Selling a business is exactly the same as selling a house. But before you rush to any conclusion, please read on….
When you sell a house you will have a number in mind that you think it would be worth to sell for. The house has 4 bedrooms, 2 bathrooms with a large garden on a flat section. There is ample space to subdivide and so the potential for the right person earning ‘an easy’ couple of hundred thousand dollars is a certainty! One problem…. If it were so easy, why didn’t you do it yet?!
It’s a very valid question; you expect the purchaser to pay a premium because of the potential of future earnings, but why don’t they?!.
Let me de-bunk a couple of myths in Business Sales straight away:
- Businesses are valued based on your past performance and a purchaser will NOT pay a penny for ‘the potential’ that you haven’t realised
- Your business valuation is not based on ‘what you need to survive on’, or ‘what you want for the business based on your ability to future-proof your life’
To sell a business successfully (and in the shortest time possible for the a fair price, reflecting market value) you should market the business within 5% of the appraised value of the official appraisal valuation provided by your LINK Business Broker.
When a business is on the market for a long time, it will have an impact on the final offer that will come in. So before you think of marketing your business at an inflated price, ask yourself the following question and answer as honest as possible (preferably with 3 reasons why…); “Would you buy your own business back for the valuation that you put on your business?” If you doubt the answer, listen to your business broker and the reasons he/she provides to you to give you a more accurate valuation… This may not be what you want to hear, but certainly what you need to hear if you are serious about selling your business.
There are a couple of scenarios that you will need to consider when you are selling the business in an open market. I will outline 3 scenarios below that you should consider before you enter the sales process at a premium valuation:
- You get to market and no enquiries (at all) come in at the initial stage of the sale process. This is hugely disappointing but not uncommon.
Possible reasons:
- Buyers are sceptical about the industry
- Buyers are sceptical about the ROI (when you have advertised Sellers Discretionary Earnings as well as asking price)
You are probably 10% or more out of the ‘ball park’ for the majority of the purchasers
Solution: You HAVE to be more realistic about your expectations! It WILL not happen at the valuation that you have put on the business as an owner! Review the marketing and support the business broker in their marketing efforts!
- A couple of enquiries come in (2 to 5) in the first week and 1 or 2 enquiries received weekly thereafter, dropping to a couple of enquiries per month in the second or third month. You are still on the market after 6 months with limited feedback provided. Kiwis rather give no feedback than bad feedback. It’s a cultural ‘thing’. Don’t get too hung up onto it!
Possible reason:
- You have a business in a desirable industry. You may lose buyers after they compare other opportunities with better ROI
- While you send follow up emails asking for feedback, no replies are coming back and nothing happens
Don’t forget that 90% of enquirers are looking at more than one opportunities for sale. If they choose another business over yours’, you HAVE to take action and review.
Solution: There is nothing wrong with the advertising as you do get enquiries. Adjust the asking price by 5 to 10% of the original asking price
- Lots of enquiries but no offers
I have sold businesses where we had a lot of enquiries but no offers came in for months! (in some cases we never got any feedback to find out why the business was not good enough to make an offer)
Possible reason:
- Some key information was not supplied in the initial advertising to narrow down the buyers pool (i.e. high stock level, non-transferable discounts from suppliers, landlords or other benefits that would not necessarily transferred to a new owner; handshake agreements, outstanding GragOne deal vouchers, favourable lease terms or an abnormal high stock level including non-moving stock and or redundant stock.
Solution: Be realistic and look at any concern from a buyers’ perspective; Would you pay for the business what you expect them to pay?; If you were the buyer, would you pay for that amount of stock? Do they need it?
If the answer is no? Maybe you could start thinking about alternative solutions; Could you supply some of the stock on consignment?; Would a Vendor Finance solution work if it means you can move on quicker?
In some cases you will just need to keep going and the right buyer will eventually find your business. This may take up to 12 months…. Selling a business is not an event; it’s a process that needs to be carefully managed! Buyers can come from unexpected sources and it requires teamwork between the seller and the business broker to ensure we find the buyer. However, after being on the market for over 8 to 10 months you should really be reviewing the asking price; your expectations are too high…. in most cases I would start to question the expectation after 6 or 7 months!
Just remember that, whatever the outcome, your business broker is employed (by you) to get you the best outcome! This does not mean that they have to meet your expectation. It means that, if they bring you an offer of 50% of the asking price after 8 months (or 10 months) they have worked hard to meet your expectation but ‘the market’ is not prepared to pay more for your business, based on YOUR past performance. The low offer is just a start and at least you have something to work with to start a negotiation. Now is the time to put the pressure on your business broker! This is where they make their money!!!
WORD OF WARNING: A Business Broker could be over-enthusiastic about the valuation of your business. You could never blame him/her because it is in your interest to get the best result, and it’s in their interest because they earn more money on a higher valuation. However, always make sure the business broker always supplies you with the data to show that the appraised value is reflecting a realistic valuation. If they can’t show data (such as historical sales) you should get a second opinion, which is good practice in any case.
Before obtaining a listing agreement (Authority to sell you business) it is a legal requirement for any Business Broker to supply you with an appraisal value. Personally, I’d be sceptical of any broker who would charge a fee to prepare an appraisal value, unless they have the accreditation of a recognised valuer.
I just want to warn you that (because of the nature of commission sales to brokers) some brokers will tell you that your business is worth several thousands of dollars more than the business is actually worth; they will sell you on the higher valuation, re-condition you to a lower price when feedback comes in and eventually you will be disappointed with the outcome and the longer sales process. You blame the agent/broker that you don’t have the result that you expected, the agent is blaming you for having too high expectations…. Not a great outcome.
At LINK we have a track record of selling 80% of businesses within 5 to 10% of the appraised valuation of the business! In other words; we don’t tell you what you want to hear, but we tell you what you need to hear!
Wherever you are in the country, if you want an honest appraisal value for your business, I can provide you with a free report*
Call me on 021 421 346 or email me at rudy.kokx@linkbusiness.co.nz
*I can only provide you with a full report if I have access (by email) to the following information:
- 2 to 3 years financial statements
- YTD management accounts
- Depreciation schedule
- Approximate Stock at value