03 Feb Selling a Business

“When should I sell my business?” That’s the question we get asked so often as Business Brokers. “The market’s not at the best point in the cycle, the economy has turned, it’s winter, it’s too early in the year”. Negative perspectives and attitudes don’t aid the prospective seller reach a decision either.

A good starting point would be to ask – “Do you want to sell your business or do you have to sell your business?” If you have to sell this will determine a whole different approach to the one taken if it is merely a decision because you the owner want to pursue another interest in your life. The tactics of the sale will vary according to the situation.

Regardless of either choice there are a few commonalities to all sellers. Let’s look at some of them –

How well packaged is your business? By this I mean how does it present to a potential buyer? Starting with the obvious – is it clean, well painted, tidy – when you arrive at the business does it look appealing? A presentable building and garden go a long way to making the first impression one that will count. Long grass, dead plants, peeling paint and dirty walls don’t do much. The obvious similarity applies to the reception area and offices / workspaces. Are they organised, clean, presentable? Is the furniture reasonable or is it old and shabby? The overall impression is vitally important – it tells the buyer – this is a well run, organized profitable venture. A real danger are the “dirty” industries – where example the manufacturing facility is producing metal components. Grease and oil don’t do too much for carpets, walls, counters and the like. Once dirty – always dirty. Over years it just spirals downward to a state where everything looks like it needs a good clean and the fittings are asking to go on to the dirt heap.

If one were to look at the workshops of some of the elite motor dealers what do you see? The workshop is clean, there are covers over the sides of the cars, the mechanics work with white gloves, there are no grease trails to the offices – everything says “professional”.That is not beyond a small business. It is a mindset. If the premise has deteriorated over the years then before posting your business for sale you need to address the presentation issue.

The”look” is more than hygiene it flows over to most things – and most importantly the books of the business. Every buyer is going to want to see the financials. If these are not in working order and well sorted as a seller you are going to have a hard sell – if at all. Think of it – when you go to buy an article – be it whatever you can think of – the same rules apply:

• Emotionally do I connect with the item. Do I want it? How badly do I want it? Is it a commodity item or is it something I have dreamt of for years.
• Will it do what I want it to do?
• How robust is it? Will it last?
• What does it say about me? Is there a status element to it? Am I going to be the envy of others?
• What if it breaks / doesn’t work? Is there a guarantee?
• Is it good value? Ultimately this is the final question – am I getting my money’s worth? What is the Return on My Investment and what is the risk associated with this purchase? The higher the risk the less likely it is that you will by the item. Think of those shady holiday deals that you may have been offered. Just pay this sum now and you will enjoy it all later. Admit it, a far off dream with a huge gap of little security never won the day. “No thanks, I will think about it and let you know”. Did you ever go back? Not likely.

Back to the books. Are the financials in good shape. Is the accounting accurate and clear. Have all the entries been done correctly and are they referable?

We need to have a good look at the financials. After all this is THE story of the company. Generally we look at the performance over the last three years. We try to see the patterns and look at seasonality, sales trends, the highs and the lows. Are there repeating patterns – has the company grown or is it heading on a downward spiral? What areas have grown? Which ones have not? Does the company have a good working capital base or is its best customer the bank? An important ratio to consider is the asset base compared to the goodwill value. The higher the asset base the lower the immediate risk. If the value of the company is primarily built around the discretionary income / disposable cash to the working owner it is considered higher risk. Why? because if the venture fails and there is a sale some of the purchase price can be recouped by selling the assets – albeit a fire sale never returns market value.

Companies can be valued on a multiple of EBITDA, on assets, or on a mixture of the two. If a mixture of the two is used there is no multiple used. One also needs to work with the broker as there are market statistics that need to be considered and the current prevailing market conditions. Brokers work across entire markets and have the day to day knowledge of what the prevailing conditions and expectations of the market are.

When selling a company there are many details to consider. One should always adopt “the eye of the beholder” approach. Look at your business through the eyes of a prospective buyer. What shape are you in?