Is your business ready for sale at the price you expect?
Recently I wrote an article for the TBR where I quoted some stats about the number of baby boomer small businesses that would come onto the market now and over the next 10 years.
The upshot was 75 per cent of those businesses would not be sold for the price the owners expect. They will either sell cheaply, close completely or the owners will battle on indeterminately – none of these are desirable outcomes.
I regularly see business owners who have decided it’s time to sell, but their business is not ready for sale at the price they expect.
If the business is not attractive to purchasers, you will have to lower your price.
Your business will be competing with all the other businesses for sale on the market at that time. In the worst case, the business could sit on the market for 2 or 3 years, and then sell for an inadequate amount.
The best solution is to have a professional business advisor look at the business and assess whether it’s ready to list for sale at your desired selling price.
It’s important to understand what assets are actually being sold and try to maximise their respective values.
Almost always businesses are selling physical plant and equipment, trading stock and a cash flow (goodwill).
The most time spent by the buyer (and their accountant) on due diligence, is assessing the value of the goodwill in terms of future risk.
For example, how much of the forward revenues are contracted versus how much is one-off revenue. In other words, will the revenue still be there after I buy this business?
Let us look at a quick case study. Business owner Tim wants $250,000 from the sale of his business. The assets are two delivery trucks worth $70,000, leaving $180,000 as goodwill – all his regular customers. He shows a net profit of $60,000 after paying himself a market salary.
Tim must prove to a buyer that the revenue from these customers is going to stay the same after the sale.
If they are ad-hoc day-to-day customers, this will devalue the goodwill because the new owner will be competing with every other delivery service in his market for that business, and the buyer will want a discounted buying price.
By Dean Demeyer, Finn Business Sales