A variety of calculation methods, progressive business planning and avoiding common mistakes are key considerations when selling your business.
Business sellers want to achieve a good result for themselves in terms of sale price and terms. They also want favourable outcomes for the buyers to ensure the on-going success of the business for all stakeholders including customers, suppliers and staff.But this can be a tall order especially if a seller hasn’t prepared the business for the inevitable (i.e. exiting) and has little evidence, to substantiate an ambitious asking price.
Further, going it alone without the help of a professional broker may mean selling the business short, in more ways than one.
One of the primary things a professional business broker should advise on, is the business value. There are countless ways to calculate value, but a good advisor will guide you towards one most relevant, ensuring maximising the selling potential and be able to justify it.
For example, experts say there are two main methods to valuing an owner-operated business; the asset and earnings approaches.
The asset approach uses the company’s balance sheet to establish overall value. This is a more simplistic approach involving an add-up of the total worth of assets, then subtracting the total liabilities to derive a figure. Some believe this method is more appropriate for businesses with a large fixed asset base.
Earnings Approach
However, the most common method used to value a business is still the earnings approach (or variations of). The earnings approach assumes that worth is based on what a business earns.
It uses the company’s historical earnings and a capitalisation rate to determine value.
Capitalisation rates vary for each industry and is affected by the riskiness of the company’s earnings. A professional broker with experience in your industry should provide the determinants in calculating a capitalisation rate for your business.
Technical calculations whilst important, can only do so much. In the end, it is the buyer’s perception of risk versus the potential return on investment that counts. So how do sellers maximise perceived value of their business?
The Key is Planning Ahead
The more homework done, the more people are willing to pay for it.
If you have considered where the key value of your business lies well in advance, and you have taken time to nurture, protect and even document this value, it becomes much more transferable to a potential buyer. Good selling preparation involves bedding down processes for ease of succession.
Another key factor you need to consider early on in your business is developing strong relationships with partners and industry bodies. Most business sales are “intrade” sales which means that the acquirer is usually someone from your industry.
Building a good reputation and developing strong rapport with suppliers, partner companies and even competitors is not only good for current but future business too.
Planning ahead is indeed vital to the final sale price of your business. Not planning ahead and waiting too long to start the process often means selling the business at liquidation rates.
There are other common mistakes that get in the way of a successful sale. Not engaging a professional broker and appropriate advisors may result in:
- Incorrect pricing for your industry
- Loss of confidentiality
- Not understanding tax consequences
- Allowing the buyer to control the process
- Neglecting the business during the sale process
Take a step back and look at your business in relation to where you’d like to be in the future. Be prepared right from the beginning and you’ll improve your chances of securing a desired selling price for your business.