Accounts prepared by your accountant are prepared for taxation purposes. These accounts may include expenses like depreciation, interest on loans, plant and equipment lease costs, irregular items and some expenses may not be totally related to the business. In this case an add back statement should be produced to adjust the net cash benefit to the owner. In some cases this makes a huge difference to the actual reported performance of the business. It is also necessary to create a plant and equipment schedule. Often balance sheets do not list all the assets of the business that are included in the sale. Unlisted assets in good condition with many future years of service left are usually worth more than a written down value of nil. In the example on the next page the business was showing a loss of $19,995 and after add-backs it changed to a net cash flow benefit to the owner of $223,897. Add-backs tottaled $243,892 Phil Mussett 0417 113 473
www.bizaus.com.au 14
Add back example
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When you only get one chance to get it right, you need the right advice.
You tell us At BizAus you choose what aspects of selling your business you would like us to do for you. BizAus can start by helping you to determine what you can expect a buyer to pay for your business. We can also provide a range of services from assisting you with checklists to create your Business Story and your Facts and Figures documentation or we will do this task for you. We will place your advertising on the business for sale sites as listed on the next page. Managing buyers • We can direct buyer enquiries directly to you or • We can qualify enquiries to establish that they are capable of buying your business before directing the enquiry to you • We can manage confidentiality agreements and the release of documents to buyers on your behalf • We can manage, qualify and negotiate with buyers on your behalf. We can assist you by managing the buyers due diligence and we can manage the completion of your business sale. Phil Mussett 0417 113 473
www.bizaus.com.au 17
What is the best way to advertise a business for sale? On sites that are found on page 1 of Google. Most people search like this
They go to Google and type in
Businesses For Sale They then type in the type of business they are looking for
Jewellery They View Results
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The Result: Our client’s business is found Number on Page
1
1
Our client’s business is also listed on these sites
Our client’s business is found in six out of ten places on page
1
Page 1 19
Why page 1 is so important According to Search Engine Watch a world leading authority on this subject page 1 results are twice as likely to get a result than page 2. The table below ranks pages 1 to 10
Google Results Page
Google Results Page Rank
1
32.5%
2
17.6%
3
11.4%
4
8.1%
5
6.1%
6
4.4%
7
3.5%
8
3.1%
9
2.6%
10
2.4%
Source: 20
Advertising reports We keep you informed with regular reports Campaign Timeline
Views 287 Days on market 0
12 11 10 9 8 7 6 5 4 3 2 1 0
100
Day 7
Day 14 Day 21 Day 28 Day 35 Day 42 Day 49 Day 54
Engagements
150
200
250
The Bakehouse
50
300
Listed 23 Jan 2013 ID 971
Indications of a deeper interest in the details of your business 49
0
5
10
15
20
25
30
35
40
45
50
5 Confidentiality Agreements 11 Documet Enquiries 15 Document Downloads 18 Document Views 0 VideoViews
Share & Save
Interactions that indicate ongoing consideration of your business 31
0
5
10
15
20
25
30
35
40
45
50
5 Print Page 11 Send to a friend 15 Share on social media
Enquiries
3
Interactions that imply plans to visit your business or contact BizAus 38
0
5
10
5 Email to BizAus 11 Phone BizAus 15 BizAus Detail Views 7 Details Saved
15
20
25
30
35
40
21
45
50
What is due diligence? When a buyer makes an offer and you accept the offer it is usually subject to the results of due diligence. This usually includes a representative of the buyer reviewing all financial records plus anything else deemed material to the sale. The potential questions that could be asked during the due diligence relate to aspects of the business such as the business's operations, financial performance, legal and tax compliance, customer contracts, intellectual property, assets and other details, often within a time period specified in a letter of offer.
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What is risk analysis? Most businesses involve risks, such as deteriorating business fundamentals, economic downturns and market volatility. There are several types of risk associated with a small business. Business Risk Business risk is a factor of internal operational problems and external threats. Economic Risk Rising interest rates, inflation, currency fluctuations and lack of business confidence pose economic risks. The small business market also reacts to news events. Industry Risk Businesses within industries enjoying rapid growth may have less risk, attract more buyers and achieve a higher sale price to profit ratios. On the other hand, businesses within industries in decline are a higher risk and achieve a lower sale price to profit ratio. When we appraise a business for its market sale price we use the following list to establish the level of risk. Phil Mussett 0417 113 473
www.bizaus.com.au 23
Typical risk analysis subjects 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26.
What is the future/potential for the industry Threat of debtor defaults Is the business dominant in its market Desirability of business/industry Competitor rivalry Supplier power Buying power Barriers to entry Threat of substitutes Need for advertising Threat of litigation Government regulation Length of time the business has been operating Length of time current owner has operated the business Number of employees Plant and equipment condition Location suitability Security of occupancy Working capital needs Pattern of business growth in sales and profit Management systems Documentation of procedures Customer base Owners’ working hours Owner dependency Intellectual property 24
Risk analysis results The answer to these questions is given a score out of ten, the perfect score would be 260 and that is very rare. The result of this is used to determine the value of the business. The higher the score the lower the risk, and the higher the market sale price will be.
Phil Mussett 0417 113 473
www.bizaus.com.au 25
Negotiating the contract terms and conditions Your solicitor will prepare your contract. Prior to briefing your solicitor on your agreement with the buyer, you and the buyer will informally negotiate some terms and conditions. This is a very important part of your business sale. If you require assistance at this point in your business sale you can get assistance from BizAus to negotiate the best outcome for you. The final stage in the sale of your business is developing a contract negotiation strategy. Successful contract negotiation means that both sides look for positives that benefit both parties in every area while achieving a fair and equitable deal. A signed agreement that benefits both parties is the best outcome.
Phil Mussett 0417 113 473
www.bizaus.com.au 26
Before you start negotiating As you develop your contract negotiation strategy, you may keep returning to this area to add additional items. You will not be able to negotiate effectively all areas of the contract at once. You want to be sure that what is most important to you is discussed and agreed upon before you move to less important items. In addition, you may want to refer to the least important items if you have to give up something to get your top items. • Know the difference between what you need and what you want • Know your bottom line so you know when to walk away • Define any time constraints and benchmarks • Assess any special conditions with care • Assess provisions of conditions related to: the noncompete clause and dispute resolution. • Do the same for your buyer (i.e. walk a mile in their shoes) • Before you start any transactions, you should obtain appropriate professional advice relevant to your particular circumstances. Phil Mussett 0417 113 473
www.bizaus.com.au 27
Will I pay tax on the sale of my business? The question of whether tax will be payable on the sale of you business will depend upon the structure of the sale. This includes whether the sale occurs by way of the sale of assets or the sale of shares. It is essential to obtain independent professional advice from your tax accountant in this regard. Although GST is normally not payable by a company where a business is sold as a going concern, independent advice from your lawyer and/or tax accountant should be sought on this matter.
Phil Mussett 0417 113 473
www.bizaus.com.au 28
Do you feel"stuck in your business?" Perhaps you‘re looking for a new challenge, but not clear about what to do. Maybe you feel "stuck in your business" and unsure how to exit.. Or maybe you know exactly what you want to do next but need a clear plan to your exit. Or you could be ready to retire and need an exit strategy. We can help. We offer a confidential sounding board and business exit solutions. Call now for an obligation free review of your business and your strategy to exit. Phil on 0417 113 473 Do it now, while you're thinking about it and before something else comes up. Phil Mussett 0417 113 473
www.bizaus.com.au 29
Are you ready? Last year the first baby boomer turned 65, signalling the start of a surge in Australians retiring. Many own businesses and face the challenge of exiting their operations to fund their retirement. Few business owners, however, have plans in place that clearly outline how they will manage that transition. But proper planning is vital for every size of business. It can literally save the destruction of years and years of hard work spent building value in a business. Planning means developing the business with a clear end in mind. It includes knowing exactly where the business is now, assessing exit options, then working on the business and implementing other plans to ensure it’s ready for that exit, whether that be handing over to your children, selling to management, or a trade sale.
WhenYOU youONLY only SELL get one YOUR BUSINESS ONCE chance to get it right, BUT IF YOU DO IT RIGHT you need the right advice
ONCE IS ENOUGH
Phil Mussett 0417 113 473
www.bizaus.com.au 30
What could I pass on from 40 years experience? How could I simplify the complex task of selling a business. I found that to achieve a successful sale it takes knowledge and understanding of: • preparation • the truth • business • law • accounting • economics • finance • reaching buyers across a very wide market both national and overseas • effective, cost efficient advertising • the business owners cost restraints • and most of all an understanding and empathy with the people who own small and medium size businesses in Australia. Phil Mussett 0417 113 473
www.bizaus.com.au 31
For many small business owners engaging a broker can be very expensive, too expensive in some cases. So if I could help: • people prepare their business sale • guide them through the tasks and • provide them with cost effective marketing it would be much more affordable and effective. This is why this PASSPORT was created. Phil Mussett CEO BizAus Pty Ltd 0417 113 473
We trust you will benefit from this passport. We are only a phone call away, we want to help you, so we encourage you to call us.
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Your business sale contacts Your Support
BizAus 1300 249 287
Your Solicitor
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Your Accountant -----------------------------------
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Buyer’s Solicitor -----------------------------------
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Buyer’s Accountant -----------------------------------
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Phil Mussett 0417 113 473
www.bizaus.com.au 33
Your buyer enquiries Name/Phone/Email ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Phil Mussett 0417 113 473
www.bizaus.com.au 34
Notes
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Experience Wanted Are you retired or semi retired? Have you had a background in business? Perhaps your work involved business management or You may have owned your own business. If so you are likely to have the skills required to help business owners when they reach the decision to sell their business. Although it sounds like a sales job it really isnt. It’s about preparing a business for sale and managing the process till the deal is done. Is it rewarding? Yes industry specialists achieve excellent income. The BizAus online administration system is designed to support consultants based anywhere in Australia. You work your own hours, from your own desk and we supply the training, administration and support. For more details call Phil Mussett on 0417 113 473
There is more to selling a business than meets the eye.