Preparing A Business Ready For Sale

Transcription

1 Preparing A Business Ready For Sale Because A Business That s Ready For Sale Is Well Worth Keeping! Facilitator Workbook Presented by John E Denton FOR

2 1 Agenda Outline Why prepare a business ready for sale Planning and preparation Understand the business sale process Know what the business is worth Increasing the value of a business Financial Factors Making a business more saleable and attractive to a buyer Preparing yourself for the sale Marketing and presenting a business for sale Summary 2 Confidentiality 2.1 Tell Us Only What You Want To Tell Us Please only share things which are relevant to the discussion and please be conscious of only telling us things you are comfortable to share. To get through everything in the time available, please keep questions relating directly to the topic being presented at the time. There is not enough time to go in to detail on any participant s particular business. PLEASE USE THE QUESTION SHEET PROVIDED AND I WILL FOLLOW UP WITH YOU OVER THE NEXT WEEK. THANK YOU! 2.2 What's said in the room stays in the room Please respect other peoples confidentiality and don t repeat stories or experiences which you heard in the room. 2.3 Your Presenter John Denton John Denton is a Business Consultant, Coach and Workshop facilitator through his own business Denton & Associates. John is also a registered business broker with Performance Business Sales Pty Ltd. You can find out more about the services John provides in the areas of business ready for sale consulting, business owner mentoring groups, business coaching, strategic planning workshops and more at the web site; John can be contacted on or and via at john@johndenton.com.au More information can be found at the end of this workbook. Page 2 of 19

3 3 Why Should A Business Owner Prepare A Business Ready For Sale? 3.1 A Ready For Sale Business Is Well Worth Keeping A BIG reason for having a business which is ready for sale is because every owner exits a business at some point! Either PROactively or REactively! When they do, they want to get the biggest return possible for their investment of time, money, blood, sweat and tears in the business. By getting the business to a ready for sale state and keeping it in that state, the business owner will be able to sell the business on their terms whenever they want to PROactively! If the need arises to sell Reactively at least the business will be saleable and its value should be at a best possible value. Let s look at some of the reason why businesses sell! 3.2 Why Do Businesses Owners Sell PROactively? Owner Plans To Sell and Cash Out Why would an owner plan to cash out? It's Time Why would it be the right time? Family Succession Plan Part of the plan for a family member to take over Employee / Management Buy out A planned sale to staff or management IPO An Initial Public Offering to raise money / bring in new shareholders Partial sale Franchising Why do business owners franchise their businesses? Pros and Cons of buying or selling franchise businesses. 3.3 Why Do Businesses Owners Sell Reactively? What circumstances can force a business owner to sell? 3.4 Why Do Buyers Buy A Business? For every seller there needs to be a willing buyer! What is the motivation to buy a business? Page 3 of 19

4 4 Key Strategy 1 Plan and Prepare 4.1 Begin With The End In Mind Where The Business Stands Now Where You Want It To Go How It s Going To Get It There. Known as the NOW WHERE HOW process! Before you decide where you are going with the business, you need to know where you are starting from. Get a Business Ready For Sale assessment ANNUALLY at minimum. Once you know where you stand NOW, decide WHERE you want to get the business to, then work out HOW to get there! Be as SPECIFIC as possible in all planning. Don t be afraid to seek good outside assistance Is The Trigger For The Sale Financial? What's the target sell price? Do I have a realistic idea what 'my category of business' sells for? Have I done any research? Check out similar businesses for sale at Business Sales Sections of newspapers etc. (Not really a good indicator usually inflated prices) Is the target price realistic? Is The Trigger For A Sale Timeframe Personal needs when does it suit me to buy or sell? When is the best time to buy or sell to get the best value? What is the Capital Gains Tax situation? The sale date is the contract date and not the settlement date! The signals and trends to be wary of for both sellers and buyers. Macro Midi Micro 4.2 In Summary Get Started! START EARLY Nothing happens until there is ACTION Allow LOTS of time Page 4 of 19

5 5 Strategy 2 Understand What A Business Is Worth 5.1 Is it A Business? PRACTICE Small team Low start up cost Based around an expert Has no value without the founder Cannot be sold High profit margin Low overheads Can be cash flow funded Highly agile and responsive to market OWNER REWARD FULFILMENT OWNER ROLE THINK SELL DELIVER BUSINESS Large team High start up cost Based upon systems Has value without the founder Can be sold Lower profit margin Higher overheads Requires start up funding Less agile and less responsive OWNER REWARD FREEDOM OWNER ROLE LEAD MANAGE COACH 5.2 Gross Sell Price = ANP x (100 / ROI%) This is the most common method of putting a sell price on to a small or medium sized business. ANP = ROI Factor = How these are arrived at is explained fully in the next sub sections. 5.3 Determining The Adjusted Net Profit Financial Factors The financial reports speak volumes about the health and future potential of the business. Are the financial records accurate and well maintained? Do management accounts seem to match financial reports for ATO? We have already seen the sell price of the business will be a multiplier of the Adjusted Net Profit Why does Adjusted Net Profit differ from Net Profit on many management reports and P & L s? Because of Add Backs and Adjustments What are allowable add backs and what are adjustments? Page 5 of 19

6 5.4 Determining the Gross Price Of The Business The gross price then is calculated as follows; Adjusted Net Profit Before Tax X 100 = Gross Business Price Return On Investment % For example: (Adjusted Net Profit) $250,000 X 100 = $750,000 (Gross Business Price) (ROI%) What Is Included In The Gross Sale Price When you sell a going concern you are selling the assets of the business. They include; The plant and equipment Machinery, office equipment, tools etc. The stock Must be saleable stock and valued at landed cost in store. The goodwill That part of the business value over and above the value of identifiable business assets. Put differently, business goodwill reflects the synergy among the various assets used by the business to produce INCOME. In a well run business the whole is greater than the sum of the parts. If we use the example above where the Gross Business Price came to $750,000 if stock was $150,000 and plant and equipment was valued at $200,000 then; What is the GOODWILL value in the example above? BUT, what SPECIFICALLY is included in the sale? Often when a business is sold, both parties make assumptions about what is included in the sale. It is mandatory that the seller document every item that IS and IS NOT included in the sale. Examples Motor vehicles Fixtures and fittings Furniture Kitchen and other staff amenities Paintings, pictures and signage Licenses, domain names, web sites, business names etc. Consumables Water fountain & Coffee machines Furniture Whiteboards Page 6 of 19

7 5.6 Determining The ROI Percentage Non Financial Factors There are many non financial aspects of a business that affect the ROI Factor (multiplier) and the attractiveness of the business to the buyer. What affects the ROI Factor? Risks to maintaining the net profit include: GET THEM TO WORK ON OWN AND IN GROUP ON THESE What does a buyer want to know about the business in addition to the financial records? Why is the owner selling the business? Has the business been profitable and are profits going UP? Is revenue going UP? Is Gross Profit going UP? How long has the business been operating successfully? Can the business continue to operate without the current owner? What skills will the buyer need to have to operate the business successfully? Is the business in a growing market? Is the business in a good location? Does the business have a good reputation for products and service? Lifetime value of clients Number of clients and repeat business clients How many days a week does the business trade? Owner s role in the business How many hours does the owner have to work in the business Will the staff stay on? How easy or difficult is it to get staff with the required skills / experience? What ongoing training of staff is required? Will the clients stay with the business? Will the suppliers continue to supply on the same terms with the business? What is the debtors and creditors situation working capital, days to pay etc? Stock levels over time UP or DOWN, HIGH or LOW Stock turnover Is plant and equipment in good working order? Is plant and equipment up to date or likely to require replacing? Premises lease situation. Are the key processes of the business systemized? Future potential for growth and expansion At the end of the day, the market price of a business is whatever a buyer is prepared to pay! Page 7 of 19

8 5.7 Is The Business An In Demand Business? What Are People Buying? 5.8 Is The Business A Difficult To Sell Businesses? What Are People Not Buying? 5.9 What Is A Buyer Looking For? What does a buyer want to know about the business in addition to the financial records? The number 1 question If it is such a good business, why is the owner selling the business? Page 8 of 19

9 6 Key Strategy 3 Understand The Business Sale / Purchase Process 6.1 Business Appraisal Analysis of the business covering both the financial and non financial aspects 6.2 Marketing The Business Prepare a detailed and very comprehensive business marketing report 6.3 Presenting The Business To Potential Buyers Sell the business to potential buyers. 6.4 Negotiating The Offer and Acceptance Negotiate of offers and present to seller. Get an offer and acceptance signed up 6.5 The Settlement Process This period includes the due diligence and can often require the business to be sold to the buyer s accountant and finance institution (if applicable) 6.6 Post Sale What is the seller going to do for the buyer after settlement? 6.7 Before You begin Assemble Your Team Business Consultant / Coach Accountant Commercial Law Lawyer / Solicitor Financial advisor Business Broker Settlement Agent Page 9 of 19

10 7 Strategy 4 Increase The Value Of A Business Financial Factors 7.1 Gross profit (The Maths of a business) The first and most obvious area of a business to work on to improve its sale value, is the adjusted net profit. How much money is the business generating for the owner before he or she or they draw any salary or discretionary monies. Discretionary monies includes things like motor vehicle expenses, non essential travel, non essential memberships and subscriptions and so on What s Happening In The Business? Know The Numbers! What can a business do to improve its profitability? L Become Q P Multiply by C R Equals C They spend A $$$ S on first transaction And come back for N of T per year Equals A S R Multiply by A G P Equals G P $$$$$$ Minus Fixed Expenses before owner drawings EQUALS Total Net Profit $$$$$ This is what the owner(s) have to draw income from! Clean And Up To Date Accounts If you take cash out on the way through it is both illegal and reducing the value of the business. The financials are the instrument panel for your business. KEEP THEM UP TO DATE! Get your bookkeeper or accountant to produce your financial reports regularly for review. (CLOUD computing) Page 10 of 19

11 7.1.3 ATO Compliance All ATO compliance requirements must be met and that the accounts match the ATO returns Structure The Accounts Structure your chart of accounts to tell you what you need to know about the business! It's your instrument panel how am I flying? Am I flying? Income, COGS (& GP), Expenses The devil is in the detail. Never Assume. Be prepared to analyse the LMA SS v EPL story Helps with the marketing / sale process Regular Reviews What are the Financial Key Performance Indicators in your business? What should be measured? How often do you need to review the accounts? Monitor daily, weekly, monthly you decide but just do it. What do you review? P & L cash flow Overall accounts for the business. What are they telling you? Accounts receivable (Debtors) Accounts payable (Creditors) Cash on Hand & Working capital Stock & Inventory Know which are the profitable products and services! Collect the information you need to "understand and manage" the business Expenses, Income, Cash flow, Working Capital Key areas to monitor Keep up to date Keep accounts current it will pay big rewards in many ways External Financial Analysis & Coaching The first thing a potential buyer will do after putting in an offer is to get hold of your financial records, give them to his accountant and say "Should I buy this business?" Often, this stage of the process part of due diligence is where a sale will quickly fall over. A good "financial coach" will meet with you regularly to review your figures Page 11 of 19

12 8 Strategy 5 Improve The Saleability Of A Business Non Financial Factors 8.1 Legal Structure It is recommended that you look at the legal structure of your business and discuss it with your 'business' accountant. If you don't know one, we can recommend one to you. Why is it important? 8.2 Key Performance Indicators Inspect What You Expect What are the Financial Key Performance Indicators in the business? What should be measured? How often do you need to review KPI s? Overall accounts for the business. What are they telling you? (See Section 7 above) Monitor daily, weekly, monthly you decide but just do it. What do you review? P & L cash flow Accounts receivable (Debtors) Accounts payable (Creditors) Cash on Hand & Working capital Stock & Inventory YOU CAN T IMPROVE WHAT YOU CAN T MEASURE What are the Non Financial Indicators in the business? Number of leads or enquiries (and their source) Conversion of leads to sales Average dollar value of a sale Life time value of a client Frequency of ongoing purchases Gross profit per sale / per product or service Average gross profit over time Operating profit Stock turns Customer / client churn Industry benchmarks And more. Collect the information you need to "understand and manage" the business. Page 12 of 19

13 8.3 Business Owner Role / Responsibilities Owner Operator Is the business currently "owner operated"? If it is, consider bringing in a manager and running it under management. Why? A business "under management" will generally achieve a higher selling price than an owner operated business. You need to do the maths obviously, to see if it is the best option. If you can do it and you haven't it begs the question "Why not?" If you expect the buyer to run the business as an owner operator then they will need the same skills and knowledge as yourself. How easy or difficult will it be to find someone to replace you? If the business is a partnership or family business where partners / family members work in the business, it introduces another factor in the valuation and sale process. How do you sell the business to a single buyer when it is currently owned and operated by multiple partners or family members? 8.4 Systems Why Systems? S Y S T E M S What Can Be Systemised? Any process that occurs on a regular basis which doesn't require any special expertise. Anything that you can train others to do for less cost. Employ intelligent systems so that you don't have to employ intelligent people! Examples The McDonalds model & The fruit bowl concept tight and loose contexts Where Do You Start? Wherever the greatest frustrations are! Identify the areas of greatest pain or frustration Page 13 of 19

14 8.5 Sales and Marketing (The Psychology Of A Business) Sales and marketing in a business should be driven by SYSTEMS AND PROCESSES The Gold Is In The Client List Does the business have a modern and useful CRM system? What is the spread of business across the client base? Are any clients more than %_ of the revenue? What does this mean for the business? What Lead Generation Strategies Does the Business Employ? What strategies does the business have for attracting new clients? What strategies are in place for collecting names, addresses, s and contact telephone numbers (preferably mobile)? What strategies does the business employ for getting referrals? Consider competitions, offers, seminars, shows, exhibitions, networking, etc Emotional Direct Response Marketing. Offer iron clad unconditional guarantees and warranties Other What Client Retention Strategies Does The Business Have? It's far easier to sell to existing clients than to attract and sell to new clients What strategies can a business employ to retain existing clients? What is the average lifetime value of a client? Does the owner know? How do you work it out? What percentage of clients are repeat order clients? How often do repeat order clients buy? Other What Sales Systems and Processes Are There For Upselling & Cross Selling? Are There Any Client Testimonials? One of the most valuable aids in the selling process is a testimonial file. How does a business collect them? How and where does a business use them? Page 14 of 19

15 8.5.6 Is There An Effective Web Site and Social Media Marketing Strategy In Place? Does the web site capture prospects details? Does the web site have a call for action? Does the business have an online and social media marketing strategy? 8.6 How Do Systems Affect The Sale Of The Business? Makes it easy to train new employees Makes it easy to replace employees Makes it easy to outsource work Creates time for the owner to work ON the business Saves money by reducing errors and rework Enables the owners to have leave from the business Makes it easy for a new owner to take over the business and gives the buyer confidence in buying the business. 9 Strategy 6 Prepare The Business Owner(s) For The Sale 9.1 Before The Sale Know WHY the business is For Sale! What is the reason for selling? Have you really thought through why you want to sell or buy? Emotion or logic? Are you committed to the sale / purchase? Will you go through with it? What are the conditions that have to be met for you to be "happy" selling or buying? What is the worst that could happen? Prepare for it! 9.2 After The Sale / Purchase What Is The Seller Going To Do Post Sale? As the seller, you need to be GOING TO something, rather LEAVING your business. If you're not going to something new, then there may be a void in your life after the sale. This can lead to all kinds of psychological problems. Make sure you know what you are going to do after the sale. Of course, the buyer will require the seller to stay on in the business for while! How long is the seller prepared to remain in the business? It helps with the sale if the existing owner is prepared to stay on in the business for a period of time. This is especially the case where the business is "owner operated". In owner operated businesses, the buyer often wants the seller to stay on for a variety of reasons, including; Deed of Restraint Also, the buyer will most probably require some form of Deed Of Restraint. Page 15 of 19

16 10 Key Strategy 7 Presenting A Business For Sale & Selling It 10.1 First Impressions Are Everything External Internal 10.2 Why Go To A Business Broker? Why Use A Broker When selling or buying a business one of the first decisions you make is whether to use a business broker or sell privately. Your decision will very much depend upon your circumstances, experience and knowledge in selling businesses. If you are not experienced in selling businesses, my strong advice is to use the best broker you can find and be happy to pay them their commission (or buyer agent fees). That has been my own personal experience and I enjoyed paying the commission. Go to a broker for the following reasons: Go to a broker for the following reasons: Sellers do not know how to properly value a business Sellers are unable to find potential buyers Sellers doesn't know the contractual and legal processes The broker is NOT emotionally attached to the business and can be objective If the seller is an owner operator they are probably too busy working in the business to spend the amount of time required to make a sale Seller doesn't know how to present the business in the best way to make it attractive for a buyer Seller is not comfortable negotiating with potential buyers Dealing with potential buyers, some of whom are not really serious, can take up a lot of time and create stress Seller doesn't know how to evaluate offers or structure an agreement Seller is unable to create competition between potential buyers Buyers often feel more comfortable dealing with an experienced broker Maintaining confidentiality of the sale with staff, clients, suppliers and the competition can be difficult if the owner does his own selling Use And Purpose of A Professional Marketing Report At Performance Business Sales we do this every time for all businesses. It is part of the process which achieves the best result for seller and buyer. It protects the interests of both the seller and the buyer. Page 16 of 19

17 10.3 When To Tell People The Business Is Selling? Staff When and how do you tell staff that you are selling? This is a very individual, case by case issue Customers When and how do you tell staff that you are selling? This is a very individual, case by case issue Suppliers When and how do you tell staff that you are selling? This is a very individual, case by case issue Prepare For Settlement The Red Zone What's included in the sale? Terms and Conditions of Sale Prepare for Due Diligence Choose An Experienced Settlement Agent Seller s responsibilities leading to settlement Buyer s responsibilities leading to settlement 11 It s All Over Summary 11.1 Common Problems When Selling or Buying A Business Poor profits Poor Financial Records Business is Owner Dependent Unrealistic Sell Price and Unrealistic Offers Owner not prepared to let go Business not prepared staff, clients, suppliers etc Owner in a hurry to sell / buyer in a rush to buy Page 17 of 19

18 PERSONAL ACTION SUMMARY Page 18 of 19

19 12 WHAT NOW? 12.1 Work On The Strategies Discussed Here Start Early Register at for a FREE series of articles on The 7 Key Tips To Selling Your Business For More $$$ which includes tips on preparing a business ready for sale. As well you will receive frequent updates, latest news and articles on preparing a business ready for sale and buying and selling businesses, and franchising generally. CONTACT JOHN DENTON For a Business Assessment; Consulting & Coaching on Getting Your Business in to a Ready For Sale State ; Facilitating workshops, meetings and speaking at conferences etc.; Business Owner Mentoring Groups which are run ongoing one day per month; Webinars covering a range of topics and supporting the mentoring groups; In House and Public Workshops; Speaking engagements; Web Site and Blog: john@johndenton.com.au Other ways to follow John John on Twitter: (@bizreadyforsale) John s Profile on LinkedIn: Denton & Associates on Facebook: CONTACT SMARTER SOCIAL MEDIA WORKSHOPS John is a partner in Smarter Social Media Workshops which was set up to deliver Hands On, Done With You workshops on Social Media Marketing, specialising in LinkedIn; Web Site: john@smartersocialmedia.com.au For All of the above YOU CAN CALL (08) Leave a message and I WILL call you back! Page 19 of 19