Some businesses are in greater demand than others. This means they’ll sell quickly and the vendor will receive a good price for the sale. First we need to look at those things that make a business marketable; not many businesses will have all these characteristics but the more a business has the greater will be its appeal to prospective purchasers.
Characteristics of a marketable business
- It is well-established and has a good trading history with at least three years of detailed financial records including tax returns that are in agreement with the books of the business.
- It is not dependent on the skills of the vendor, nor on relationships between the vendor and customers.
- It can demonstrate growth in revenues and increases in profitability over the past three years.
- It is in a market that is growing and provides opportunities for the business to grow further.
- Key personnel will remain with the business after the sale.
- The owner can work reasonable hours and no more than five days a week.
- Premises, fixtures, fittings, plant and equipment are in good condition.
- The inventory (if applicable) can be verified and accurately costed and all stock is of reasonable age and is in saleable condition.
- Tenancy of the premises is secure for at least three years and the cost to the business reflects market levels or less.
- The location is suitable to the operation of the business and will not be difficult for employees to reach.
- The customer base is diverse without over-reliance on just a few major customers.
- The vendor will provide transition assistance and some finance if required.
Those are characteristics of the business itself, but what can the vendor do to help ensure a trouble-free sale process? Here’s what the vendor can do to make selling a business easier:
Tips for business sellers
- Establish a realistic expectation of the value of your business. It should be supported by facts such as the selling prices of similar businesses and a reasonable ROI for the purchaser.
- Keep the business going as usual. Focusing on the sale and not the business will usually affect both sales and the team’s morale.
- Consider using outside expertise to gain advice and maintain confidentiality. There are many things that you need to know that can only come from those who have been involved in many business sales, including how to keep the sale under wraps.
- Be sure your records are in good shape. You need at least three years trading history and supporting documentation including tax returns.
- Pay attention to the visual appeal of the premises and equipment. If the business has a run-down appearance it will be quickly devalued by anyone considering buying it.
- Be positive when talking about your business with prospective purchasers. Be able to give them a reason for selling that makes sense, and if they mention any suggestions about improving the business be receptive.
- Anticipate what a buyer or their agent might want to see in the way of documentation including leases for equipment, licenses from local authorities, stock purchase records and details of any intellectual property the business owns.
- Be prepared to negotiate on every aspect of the sale. Some purchasers might want you to stay with the business for a period of time, some might want you to finance a portion of the goodwill, and some might not want to purchase all the equipment and fittings. Consider every element carefully before accepting or rejecting it.
- If any information is requested that you haven’t already prepared be sure to get it back to the prospect as quickly as possible. Minimize delays; they can often let someone else come up with a better offer for the purchaser.
- Step back and view everything about the business from a purchaser’s perspective. Ask yourself questions such as ‘would I want to do business here?’ and ‘just how good are the future prospects of this business’? Be honest so you get the answers you really need.
Tips for business buyers
- The purchaser can do a lot to facilitate the acquisition and be sure it’s the ‘right’ business they’re buying:
- Don’t be unrealistic in your expectations. Accept the fact that every business has faults and you’re more likely to uncover them if you do a thorough job of pre-purchase investigation.
- Talk personally with the owner. This is the best way to put yourself in their shoes and gain a picture of how you’d go if you were running the business. Ask any questions you want to ask and don’t accept inadequate answers.
- Do your research into the recent selling prices of similar businesses. Talk with those who were involved and find out how their final valuation was achieved. If real estate is involved get records of all sales in the area for the past twelve months.
- Consider using the services of an outside expert – someone who’s had a lot of experience in purchasing businesses. There are always details to every transaction that are best handled by somebody who knows just what to do.
- Don’t delay the process; it could give another purchaser the chance to acquire the business you really want. It’s alright to make an early offer that’s near the price you think is right, even if you know you’ll probably have to pay more.
- Don’t look at businesses that are too expensive for your financial means. Overextending yourself at the beginning is almost a guarantee that you’ll fall over when some unexpected problem crops up.
- Always ask if the vendor is willing to stay with the business during a short transition period, and if the goodwill component is a significant part of the asking price see if the vendor will be willing to finance part or all of it.
Why use a consultant, whether buying or selling a business?
Consultants who have been involved in a number of business sales and purchases can make a big difference to the outcome of your own transaction for these reasons:
- If buying, you’ll have a better selection of businesses to consider; if selling you’ll have a greater range of prospects.
- They can do your negotiating for you and give you a better outcome. They can also act as a ‘middle man’ and keep you from getting too personally involved.
- They will be better at analysing the marketplace and ascertaining the real value of the business.
- They can help keep the transaction confidential and not involve others such as employees or competitors.
- You can ask the consultant questions if you need an honest answer based on experience.
Buyers and sellers both want the best deal. They want a hassle-free transaction that leaves no doubts they’ve done the right things and that they’ve achieved what they wanted. By following these tips both parties will have the best chance to feel satisfied with the outcome.