6 EASY STEPS TO SELLING A BUSINESS
STEP 2 – SETTING THE RIGHT PRICE
You can only sell your business once and you don’t get a second chance so you and GMO need to obtain the best possible fair price which the market will pay.
Remember that Buyers do want to pay the right price. Buyers will basically have a clear sense of fair market value as they are considering various businesses at the same time. Buyers do feel more comfortable when they investigate businesses offered at a fair market price.
Determining the fair market value of your business is the most contentious part of selling. You want to set the highest price the market will bear so that you are rewarded for the years of hard work you’ve put into the business, while the Buyer wants the highest future profitability for the lowest price.
Getting the right price is all important! The first few weeks of marketing a business are critical. If the price is too high you may have a false start. To avoid a disappointing start, you need to properly and accurately set the market price.
Remember the market place is not necessarily interested in what the business owes you. Nor is the market interested in what you owe the bank. The business is worth what the market will pay, however an attractive and informative presentation of the business by GMO will enhance market value and having GMO represent what you consider to be the strong points of the business will attract keen Buyers.
What creates market value? Market value of any product is largely determined by SUPPLY and DEMAND. If there is a wide supply then value will be lower, whereas if there is low supply then value will trend higher. GMO can show you data on the supply and demand for businesses in your industry and the sort of returns and yields Buyers expect in return for risking their capital.
On some occasions it may be preferable to offer the business with no specific asking price. “Expressions of Interest” or a “price indicative range” are other methods of presenting the business to the market. Your GMO consultant can assist you in deciding how to approach the marketplace.
The stability of profits is an indication of the likelihood of earnings continuing after the Buyer has assumed ownership.
Essentially, a business is worth what the market will pay for it, but as basic guideline, value usually relates to expected returns as well as the level of perceived risk.
The price is usually based on a multiple of earnings. For instance, a business regarded as “very safe” may fetch a high multiple of earnings while “less safe” businesses may sell for a lower multiple of earnings.
The role of our Brokers is to explain this in full to you – so do feel welcome to ask questions as you must have a full understanding of what the Buyer is paying for and a good appreciation of the business’s achievable market value. You are then ready to exit your business and commence the listing and sale process with GMO.
There are four key aspects to a business that a Buyer pays for:
- The tangible assets such as plant & equipment – The plant includes shop fittings, office equipment, computers, machinery and sometimes includes vehicles.
- The stock or saleable inventory of the business – This stock has been paid for by you (the Seller) and you are reimbursed by the Buyer at settlement for that cost. The Buyer then owns the stock and can upsell it to the customers for a profit margin.
- Intellectual Property – This may include items such as patents, trademarks, operating systems, designs/drawings/logos, recipes and formulae.
- Goodwill – Goodwill is the expectation that the customers will continue to patronise the business, regardless of who owns it. Goodwill is a consequence of profits and the level of goodwill is determined in part by the consistency and level of those profits.
The total purchase price of the business is made up of those four components. Effectively, the plant, equipment, stock, intellectual property and the use of those assets by the owner of a business result in customers liking and patronising the business. This patronage results in the business being profitable.
HOW A BUSINESS IS VALUED
The profit of a business is “valued by the marketplace” on a yield on the purchase price or a multiple of profits. The most common way this is expressed is as a Return on Funds Invested. That is: the profit divided by the total price and multiplied by one hundred per cent.
For example: if the ROI is 50% then that would mean at the current net profit and the price paid, it will take the Buyer 2 years to recover the purchase price.