Seller beware

Talk to the experts before you put your business on the market.

The Sydney Morning Herald, February 22, 2005

seller_beware

As Australia’s self-employed baby boomers reach retirement age and decide to sell their businesses, some may be in for a shock. It could prove harder to find buyers as increasing numbers of enterprises come on to the market. And while a buoyant economy produces more buyers, their ability to compare a large number of businesses makes them astute purchasers.

Selling a business involves far more time and imposes far greater stress on its owners than most realise, particularly if they do it themselves, says Tim Miles, managing director of corporate advisors Miles Corporate Services.

Even if a company is in good shape, if it’s not properly prepared for sale it may not find a buyer or will sell for far less than its potential.

“Owners may get to the eleventh hour, then the deal falls over because something they hadn’t thought of during the sales process creates a barrier,” Miles says.

Those who conduct their own sale can also find at least half their focus is on selling the business rather than running it.

“They could lose six months, then the business is actually in worse shape when it sells because the owners have been so badly distracted,” he says.

CPA Australia advises business owners to plan their exit at least five years before they intend selling. They may need to do considerable work on their company, particularly if it cannot function independently of its owner.

Restructuring may be required, the owner may need to start thinking more strategically, business processes must be properly documented and good contracts in place with staff, customers and suppliers, says Judy Hartcher, CPA’s business policy advisor.

A business can prove hard to sell if it tenders for most work and has little brand loyalty. If it lacks a competitive advantage, particularly in a market with low entry requirements, buyers could open up in opposition or simply wait until the owner closes the business.

But a CPA survey last year found less than 40 per cent of small business owners were prepared to invest time and money in maximising their sales potential.

About a quarter would simply advertise their business, without even identifying potential buyers amongst customers, suppliers, staff or their industry.

So should you attempt to sell a business yourself, or seek professional assistance?

Accountants normally charge by the hour to assist with a sale, and John Mann, a partner of accounting firm Everalls DFK Pty Ltd, says fees would range from about $2000 to $10,000 for the sale of an SME (small to medium enterprise). Fees depend on the business size, and on the accountant’s level of involvement with potential buyers.

Advice would include structuring finances before and after the sale, preparing summaries of the last three to five years financial results, developing budgets and cash flows, extracting relevant information from the company’s business plan and calculating return on investment.

The Australian Institute of Business Brokers says its members usually charge commission on a sliding scale, based on the sale price of the business. This ranges from 10 to 11 per cent on the first $100,000 to around four per cent for a business worth several million.

Corporate advisors charge around 4.5 per cent to 10 per cent for enterprises selling for less than $10 million, Miles says.

If the business is quite straightforward, such as a flower shop or coffee shop in a mall, listing it with a business broker specialising in that sector maybe sufficient. But if it’s a substantial and complex operation, a more extensive service may be required.

Miles says corporate advisors will do a thorough analysis of the business, prepare a detailed memorandum of information and identify risks that should be removed if the sales price is to be maximised.

“This might be a key man risk, a supplier risk or a customer contract. We recognise things the market rears up at, and so we would fix it before the business goes to market.”

SMEs generally take four to six months to sell, he says. But it may not be the price that actually determines the sale so much as the transaction. This could include vendor financing, or structuring the sale so it is more tax-favourable to the seller.

“Even though it doesn’t change the sale price or impact on the buyer, it may change what the seller can put in their pocket,” Miles says.

Case study

Jack Watford was amazed at the “horrendous amount of work” involved in readying a business for sale when he decided to sell his family company because of health issues.

Watford and his wife Linda retained a corporate advisor to sell the Container Connection, a specialised business that manufactures and distributes large planter pots to the commercial market.

They had considered listing the business with a broker, but decided they needed someone who would get right inside their company, prepare a full memorandum of information and pitch the business in the right way.

“Our business is unique, and we worked in a sector that wasn’t large but we had a very large market share,” Watford says.

“For those reasons, the business could have been valued at more or less. One view is that because you’ve got such a big market share you are quite vulnerable, and the business could be worth less.”

It took several months for their advisor to pull together all the information required for the sale, despite the fact that the Watfords had maintained very good systems and computer records for 15 years.

A major supplier agreement also needed formalising, as it had started out with a handshake when the Container Connection was launched.

By the time the business was sold last June, six months after the Watfords approached the advisor, they had received eight offers and achieved 50 per cent more for it than they originally expected.

Price was not, however, the only factor. The Watfords wanted to ensure the buyer would carry on the business and grow it, and were prepared to offer vendor finance for the right buyer.

Watford agrees there was emotional stress involved in selling the business because of close relationships with staff and customers.

“You have a business for a long time, and you become very close to the staff. Because it’s a small business, we were almost like family. Some had been with us for eight or nine years,” he says.