Frequently Asked Questions

Question: If I’m wanting to sell my business, how do you decide what price to sell for?

Submitted by: Andrew

Answer:

Though the process of pricing a business can differ from business to business, the basic principals remain the same for the most part. There are three primary elements that need to be assessed.

The first, and perhaps the most objective element, is the net profit. In order to do this we gather the financial information for the business, apply adbacks as necissary and establish a reasonable estimate of what a new owner would be making in the business in its current state.

The second element takes into account the risks involved with its purchase. Even the best businesses come with a reasonable amount of risk and it is the risk that allows us to calculate the profit multiplier. For example, say your business has been running for only 6 months but the profits are good. A lack of profit history means that these profits, though good, cannot be assured and therefore a lower profit multiplier must be applied. Realistically, though the profits are our starting point for valuing a business, it is the risk that enables us to establish an eventual selling price. As to how the risk is used to do this- it is simply a matter of experience.

The third element pertains to context. We take into account the sale of similar businesses in the recent past and use that information to verify whether our calculations have resulted in a price that buyers are willing to pay. What does this mean? Well, once we’ve come up with a price for the business, if we complete our research and find that similar businesses are not selling for anything near the figure we’ve come up with, then it is reasonable to assume that neither will your business. It’s a saying that get thrown around a lot, but it is still true: A business is worth what someone is willing to pay for it.

I hope this answers your question Andrew.

Question: I read your pricing a business question and I wanted to know if I should be adding a little more to the price to leave room for negotiations?

Submitted by: Timian

Answer:

This is a question that we get asked very often, and it is one that we feel quite strongly about. Though we can see the intent behind ‘upping’ your price to leave room for negotiations it is actually not something that we would generally recommend.

Though we have written blog articles regarding this issue (see Pricing Your Business: Why leaving room for negotiation can leave you out of pocket.) here is the short answer:

Overpricing your business will most often result in locking out enquirers in your price range and inviting enquirers from a price range above your own.

The buyers in the higher price range that you do attract will see your figures and either not make an offer because the business is to small for them or because they don’t feel comfortable making an offer so far below the asking price. The buyers that actually are in your price range will be significantly less likely to enquire as the business is not affordable to them.

So effectively what you are doing when you overprice your business is attracting buyers that would not be interested in buying your business, whilst pushing away buyers who would be.

What you’re much better off doing is coming up with two figures in your head: the highest reasonable price you’re willing to accept (your asking price) and the lowest price you’re willing to accept. The distance between these two prices would be your negotiating room.

To summarise, ideally you should aim to advertise your business for a price that is foreseeably what someone will actually pay. In the past, businesses that we’ve sold, that sold the quickest for the total original asking price, were the ones that were priced correctly. When they’re overpriced they end up staying on the market for much longer, becoming stale and eventually either not selling, or selling for well below a reasonable price.

Question: I’ve been thinking of selling my business for some time now and I was wondering how long it usually takes to sell a business?

Submitted By: Jane T.

Answer:

This is a question that we get asked a lot, and unfortunately there is no set answer that we can give. For the sake of answering this question we will only be looking at the timeframe from the day advertising begins, so bare in mind that preparation time will be needed before going on the market.

The reason that we cannot give a specific answer is that there are far too many variables with businesses to allow for a ballpark figure. That said, there are certainly things that you can do to try to speed up the process.

1. The first thing we should mention, and perhaps the most obvious, is to make sure that the business is priced realistically. Your first hurdle in this whole process is to get enquiries and if your business is overpriced you will find that your enquiries will be limited and will often produce leads that are not prepared to take their enquiries past the initial stages.
2. The second thing you can do is to be quick and forthcoming with information. Many of the hold ups during the enquiry stage will often come from a lack of preparation on the vendor’s part. I am aware that this is the second time in this response that we have mentioned ‘preparation time’, and that’s because it’s important. Make sure that prior to going on the market you have already prepared information such as profit and loss documents, information summaries for the business, equipment lists etc. The advantage of having this information prepared in advance is that your possible buyers will not have to wait for it to be produced. This is good for two reasons: one, because it helps maintain momentum; and two because it reflects positively on you and inspires more confidence.
3. The third thing you can do is to have your legal documents prepared (there’s that word again) with your solicitor already. You would be surprised how much time can be lost with this step if it is done too late in the process.
4. Fourth: Be active. Answer every phone call and remember that you have something that somebody else wants so it is your job to make it as accessible as possible.

Beyond these points there are a number of factors that you may not be able to control that will affect the time frame such as market sentiment, the growth or diminishing of your industry, and of course your businesses performance over the past few years. These are things that can drastically affect the speed of your sale.

So, in short (or long, as it were) it would be irresponsible of us to give you an indication as to how long it would take to sell your business without analysing it first. That said, in a best case scenario, from the date of going on the market we’ve had businesses that have settled in under 30 days. On the other hand we’ve had businesses on the market for almost twelve markets before a suitable buyer was found. It all depends on your personal circumstances.

Question: I read your FAQ entry on timeframe and you mentioned preparation a few times. What documents should I be getting ready before going on the market with my business?

Submitted By: Alicia

Answer:

We can probably answer this one fairly quickly for a change. Below is a list of documents that we would recommend have ready before going on the market. Obviously not all of these will apply to every business, and some of this information will be unatainable to some business owners, but generally the more of these documents you have, the better.

1. Profit and loss for last three years
2. Property Lease documentation
3. Last two years tax returns
4. Asset registry with pricing and proof of purchase
5. Current Rental Agreements
6. Last 4 BAS Statements
7. Insurance policies
8. Workers contracts
9. Work manuals
10. Proof of sales for last 12 Months
11. Bank statements for last 12 months
12. Last 6 months purchase invoices
13. Current balance sheet
14. Stock take with stock value
15. Current accounting software records
16. Certificate of registration and or incorporation

Other than this list, you will definately want to have a sales memorandum prepared for the business. The Sales Memorandum is essentially your main sales document for the business. If you are using a business agent to sell your business they will generally create this document for you, but if you are managing the sale yourself you may want to do some research on how to write a good sales memorandum.

The last thing you should have ready early on in the process is your contract for sale. Have your solicitor draw it up well before finding a buyer. The reason for doing it early is that once a buyer has decided to buy your business it can often take a long time to produce the document and you want to make sure that you keep momentum.

There are of course other things that you can do early on, but these are the big ones.

Question: I’ve had my business on the market for a few months and am considering using a Business Broker. What advantages are there to using a business broker as opposed to selling it myself?

Submitted by: Narit

Answer:

It’s always difficult to answer this question without simply preaching our own services, but we do get it a lot, so I will endeavor to. Working with a business sales agent is no different to working with any other professional services agent. For example, the services of an accountant, real estate agent or a solicitor are services that you could foreseeably undertake yourself, but you simply wouldn’t because you know those service providers will be able to do a better job than yourself. The benefits of engaging these professionals almost always outweighs the investment in their services.

The same is true for business brokers. Doubly true. The breadth of service provided by a good business broker is often surprising when written down. They will include preparation, marketing, appraising, negotiation, confidentiality handling and coordination of the professional services of both buyer and seller to name just a few.

Each of these elements of the business sales process requires training and experience to do well, and in business sales, ‘doing well’ means a higher return for your business sale.

Beyond the obvious services offered by a business broker, what follows are some of the things we feel that a good business broker should offer.

A good business broker:

• Will know how to work with you and prepare you and your business for the sales process. More than anything this is perhaps the single most important contribution a business sales agent can bring to the table.
• Will know how to plan and conduct an effective marketing campaign to generate interest in your business. They will have strategic systems in place designed specifically to identify possible buyers and contact them directly. They will know that simply running a few ads in not enough.
• Will facilitate and assist with all contact between yourself and potential buyers. Having an experienced mediator as well as an expert on business sales on your side of the table is, to put it simply, invaluable.
• Knows that as the business owner, your primary concern when it comes to your business sale should be keeping your business healthy and ready for sale. They will invest time and energy in facilitating this, while they work on the necessary preparation required to sell your business for a good price.
• Will have systems in place to keep you well informed throughout the entire process. Reports and updates should always be readily available to sellers, allowing them to stay in the driver’s seat without having to chase their agent for information.
• Will have at their disposal a large network of professionals and financial advisors. Having immediate access to those resources means that an unforeseen issue can be resolved in a matter of days rather than weeks. When it comes to maintaining momentum, access to these resources is priceless.

And finally, a good business broker will know what to expect. There is no single issue that has not been met and dealt with in the past and that cannot be dealt with in advance of putting the business on the market.

As you can see, the role of a good business broker is far bigger than you may originally have thought. It isn’t simply a matter of finding buyers. Working with a business broker means working with a team that will assist you from start to finish, and work with you to get your business sold quickly for the best possible price- and in the end, that’s the point; to get the best return for all of your hard work.

As I said, it is difficult to answer that question without simply preaching our own services, but I hope that has helped. Thanks for the question!