When it comes to selling your business, getting the best price is important. Like any sale, you want to be in a position of strength during the price negotiation process. Learn to value your business, highlight its qualities and ultimately maximise your profit.
The Importance of Due Diligence
When a buyer embarks on a business purchase, they usually carry out an investigation to determine whether the selling price is reasonable, as well as the benefits, risks and costs associated with running the business. This is called due diligence.
Before you consider positioning your business for sale, it pays to put yourself in the buyer’s shoes and conduct your own due diligence to identify any matters that may affect your sale price during negotiations.
Corporate Structure and Governance
A good first step is looking at the internal governance of the business. Is it run as a company? If so, are the shares also for sale? Do the directors and shareholders have other (conflicting) interests in the company – like supply contracts, charges or remuneration agreements?
In short, a clear, independent and well-balanced executive board is best for a transparent and efficient sale.
Profit and Loss Statements
You also need to consider the company’s profit and loss statements. Are they accurate and up to date? Have you met all legislative reporting requirements like those required of public companies? Have any financial reports been prepared by an independent third party auditor?
These elements will provide strength to the numbers backing your business. If you can show where and how money is received and spent, you give the buyer a better idea of how the business is managed and what can be made of it.
Also look at the numbers themselves. Have you been operating your business at a loss for the last few years? While not necessarily a disadvantage, it does help to understand why this has been happening – were you investing elsewhere or growing a new niche sector?
Being in a position to explain seemingly negative financials can help you maintain a position of strength during the sale negotiations. It may also influence how you consider valuing your business – perhaps it is better suited to a return on investment (ROI) valuation rather than one based on existing goodwill.
Accounting software such as QuickBooks Online can assist in creating and maintaining profit and loss records, as well as charts and diagrams to demonstrate the performance of different sectors of your business.
Read more about profit and loss statements: Profit and Loss Statements: Your Key to Smart Business.
Assets and Liabilities
One of the most valuable assets of a business is goodwill. In order to value the goodwill, it is worth engaging an independent third party valuer before you try to sell. The price of goodwill can depend on the location, customer demand, customer base, brand awareness, reputation, longevity and many other factors.
Other assets you’ll need to value include the business stock-in-trade, tools, plant and equipment, relevant licences, employee contracts, loans owing to the business as well as any outstanding invoices.
Liabilities may include charges and debts owed by the business owners or company, rental outgoings, maintenance and running costs, remuneration, superannuation and insurances, as well as licence fees.
With QuickBooks Online, you can maintain asset and liability statements that are easy to read and understand – for both you and the buyer.
Some businesses’ operations are restricted by the need for licences, permits and authorisations. For example, a financial services licence, liquor and gaming licence or building licence may be required to operate the business legitimately.
As the consequences for non-compliance can be harsh and costly, it’s important to ensure your business has all necessary licences and permits before you consider putting it up for sale. It also helps to understand the licence transfer procedures and any associated costs, and ensure they are borne by the purchaser.
A Professional Valuation
A business valuation by an independent professional is a good place to start in ascertaining the market value of your business and to get an idea of comparable businesses in the area.
A professional valuer will also be able to help you understand the best method to use in valuing your business – whether it be goodwill or ROI. Alternatively, your accountant or a business broker can be a useful resource is helping you to value your business.
Selling your business can be an exciting time of change, provided you tackle it with preparation, research and organisation.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.