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Things you need to
know to get the best price for your Business AND get
a Successful Sale"
A
business needs to be prepared for sale. Take the
time to collect and have available the information
that a purchaser will require to make a decision on
your business. Use the points below as a guide and
prepare a one page "Business Summary" that
can be provided to interested purchasers.
Financial Statements. The
key to getting the best possible price for your
business is in being able to provide potential
purchasers with 2 or 3 years financial statements
and year-to-date figures. These include the Profit
& Loss Statement, Balance Sheet and Depreciation
Schedule. For purchasers that need finance these are
crucial. You should have your most recent full
financial year completed and available. Detail ad
backs, proprietors wages and any one-off expenses
incurred to calculate your "true surplus".
Presentation. Treat
your business like your home. First impressions are
everything. Potential buyers want to see a well
organised business like operation that they can
visualise themselves working in. Get an opinion from
a friend (or customer) on what you could do to
improve your business presentation.
Plant & Equipment
Have an up to date list of all plant, equipment and
fixtures included in the sale. Normally all plant
and equipment is sold unencumbered unless
specifically stated. Provide a separate list of
leased or financed equipment that will be paid out
at settlement. Equipment not owned should be
detailed. List as fixed and moveable as fixed plant
and equipment attracts stamp duty where moveable
doesn’t. Try and avoid pricing individual items as
this may be a point of disagreement with an
intending purchaser and could jeopardise a sale. As
a guide, follow your depreciation schedule and talk
totals. You may be liable for capital gains on items
sold at higher than depreciated value. In a recent
hotel sale of almost $1,000,000 a $60.00 vacuum
cleaner, missing from the premises on the final
inspection put the entire sale in jeopardy. Luckily
a cash adjustment at settlement saved the day. The
purchaser also had a microwave oven fuse on it’s
first use. Inspection by a technician found a
mummified mouse inside. The purchaser tried to claim
this also from the vendor but with no success.
Lease Agreement
Your lease may be the most important factor in the
goodwill component of your businesses, particularly
if you are a retail business. Some businesses are
happy to pay $150,000 per year rent for less than 40
square metres. Why? Because they know that they are
almost guaranteed sales of $12,000 to $16,000 a
week. Your lease may not be as crucial but it is
certainly important. Have a copy of your lease or at
least a copy of the lease schedule available. The
schedule summarises the main points of the lease
such as costs, rent reviews, term and options.
Maintenance If
you have had plant and equipment repaired recently
have copies of invoices on hand for intending
purchasers to show that you are keeping good
maintenance records. A standard clause used in an
Offer to Purchase a Business is "Plant &
Equipment to be in good working order and condition
at settlement" Well your idea of "Good
working order and condition" and my idea of
"Good working order and condition" may be
two completely different things. Why not demonstrate
the plant and equipment well prior to the settlement
date.
Settling In Period
This is the period of time that you, the vendor,
will assist the purchaser in becoming familiar with
your business and it’s operation. Normally this is
done after settlement, without pay, for one or more
weeks. The purchasers may require to be in your
business one or two weeks prior to settlement to
confirm the weekly sales. This is often a condition
of purchase.
Staff
Will they stay or will they go? Sale of a business
requires you to terminate the employment of all
staff and pay them their appropriate entitlements.
The purchaser may wish to re-employ certain staff
members and this is normally detailed in the Offer
to Purchase. Sometimes existing staff are crucial to
successful sale. There is no reason why you or the
new owner couldn’t offer some financial incentive
to key staff to stay in place for a further 12
months.
Indemnities You
as the vendor will normally indemnify the purchaser
from all claims arising against the business prior
to the settlement date. You also accept all debts
and receive all income outstanding at his date.
Licenses You
warrant that all licenses necessary for the running
of the business are current and included in the
sale. Some businesses require the new owner to
complete certain training.
Trade Restraints
The purchaser will not agree to you opening up in
competition down the road. Normally expressed as a
period of time and a distance from your existing
business. I.E. 2 years and 10 kilometres. I believe
a popular suburban restaurant was sold recently and
the vendors purchased a restaurant business some
kilometers away to make a fresh start. All was well
until the purchasers of the original restaurant
found that the new venture was only 9.5 kilometers
away when the restraint of trade was 10 kilometers.
The fact that the new owners had spent a substantial
amount of money on their new venture was irrelevant.
Threatened with legal action they were forced to
sell up and move.
Stock Where
the sale price of a business includes "stock at
valuation", an independent stock take is
normally conducted as close to settlement as
possible. The cost is shared by both vendor and
purchaser, often with funds held back (in the
settlement agents trust account) to enable
adjustment when finalised. A purchaser is not
obliged to accept old or unsaleable stock nor pay
more for stock than specified in the Agreement to
Purchase. Keep your invoices or proof of purchase to
establish the value. If you have really old stock,
try and sell it at any price. It’s unlikely the
purchasers will want to pay for it.
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GST and Business Sales
Business sales can be GST free
where:- The vendor supplies to the purchaser
everything necessary for the continued operation of
the business. The vendor carries on the business
until the date of sale and: Both parties agree in
writing that the supply is of an ongoing concern.
Purchasers must be registered for GST at the time of
settlement. Note that the Vendor is
responsible if, at a later date, the sale is
determined to be taxable.
GST Update:- We
have mentioned before that under current legislation
business sales can be GST free where:- "The vendor supplies to the purchaser everything
necessary for the continued operation of the
business. The vendor carries on the business until
the date of sale and: Both parties agree in writing
that the supply is of an ongoing concern."
Purchasers must be registered for GST at the time of
settlement. Note that the Vendor is responsible if, at a later date, the sale is
determined to be taxable. However,
now GST clauses have been incorporated in some
"General Conditions for the Sale of a
Business" (used by many Real Estate
Agents and Business Brokers) the GST condition now
includes a clause that basically says "....
should the sale subsequently be deemed to be taxable
under the GST legislation the vendor has the right
to demand the amount of GST from the purchaser who
must pay the "said" amount within 30 days
of receiving notice in writing. The clause has an
effect for up to 10 years from the date of the
settlement of the business.
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What Price Potential?
Just
how much value in dollar terms do you place on the
potential of a business? Generally the opinion is
very little. All businesses have some future
potential under the right management but are you the
right person to realise that potential? Using a
S.W.O.T. test (Strengths, Weaknesses, Opportunities
and Threats) on yourself can be a useful tool to
establish if you will be good for your future
business. Of course the same test should be used on
the business you are considering buying. A business
is not like a house. It’s difficult to turn a
$100,000 house into a $10,000 house. However,
turning a $100,000 business into $0 business can be
surprisingly easy. It’s not possible to guarantee
100% that the business you buy today will still be
worth the same or more in 12 months time.
Give
yourself the best chance of success by carefully
assessing the business you are thinking of buying.
Get professional advice. A few hundred dollars spent
now with your Accountant or independent Business
Advisor could save you $1000’s in the future. A
business needs to provide an income for it’s owner
and make a profit. The following are essential for
assessing a business and will be required when
getting professional advice:-
Profit
and Loss Statements and Balance Sheets for at least
2 years
A
list of Plant, Equipment, Fixtures and Fittings
An
estimate of Stock to be purchased
A
copy of the Lease Agreement
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Business value using Return on Investment (ROI)
Return
on investment is the time it takes to recoup the
money spent. If it takes 2 years you are
effectively getting a 50% annual return on your
investment. ROI is the yardstick used to determine
the price of a business.
Business
Online has polled a number of local Business Brokers
who are actively appraising and selling businesses.
The result is that the Return on Investment is
calculated on the adjusted
net profit of the business divided by the total
purchase price. For example a business that has an
adjusted net profit of $100,000 and the current
accepted ROI range is 30%-50%. At 30% it would take
3.3 years to recoup your purchase cost, at 50% it
would take 2 years. Calculate the ROI as follows:-
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Adjusted Net
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$100,000 x 100 = 30% (3.3 Years)
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$100,000 x
100 = 50% (2 Years)
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Price
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$333,000
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$200,000
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The
total purchase price for this business including
Goodwill, Plant & Equipment and Stock is between
$200,000 and $333,000.
Many
factors influence where a business actually fits in
this scale. These can include location, number of
years established, length of lease, owner
involvement, staff, contracts, competition etc.
As
a rule, the stronger the business type, the lower
the Return on Investment.
For
example, corner deli/convenience stores are under
pressure from service stations who are now stocking
all the traditional delicatessen lines and major
supermarkets and shopping centres now operating 7
days. Buyers who may have been prepared to accept a
50% return (2 Years) on this type of business
some years ago now want their investment back in 1
year or less. A 100% or more ROI
Some
accountants use a general rule of a Return on
Investment over 2.5 years. (40%)
Business
prices are normally calculated using sales data for
similar businesses, considering current market
demand and the prevailing economic climate.
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Business Finance
Business finance is a specialised
area of finance and is completely different to
housing and property finance. Most lenders view
business assets as marginal from a security point of
view so they limit lending to only a small
percentage of the total cost of the business. There
are no hard and fast rules in business lending. The
following is a general list of considerations:-
I.
The length of time the business has been operating
II.
The amount of financial information available on the
business
III.
The length of the lease and suitability of the premises
IV.
The profitability of the business and it's ability to
service borrowings
V.
Special skills, plant and equipment required to operate the
business
VI.
Your background and experience in relation to the business
VII.
Your assets, liabilities and available cash or equity
available to be invested in the business
VIII.
Working capital and cash reserves
The number one consideration for
business lending is the amount of cash or equity you
have available to cover the deposit, costs and
working capital requirements. This is generally
regarded as "Hurt Money" or the amount
that you will risk.
Again, there are no hard and fast
rules but generally, for a well located and
established business lending is normally restricted
to 30% to 40% of the purchase price. So to purchase
a $200,000 business you may be able to borrow
$80,000 (40%) leaving a balance of $120,000 to find.
If you have residential property, such as your own
home, generally you can use some of the equity you
have built up. Normally to 80% of the value. If your
property is valued at $150,000 - 80% equity is
$120,000. If you have a mortgage on the property of
$50,000 then the amount you have available is
$70,000. This amount plus the business loan ($80,000
+ $70,000) totals $150,000 so you would need another
$50,000 plus costs and working capital to purchase a
$200,000 business. Lets say you have the extra funds
required and look at a typical loan structure for
$230,000.
Residential Secured
Business Loan
Amount
$150,000 Term N/A Structure Interest
Only Interest Rate 7.25% (Fixed for the first
3 years) Monthly Repayment $907
Business Loan
Amount
$80,000 Term 5 Years Structure Principal
and Interest Interest Rate 8.75% (Fixed for
the 5 year term) Monthly Repayment $1651
In order to keep the monthly
payments to a manageable level we have opted for
interest only on the residentially secured loan
while the business loan we have locked in at a
reasonable interest rate to completely clear over 5
years. After 3 years the residential loan can be
reassessed with the view to start paying back some
principal.
If the business enjoys a strong
cash flow the term of the business loan may be as
short as 3 years ($2535 per month) and the
residential loan could be principal and interest
over 20 years at $1186 per month.
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