How can you agree on a price in a market where it’s almost impossible to agree on a price? Part 1.

In reality, business buyers and business sellers want the same thing; the best price possible. Unfortunately, in times of economic uncertainty the distance between their two desired prices becomes increasingly difficult to reconcile. This feature article as well as the next one will be discussing methods through which a seller and buyer can agree on price.

A business buyer wants a price that both adequately justifies the risks involved in a business sale, and a price that outweighs the returns of an alternative purchase elsewhere. A business seller needs a price that both satisfies their reasons for selling, and outweighs the alternative of continued ownership.

The seller’s criteria can’t change, nor can the buyer’s alternative purchases. Of all of these criteria, the only one that can be changed is the risk, and if the risk is lowered, the buyer can justify a higher price. Unfortunately, by the time most sellers and buyers come to this realisation, it’s far too late to reduce risk by conventional means. If you’ve found yourself in this position start taking notes, because it’s looking more and more like this decade will require a little more ingenuity, creativity and teamwork to get your business sale across the line.

Not all of these approaches will be applicable or even appropriate for all business sales, but the point is to think outside the box when caught in a stalemate over price. Most sellers would certainly prefer the idea of making a clean break from their business, but signing up for a little extra work after the sale can prove to be an extremely effective tool during negotiations.

Part 1. Design an effective handover period.

This approach costs you nothing but time and can be an extremely effective tool in alleviating the perception of risk. A good handover period can involve any of the following:

a)    Trial period. A trial period is a pre-sale arrangement whereby the potential buyer is allowed to spend a period of time working in the business in order to both verify the cash flow and to learn the ropes on the job. This proves particularly effective for situations where the buyer is sceptical about the business’s week-to-week success, or in situations where the buyer is uncertain about what might be involved for them as a new owner. A trial period is not necessarily designed to teach them how to do the job, but to show them that they can. Remember, a trial period’s primary purpose is to help a buyer make the decision to buy.

b)   On-site Training. Training generally takes place after the exchange of agreements and can be a useful tool in alleviating risk. Generally, a training period will last between two and four weeks though it can be considerably longer depending on the size and complexity of the business. The vendor will stay, working in the business, gradually taking steps to phase themselves out, and install the new owner. The reason for this is that if the buyer is made certain that once they take over the business they will able to continue to run it effectively their perceived risk will be reduced, and all it costs the seller is time.

c)    Introduction to Clients and Suppliers. This should take place after the sale and during the training period. By offering introductions, the buyer can be assured that all of the relevant clients and suppliers will continue to deal with them to the same degree as with the current owner.

d)   Ongoing Phone Assistance. Phone assistance subsequent to the sale and training period is another useful tool. Even with training offered, a cautious buyer will be concerned with the ‘what if’s’ that mightn’t be covered during the training period. This of course doesn’t cover future business issues, but situational solutions. For example, a database needs updating and it would make sense to use a developer familiar with the system. They could simply call you and get the name of the developer who set up the system in the first place.

e)    Non-Competing agreement. To remove the concerns of the buyer, a clause should be written into the contract for the sale of the business that the seller will agree to not compete with the buyer for a period of usually five years. Though this is very commonplace these days, it’s still worth mentioning.

This entire approach is becoming more common than uncommon with business sales today. Most businesses you see on the market will have elements of this style of handover period included or on offer with the sale.To reiterate, the advantage of a good handover period is that though it costs sellers nothing but time, it is one of their most useful tools for alleviating the concerns of a buyer. A good handover period could make the difference between your business selling and not selling.

Keep an eye out for Part 2. Vendor Finance & Earn-Outs.

 - By Zoran Sarabaca
Principal Xcllusive Business Sales
Sell your business with Certainty


Disclaimer: All information in this article is for information purposes only. It should not be taken as financial, legal or any other advice. Individual circumstances of businesses and business owners may vary and have not been taken into consideration in this article. Always seek independent legal and financial advice for any matters regarding business sales.

Share

Survey Results Part 2: Buyers Beware! Why pushing sellers too low could cost you a lifetime of profits.

Before we start, congratulations to our five lucky iPod Shuffle Draw winners- Martin Fernandez, Connie Comber, Tim Sargeant and two others. If you would like to take part in the survey for your chance to win one of five iPod shuffles every month click the link bellow: To take part in the 2012 survey click the link below.

Buyer Confidence Survey

Now that we have two sets of results we can begin to plot how buyers are feeling.

We are more than happy to share this data so let’s take a closer look at what was being asked and the specific results. There were five questions being asked of each entrant. Response was given as a number between one and ten, ‘one’ being a negative response, and ‘ten’ being a positive response.

The questions addressed the following areas:

Question 1: Addresses how likely it is that buyers feel they are going to find a business that suits them in the next six months.

Question 2: Addresses how positive buyers feel about buying a business.

Question 3: Addresses how buyers see the current economic and business climate changing over the next 6 months

Question 4: Addresses how easy buyers feel it would be to finance a business purchase in the current climate

Questions 5: Addresses how buyers feel about the current supply of businesses on the market.

The results are as follows

On almost all topics with the exception of the business finance question (Q4), the results are trending negatively. Though buyers still think it will be difficult to obtain funding (see last Survey Results Blog: The Top 5 Tips to Boost Your Success in Obtaining a Business Loan) it seems that now their major concern is that there are not enough good business for sale, and that they are overpriced.

What’s interesting about this, is that though business buyers don’t think there is a great deal of opportunity at the moment, the survey results also suggest that they are still a surprisingly positive group. Sellers on the other hand are not. More and more frequently sellers are pulling out of sales at the last minute, deciding instead to hold onto the business. So why then, when buyers are so positive, are sellers pulling out at the last minute.

The problem stems from a drop in business valuations. These days, businesses are actually improving, but business values are lower than they were during the Global Financial Crisis.

During the GFC, all business valuations, as they are today, were based on the previous three years trading history, which at the time were solid. What’s happening in 2011, is that in spite of the media reporting that the Australian economy improving, valuations are still based on the previous three years trading history; 2008, 2009 and 2010 – the GFC.

The very nature of how business valuations are conducted means that this drop in business value is largely a three year delayed reaction from a time when business was not so good. Strictly speaking, business valuations aren’t wrong at the moment, but they are certainly less than most business owner’s feel their business is worth and it is because of this, that sellers are pulling out at the end of negotiations.

As an example, let’s say Jeff wants to sell his business. Though he had to tighten his belt during the GFC, his business has otherwise been a successful business. He receives a valuation that is less than he is happy with, but concedes and places his business on the market. After a short while, Jeff enters into price negotiations with a handful of buyers and as you’d expect, the buyers begin to bargain him down. Eventually Jeff manages to agree on a price.

This is where logic kicks in. Jeff realises that based on his businesses current profit trend, he could be making the same amount of money from the business in about two years than if he were to sell it now. He pulls out of the sale and the buyer misses out on a lifetime of profits. So why did Jeff pull out? It simply didn’t make sense to sell the business for that price. Under these circumstances, wouldn’t you have pulled out?

So what can buyers do to avoid spooking their sellers? Remember that a lot of sellers these days have already budged on their desired price before placing their business on the market. Buyers, in an intriguingly strange turn of events, now have to make a business sale worth it for the seller in order to proceed.

In today’s market, a buyer pushing a seller for that extra 10% off the price could mean the difference between loosing sale all together, and gaining a business and it’s future profits that’s already priced cheaper than it should be. It’s a strange turn of events, but for the time being, buyers need to think about the sellers in order to make themselves happy.

Share

The Top 5 Tips to Boost Your Success in Obtaining A Business Loan

Survey Results Part 1: The results are in and it seems that though your average buyer is confident that they will find the business for them, they’re unsure of how they’ll pay for it.

To take part in the survey click here.

When asked about the ease of funding a new business purchase, most prospective business owners responded negatively and it seems that their concerns are not without warrant. In September of this year The Australian reported that business lending in Australia had fallen from $739.9bn in July 2009 to $683.7bn in July 20101. Regardless of the reason, the fact remains that there are countless business buyers out there who are unable to obtain funding. Obviously having a good source of collateral is one of the main elements, but beyond that what else can you as a business buyer do to increase your chances of achieving a successful loan application?

1. Prepare Your Documentation

Prepare yourself as if you are going for a job interview. If you show up unorganised, your loan manager could perceive you as being a high-risk proposition. By the time you sit down in front of your loan manager you should already have the Profit and Loss statements ready (last three years preferable), a completed loan application, a cover letter, and if applicable a business plan. You would be surprised to what degree presentation matters so it may also be worth bringing promotional materials along also such as articles and brochures.

2. Prepare Yourself

You could have all the paperwork prepared, but if you aren’t ready to answer some questions, then your loan manager could perceive that you aren’t ready to borrow some money. Make sure you know as much about the business and your intentions as possible, and rehearse answering the following questions-

  • How much money do you need to borrow?
  • How long will you need to repay it?
  • Do you have a plan in you can’t procure the loan?

Know the answers to these questions before you sit down, and answer them with as much confidence as you can muster.

3. Prepare Your Wardrobe

It’s been said before, but presentation matters. Dress like you’re about to borrow and spend a lot of money.

4. Prepare the Truth

Show a loan manager a perfect business and they’ll show you the door. No business is without risk and if you don’t present these risks and how you intend to address them, the loan manager may rightly assume that you haven’t thought about it. Imagine you’re completing due diligence. As a buyer you dig as deep as you can to uncover any discrepancies with the business, because the potential investment represents your future lively hood. For a loan manager, you are the investment, and of all the risks they could take, perhaps the biggest one, is not knowing the risks.

5. Prepare For Failure

Just because one bank knocks you back, doesn’t mean that another will. Your first business loan will most likely be the most difficult to procure because, having never borrowed this much money before, the banks can perceive you as being a higher risk (which is bad). Use the knock backs to practice and hone your presentation. Focus your efforts on banks that support business types like your own. For example, if you’re buying a SME, research banks that fund SME’s. Keep trying until you succeed, but it’s always important to have a back up plan in place if all else fails.

As a borrower, it’s important to keep in mind that banks make money off loans. They DO want to give them, but only so long as they can trust the borrower. Times are tough at the moment, which does make it harder, but it doesn’t mean you can’t get ahead of the pack. If you are prepared, confident and present well you can greatly increase your chances of obtaining funding. Good Luck!

By Zoran Sarabaca

1Glenda Korporaal, “Banks have been focusing on lending for houses at the expense of business”, The Australian, (http://www.theaustralian.com.au/business/opinion/banks-have-been-focusing-on-lending-for-housing-at-the-expense-of-business/story-e6frg9if-1225928591880), September 24, 2010

Share