Adjust Your Financials
The value of a business lies in its ability to create a profit. This is what buyers are looking for. It is the number upon which they pay the most attention and is typically the most important determinant of the price of the business.
Too often these numbers are hidden from view or not provided at all. While some business owners steer their business with the help of management accounts and are intimately familiar with the profitability of their business, many are not.
In many cases the only purpose a business owner sees in maintaining financial information is so they can do their taxation at the end of the year.
This immediately places a negative bias on the performance of the business since many business owners want to minimize the tax they pay. This is done by minimising the profit of the business.
A clash of purposes is therefore set up between the aim of minimising tax which requires minimising profit and maximising the sale price of the business by maximising profit.
One of the important tasks in preparing a business for sale and establishing a sensible listing price is to determine the operating profit of the business. This takes some adjustments to the profit and loss that is prepared for taxation purposes.
While there are many factors that will go into determining the value of a business this one is critical. One of the tasks of the business broker is to assess the profitability of a business.
Accountants often present adjusted financials for assessment although often they will follow different methods of adjustment to other accountants. If they are working for the seller then they may make adjustments that overstate the profits. The accountant for the buyer will then shoot them down in flames.
A broker is more attuned to making adjustments that satisfy both parties because they want to provide the best chances of a deal proceeding.
Show Your Profit
The first action of a buyer when assessing a business is to compare the profit to the price. If the price does not fall within the range of multiples of profit where they are prepared to invest time and effort into investigating your business, you won’t hear from them.
The greatest business in the world won’t sell if it is kept a secret. Showing your profit really means get the message out into the market that you have a business for sale that creates a certain profit. Attached to that is your invitation to negotiate which is the price at which you have the business for sale. In legal terms this is an invitation to treat and is a message to all those who are interested that they should start negotiations. Alternatively, they can simply make an offer at the amount you have indicated and reduce negotiations significantly.
There is not much detail you need to show at this point. If buyers are interested they will ask for it and you can determine whether you will provide it to them and on what terms.
There are several ways of showing your profit:
- Advertise it
- Send it out to a database
The idea is to put it in front of people who may be interested in your business. Different businesses will benefit from different approaches.
As part of this approach you may have a summary of the details of the business to provide to prospective buyers so they can better determine if it is what they are looking for and are therefore prepared to invest the time in interrogating it. The data should be basic and unless certain requirements are met should not identify the business.
Eventually you will get someone who is interested in the business and it is time to proceed to the next step. This is where negotiation begins.
Sell Your Business
This is the point where the seller exposes themselves to buyer scrutiny. It is a stage that is full of negotiations. It starts with obtaining non-disclosure or confidentiality agreements from prospective buyers so that you are able to safeguard your business information.
A seller typically wants no-one to know that the business is for sale. This information falling into the hands of staff or customers can be very destabilising to a business and expose it to various dangers.
The beginning of this process should also be where the buyer provides an indication that they have the resources necessary to purchase and operate the business.
There are many agents involved in the sale of the business. A helpful way of assessing the impact they can have is to look at what the impact of success or failure will have on them. Some of the direct stakeholders are as follows:
- The Seller.
- The outcome of the negotiation has enormous implications for this party to the sale.
- A successful business sale provides liberation from a great many obligations related to owning a business.
- Relief is one of the most palpable feelings you will see in the face of a successful seller and this is even before considering the monetary benefit.
- Costs are incurred whether the proceeds successfully or not.
- The outcome all depends on a successful sale.
- The Buyer.
- The outcome of the negotiation has implications second only to the Seller.
- They have invested significant time and effort and often their mindset has assumed ownership so failure can be quite wrenching.
- The reason to buy a business is leverage. The purchase is important in the buyer’s plan to extend themselves.
- Costs are incurred whether the sale proceeds successfully or not.
- The Landlord.
- Depending on the importance of the business location to its operation and success a landlord can place many impediments in the way of a successful business transaction.
- They are interested in securing the rental income of their property and would love to see a successful business owner stay on and avoid running the gauntlet of whether a new owner is able to profitably run the business.
- If the business sale does not proceed they are still likely to receive rent as long as the lease is still in place.
- Solicitors.
- They will get paid regardless of the outcome of the sale
- Accountants.
- They will get paid regardless of the outcome of the sale although they stand to lose a customer if the business is sold.
- Bankers
- Their income is largely tied to the success of the sale.
- Staff.
- They worry about their jobs.
- Will the new owner want to retain them and will they get on with them.
- Customers and Suppliers.
- If the business relies on repeat customers or critical supplies these have to be factored into a business sale.
- The business will be unattractive to the buyer if they lose these key components during the sale.
All of these people as well as many preconditions have to be satisfied for a sale to complete. The job of a broker encompasses many things including navigating through and managing these various agents so that a negotiation and contract of sale proceeds to completion.
Often they have to absorb a certain amount of heat where communications go astray and bring peace and calm back to the process.