1. What is the value of a business?
Theoretically the value of a business is the present value of future cash flows. This can be thought of as the amount of cash accumulated that will justify the amount and risk of the investment.
In reality it depends on what the owner or buyer of the business wants to achieve. The value of a business may not just be financial – it could provide the owner with a desirable lifestyle or personal satisfaction or a sense of achievement.
2. How do I determine the real value of my business?
The value of a business is ultimately determined by “what the market is prepared to pay”, but that tends to be a politician’s answer.
There are three ways of calculating your business value:
Most people can arrive at some estimate for the value of their business, but few can sufficiently prove or justify this value to a potential buyer. This is where professional advice and support is vital.
- Assets method – what is the book value of the assets of the business. In some cases it is more appropriate to use the liquidated value or the replacement value. In many cases an allowance for goodwill can also be added to the asset value to arrive at an overall business value.
- Earnings Multiple – Multiplying the average net profits before interest and tax (EBIT) by a particular multiple. The multiple will depend on typical industry and regional values achieved in the past, the perceived risk of the business and its attractiveness.
- Discounted Cash Flow – using cash flow projections to determine the present value of future cash flows.
3. How can I potentially increase that value as I move towards selling it?
There are many factors that govern the value of a business, however there are some key actions that can help increase your business value:
What ever actions you choose to implement, give yourself enough time to get your business ready for sale. This can take up to two years to do it properly and a minimum of three months if done in a hurry.
- Boost your cash flow at least 1-2 years prior to a sale.
- Reduce working capital so the business appears to be “capital efficient”.
- Document your systems and procedures so that everyone in the business knows what to do without you being around.
- Develop a succession plan for key staff so that the business is not reliant on these people.
- Develop a greater awareness of your business or brand within your customer base.
- Implement regular sales and cost reporting systems to highlight the ongoing proactive management of the business.
- Prepare your financial reports so that key financial strengths (such as new product or new customer sales) are clearly visible.
- Develop a sufficient business plan to demonstrate the future potential of the business and what is required to achieve this potential.
Don’t leave the value of your business in the hands of the buyer – put it in your pocket and be prepared.
4. I want to sell my business but I think I might under value what it is worth. What do I do?
It is common for a business owner to overlook the inherent value in a business that is often obvious to an outsider – including a potential buyer. Making sure you arm yourself with knowledge about your business’ real potential is critical in making sure you don’t undervalue the business. The best way to do this is to get an independent assessment of your business and its opportunities that someone else may be able to provide.
5. Do I need a licence to sell my business?
No you don’t – any person can make an agreement with another party to sell a business. However if you have someone act as your agent they must have the relevant licenses.
Even if you do sell your business yourself, there are a number of regulations that you must comply with, depending on the type and nature of the business. There are also a number of websites available that enable you to list your business and provide the necessary documentation to enact the sale.
However the process of finding buyers, negotiating terms and implementing the sale is a complex legal process. It should not be undertaken without appropriate professional advice and assistance.
There are also taxation implications with the sale of a business, and these will vary widely depending on the vendor’s personal situation. Advice on these matters must be obtained before you make a decision and must be obtained from professionals experienced in the appropriate field.
6. What legal processes are involved in the sale of a business?
There are no pre-defined legal processes, however key steps usually include:
This is not an exhaustive list and will vary depending on the state and industry your business is in. Make sure you seek professional assistance before signing off on any agreement.
- Issue of Information Memorandum after Confidentiality Agreement has been signed.
- Signed Heads of Agreement.
- Signed Contract of Sale.
- Due diligence by buyer including:
- Examination of financial accounts.
- Title searches for assets sold or transferred.
- Checks for any outstanding legal proceedings or pending judgements against the corporate entity.
- Checks against any issues that may result in liabilities incurred by new owners.
- Transfer of business names, registered names and associated brand identities or trademarks.
- A contract of sale must be drawn up by a suitably qualified solicitor or commercial lawyer.
- Notifications of relevant licensing and regulatory bodies including Australian Taxation Office, Australian Securities and Investment Commission and Consumer Affairs Victoria (Change of ownership of business name within Victoria).
- Notification to creditors and debtors of any change in ownership.
7. How do I find a buyer for my business?
Buyers can come from within your own industry, such as competitors or other businesses that are related to yours. Sometimes suppliers or customers are interested in purchasing a business they deal with to give them more control over the supply chain and potential increase their profit margins.
Buyers can also be those wanting a lifestyle or career change and want to try something different. Often these people will be asking there accountant or financial planner about the types of investments that are available.
In other cases buyers can come from friends or relatives that may have been involved in your business or have seen it grow.
8. I have a buyer, how do I ensure my business is sale ready?
The points listed in Question 3 are a good start, but if you already have a buyer then you may not have time to implement all of them. The critical things you need are:
- The right documentation that positions your business to get the best possible value. The key document is an Information Memorandum that outlines the current performance of the business and its future opportunities.
- A succession plan that outlines how key staff will be retained and new staff developed into key roles.
- Documented systems and procedures for key business management functions.
- Demonstration of a viable ongoing business that the buyer can manage and develop further.
9. How do I tell a buyer is genuinely serious about buying my business?
First it is important to know who the buyer is. What is their background? Who have they worked for? Have they owned a business in the past and are they a competitor?
Do some background checks first by asking for referees that can vouch for the person, including people they have done business with in the past.
Get the buyer to sign a Confidentiality Agreement before you show them any information that is not readily available in the public domain. And only provide this information initially in the presence of an advisor such as your accountant, solicitor or business consultant. This will tend to deter “tyre kickers”.
In some cases you can ask for financial referees such as an accountant or bank manager. If you are really concerned about there ability to pay for your business on the terms you want, then ask them to agree to a credit check and have this done through a registered credit information service.
You will have to pay for this service, however it will identify any potential issues in getting the value for your business.
10. I have a buyer, what information do I need to give them and in what order?
This will depend on the value of the business and in which state the business is based. Within Victoria, you will need to provide a Vendor’s statement for businesses that are sold for less than $250,000. This detail will include what is being sold, the terms of the agreement and recent financial statements.
If the buyer is genuinely serious about purchasing your business, they will need:
- Information Memorandum outlining what is for sale, regulation and licensing requirements, past performance of the business, key selling features of the business and future opportunities the business has.
- Financial statements from your accountant for at least the last three years. These are preferably audited accounts.
- Statement of what is for sale in terms of assets, intellectual property, legal arrangements and ongoing business terms, and evidence supporting ownership of assets being sold.
- Evidence of ongoing contracts with key customers and suppliers.
- Confidentiality Agreement and draft Heads of Agreement.
- A solicitor and taxation accountant.
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