The 6 easy steps to selling a business are:
Step 1. PREPARING FOR SALE
Step 2. SETTING THE RIGHT PRICE
Step 3. MARKETING YOUR BUSINESS
Step 4. THE OFFER
Step 5. DUE DILIGENCE
Step 6. SETTLEMENT AND HANDOVER
The GMO success formula has proven over thousands of business sales that a good business will sell if:
- The business is properly priced
- Full financials are provided
- Business information and data is professionally documented
- The business is effectively marketed and well-advertised
- A pro-active Broker and Seller relationship exists
In many ways selling a business is like completing a jigsaw puzzle. Every completed task and step is needed to fit perfectly into the compilation of a smooth and successful sale where you, the Seller, exit to your satisfaction.
GMO will work with you, your accountant, financial planner and liaise with your legal advisers to construct a transaction where there is a happy Buyer and a satisfied Seller.
STEP ONE: Preparing your Business for Sale
You only sell your business once, so you’ve got one chance to get it right.
Planning the Sale of your Business
Ideally you, your accountant and GMO will begin to prepare your business for sale well before you put it on the market. You want to ensure your business is represented at its best and highlighting its unique features and benefits.
Make yourself Redundant
Make it easy for a Buyer to step into your role. If you have all the knowledge and skills to run the business, the Buyer’s greatest fear is that the business will walk out the door when you do.
Document the policies and procedures that exist as unwritten rules. It is advisable to systemise the various functions of your business and create a Procedures Manual. Any Buyer will then be able to operate the business without the need to rely on you.
Each employee should have a documented clearly defined role, and a designated set of tasks and procedures, which leads to measurable outcomes.
Subject to your confidentiality needs, GMO will also help to document the relationships which are key to your business. We recommend converting any verbal agreements with suppliers and clients into written agreements wherever possible. Written agreements will make your business stronger and builds confidence in potential Buyers. Examine existing contracts with suppliers and customers to ensure they will not expire or require renegotiation just as a new owner steps in.
Ensure your financial records are up to date to clearly demonstrate the true profitability of your business to a potential Buyer.
– Debtors – collect all payments that are overdue from your clients. Potential Buyers may be discouraged about buying a business with clients who take a long time to pay their accounts.
– Creditors – ensure you are not late with payments to your suppliers. This will create a positive impression of the financial strength of your business.
– Produce monthly profit reports to demonstrate to your Buyer your ability to monitor and manage the performance of your business.
– Prepare audited financial statements so the potential Buyer is confident of the financial performance and value of the business.
Similar to selling any other valuable asset such as your home, there are several practical steps you can take to create a good first impression to a potential Buyer. You will improve the perception of value to the Buyer and may increase the price you can ask for your business.
- Inventory – sell all obsolete or slow-moving stock items. This will improve both your sales figures, and eliminate disputes about the value of inventory during the sale.
- Plant and equipment – sell any redundant or obsolete plant and equipment, machinery, spare parts and scrap that are no longer required.
- Business premises – look at your premises with the eyes of a potential Buyer. Clean up, maintain and paint the premises where necessary. Ensure the premises comply with all regulatory requirements.
- Employees – Retaining key employees after transition to the new owner may be important for a successful sale. Determine which employees are critical to the business and those prepared to stay. Ensure all employee contracts are up to date and calculate the staff entitlements.
- Commercial premises leases – Review business premises leases and ensure the lease does not expire or require renegotiation during the time when you plan to sell the business.
STEP TWO: 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.
STEP THREE: Marketing your Business
Once you’ve prepared your business for sale and determined its value it’s now time for GMO to find a Buyer. GMO will determine the ideal target demographics likely to be interested in purchasing your business. We tailor our promotion to attract as much Buyer interest as possible.
Your GMO Broker will help you explore your immediate networks. This could include competitors, customers, employees, friends, family and industry professionals. You never know who might be interested in buying your business.
GMO will also have Buyers on their mailing and E stream lists who are in the market to purchase a business similar to yours. At this early stage, GMO will advise to maintain confidentiality of the proposed sale. We will use general terms to advertise your business and place web advertisements that don’t divulge your business name. There are many advertising channels to choose from which include:
- The internet – there are many websites dedicated to business sales, with GMO’s own site www.buyabusiness. com.au being the most popular independent site in WA.
- Social media – Whether it is to investors, accountants and industry professionals on LinkedIn or direct advertising on Facebook or Youtube, social media is an important platform to market business for sale.
- Local, state, or national newspapers which usually have a separate classified section devoted to “businesses for sale”; DD Trade journals, specialist publications, or newsletters that relate to your specific industry.
GMO will Qualify Buyer Enquiries
GMO will obtain a signed Confidentiality Agreement before supplying private financial records to any potential Buyer.
Your GMO Business Broker will meet with prospective Buyers in person and present your business’ information profile. Highly interested Buyers may request an on-site visit. This will be prearranged with you for a mutually convenient time.
The Buyer’s Perspective
Take a moment to place yourself in the shoes of a prospective Buyer. Our experience shows that Buyers seek the following when looking for a new business:
- To pay a fair price
- To receive accurate and honest information
- To secure their future
- A manageable business with proven systems
- A business in good repair and without upgrade or maintenance issues
- A well-presented attractive business
- A business which is not overly reliant on key staff
- A business which is not overly reliant on a few key customers
- A business which is not over reliant on one single product
- A business which is not overburdened with excess stock
- A business which has debtor management under control
- A business where the owner is not a “slave” of the business
- A business with manageable trading hours
- A business which can benefit from technology advances
- A business which can adjust to changes in government policies affecting its industry
No business has all these attributes; however, GMO will work with you to identify and emphasise positive attributes your business does possess. Remember that first impressions do count, so try to prepare your business so when the GMO Broker visits with a prospective Buyer, that your business gives the clear impression of success.
STEP FOUR: The Offer
Once the Buyer is satisfied after physically examining your business and analysing the financial statements, they may want to negotiate certain issues before making a formal offer. Think about the following before you start negotiating:
- Negotiation terms: what do you want?
- Anticipate compromise: what will you compromise on?
- Your walk away position: when will you stop negotiating and walk away?
- Buyer’s offer will be to buy the business:
- For a certain price
- On a certain date
- Subject to:
- Finance being approved by their bank
- Their accountant doing due diligence and being satisfied with the profitability
- Their legal advisor doing due diligence and being satisfied with the terms and conditions of the premises lease (and also the franchise terms – if the business happens to be a franchise)
- All government licenses held by the business being transferred to the Buyer
- Satisfaction with the staffing arrangements and staff transition to their stewardship
- Satisfactory assistance from you as the outgoing owner as they learn the business operations
- Written assurance from you as the outgoing owner regarding a competitive restraint period
- Any other pre-conditions appropriate to the business such as environmental issues, supplier contract assignments, product warranties etc.
The GMO Broker will present their offer to you and you may either decide to accept or to make a counter-offer. GMO will attempt to mediate on issues of contention such as price, with the aim of achieving the highest possible price for you whilst reaching consensus and acceptance between you and the Buyer.
Once agreement is reached between Buyer and Seller the business is then officially “under offer”.
The Buyer’s deposit is paid into the GMO trust account and due diligence will then commence. GMO will help you and the Buyer tick off “all the boxes” and undertake due diligence and progress towards settlement.
The “Agreement to Purchase a Business”
A Contract of Sale for a business acquisition is a serious document requiring expertise of professionals to ensure your wishes are precisely transcribed into the agreement.
In Western Australia business brokers are legally empowered to help you and the Buyer in the preparation of an Offer and Acceptance Agreement.
Working in co-operation with your accountants and solicitors, we can utilise the 12-page Real Estate Institute of WA Business Sales Agreement documentation.
Our role is to then provide the expertise that facilitates negotiations and brings a finalisation of the sale.
Your alterations, counter proposals and price adjustments will be put to paper meticulously in the REIWA contract form (a form established by REIWA’s solicitors to be as mutually beneficial as possible – for protecting the interests of both Buyer and Seller).
Your counter offer will be prepared and presented to reflect your conditions and instructions. Once you are satisfied with how your counter offer is presented, it will then be relayed to the Buyer. Having put thousands of business agreements to bed, the development of satisfactory Contracts of Sale is a feature of GMO’s service that we take great pride in.
Our track record in document preparation is exemplary.
AN IMPORTANT DISCLOSURE:
While GMO is happy to assist prospective Buyers in purchasing a business, it should be remembered that we act for the Seller and our remuneration is paid by the Seller.
Therefore, we strive for the best possible transaction for the Seller whilst still endeavouring to treat the Buyer in a fair and respectful manner.
STEP FIVE: The Due Diligence
Once the offer is accepted by both the Buyer and Seller, the Due Diligence commences. Due Diligence is an important step in the sale process and involves examining the records of the business so the Buyers are able to verify the validity of financial and operational information.
Due diligence normally occurs once you and the Buyer have signed an agreement to purchase which is subject to conditions. The Seller then gives the Buyer access to all business data, including financials, sales figures, personnel records and customer data.
Typical Issues Checked in Due Diligence
The process involves examining the financial statements, balance sheets, income statements, and cash flow statements if available, as well as recent years tax returns to determine:
- Full year-end financials for three years
- BAS statements for three years
- Copy of lease and any variations
- Plant list and depreciation schedule
- Copies of PAYG summaries for three years
- If legal agreements such as licences, permits, insurance policies, and documents related to intellectual property, franchise agreements, contracts with suppliers and clients are in good order.
- Employees: Awards, wage and salary information, superannuation payment records. Whether there any staff grievances
- Operations: List of suppliers and customers – an operations manual is handy
- The business’s reliance/diversification of suppliers and clients
- Discussion on potential future growth
Due diligence is largely the Buyers task and the Buyers expense, but you should be aware that you should co-operate in the process and there may be some expense incurred if your accountant has to liaise with the Buyers accountant. If due diligence proves unsatisfactory, then it is common for the deposit to be refunded and GMO will then seek to find you another Buyer after the issues with due diligence have been considered by you, your accountant and with GMO.
Far more likely is that due diligence, finance and lease conditions are all satisfied and you now are ready to exit ownership of the business and proceed to sale.
STEP SIX: The Handover
Prior to takeover and settlement you will have appointed a conveyancer/settlement agent. They will organise the money movements and liaise with your banker or finance Broker and arrange a settlement time with the Buyer’s conveyancer.
They will also liaise with the landlord/managing agent on lease assignment documents and also on transfer of licenses associated with the business. Your settlement agent will also assist you with business names transfers and housekeeping issues such as utilities.
As the outgoing owner, you will need to advise termination of your staff after the Buyer advises you if they intend to employ all or some of the staff. The Buyer must give you the appropriate time to advise staff members of their future employment and for you to introduce the Buyer to the staff prior to settlement day.
On settlement day you and the incoming owner will arrange:
- For the stock to be counted
- To check off all the plant and equipment of the business
- To transfer control of keys, alarms, domain names, websites, security codes and computer systems
- The transfer of purchase funds
Settlement usually happens over a weekend.
Finalising the Sale
To minimise the occurrence of any problems and to ensure the sale is valid involve a professional settlement agent or conveyancer. GMO can provide you with names of credible professionals to consider.