Vote for Xcllusive in the 1300AUSTRALIA People’s Choice Awards.

As a brief sway away from our usual articles and reporting, we’d like to take a few moments to request that you vote for us in the People’s Choice Awards 2012.

Our focus on clients, business model and dedication to providing useful, relevant materials to business sellers and buyers is something that we are extremely proud of. To receive recognition for our work and effort through this award would mean a great deal to us and our clients.

If you could please take take a few moments of your time to vote we would really appreciated it. Just a quick click and you’re done!

Click Here to Vote for Us!

- Thank you from the team at Xcllusive Business Sales

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The Survey- What’s being asked and what’s being said. Period 10.

Click here to be taken straight to the survey!

There are 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 for sale 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 current results are as follows

 

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How rising unemployment may affect the business sales market and the saleability of your business

Three months ago I was at my local hotel and noticed a new member of the bar staff. He looked out of place amongst the others behind the bar so I struck up a conversation. Turns out, he used to be a financial analyst with one of Australia’s biggest financial institutions.

These are strange times we live in.

With many major corporations and financial institutions announcing mass layoffs over the past few weeks, a new wave of negativity has been injected into the market. Despite this, recent survey results have actually showed an increase in both a buyer’s likelihood of buying a business (6.9%+) and positivity towards buying a business today (3.1%+)

Given the doom and gloom being reported at the moment, these results may seem incongruous with current events, however they actually tie in quite closely with the motivations that spur business buyers. The motivation for buying a business changes with the economic climate. In positive times the business buyer pool is largely populated with securely employed individuals looking to take a risk by leaving their jobs with the intention of making higher profits than their jobs can provide. In uncertain times however, this motivation couldn’t be farther from their minds.

In September of last year we sold a business to an individual who was leaving their middle management job because they weren’t certain that the job was going to remain secure. This person’s motivations are a perfect example of why many people are buying businesses today: to take control of their financial future and secure their income through investment. With the recent layoffs in middle management, it is expected that this motivation will be the driving force behind many business sales in the months to come.

With this motivation also comes a change in the criteria that most attracts buyers. In times of more certainty, buyers are willing to take more risks in exchange for potential high profits. Though the motivation for high profits still remains, the stability of the business is becoming increasingly more important than it already was for this new pool of buyers. High-profit, high-risk businesses are becoming significantly harder to find buyers for at premium prices, and the reason is this: at the moment buyers are more concerned with financial security than increasing their wealth. It is for this reason that the profit multiplier used to value businesses is dropping.

So how will this affect your business? The more protected your business is, the more likely it is to sell. The factors that are most important to buyers today are as follows-

  • Length of operation
  • Even spread of suppliers
  • Even spread of clients
  • Good lease length with options
  • Solid and thorough financials
  • Limited competition with reasonable barriers to entry

This is not to say that buyers weren’t concerned with these things in the past, but more to say that in the past these factors could be more easily offset by high profits. In contrast, in today’s market they affect the business’s ability to sell or even receive enquiries unless the price is dropped dramatically.

The main point to be taken away from this is that there is a new wave of cautious buyers entering the market. These buyers are in a position where buying a business is increasingly becoming a necessity, but as they are coming from otherwise stable jobs they will be looking for equal stability in their investment. Businesses with higher risk factors will still sell, but it is vital that the risk is offset in the price for which it is marketed. Having more buyers is always a good thing, but the game is changing, and how you play it will determine your success.

By Zoran Sarabaca

Xcllusive Business Sales
Sell your business with Certainty

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Is there really a ‘best time’ to sell your business?

Just how important is timing when selling your business? To answer this question we take a look at the relationship between timing and performance and assess how these factors can affect your eventual selling price.

For most sellers, regardless of their reasons for selling, the goal of a business sale is to get the best price possible for their hard work. One of the most crucial elements in determining a price is the business’s current and most recent performance. It is therefore of the utmost importance to take a rational and measured approach to using this information to not only establish a price for which the business will most likely sell, but also and perhaps more importantly, inform the seller on whether or not now is a good time to sell.

Choosing when to sell a business is not an exact science, and can be even less so in an uncertain economic climate, but there are certain truths that simply don’t change. What follows is an analysis of the three most common trends in a business’s performance as well as suggestions on how to use this information to your advantage.

1. Declining performance or ailing industry.

It is not at all uncommon for business sellers to wait until this point to sell their business. The problems with selling your business whilst it is on a decline may be obvious from the outside, but for many hard working business owners, the problems are often quite hard to accept or even see.

Quite simply, you cannot price the business on historical sales because the trend indicates that those profits are diminishing. So what are your options? The first is to price the business on the most recent year’s profits or lower. This is often a hard decision to execute given the emotional attachment one can have with their business, but in order to attract a buyer it may be the only viable course of action. The second option is to continue running the business until you can demonstrate that that business performance is picking up or levelling out. Though this course of action may mean a few more years in the business, a consistent and steadily performing business is significantly more likely to sell than a declining business, even at the right price.

2. Slightly varied or sustained performance in steady industry

Businesses in this position tend to have a much higher sales success rate than business’s in decline. In these situations, the price is generally based upon the average of the last three to five years’ profits. The important thing to remember if you are selling a business in this state is; you cannot relax whilst the business is on the market. It may not be a quick sale, and given that the strength of consistent businesses is the implication of sustained and unthreatened income, if profits falter, or

drop two years in a row, the primary strength of the business is lost. Far too many businesses in this position have not sold because the owner started to wind down their efforts before the business was sold. The last 100 metres in a marathon can often be the most important.

3. Rising performance in a steady or climbing industry

As one might expect, businesses in a state of growth are the most likely to sell. They tend to sell quicker, gain more enquiries and sell for higher prices. The irony of this is that in situations when a business is most ripe for selling, the owner is the least likely to sell. This isn’t necessarily a bad thing of course; if everybody sold their business as soon as it exhibited signs of growth, nobody would make any money. The point is; if you are thinking of selling, you shouldn’t wait until your business is in decline, a state that is the least appealing to buyers, before you decide to ‘cash in’. Buyers are prepared to pay a lot more for increasing profits.

Though these examples represent a simplified breakdown of what can be an incredibly complex and varied landscape, in all cases, the businesses are priced on their historical and current profits, that is, a relatively short period of time in which the profits are compared in order to project the businesses future performance. It seems that the timing of your business’s profit cycle is therefore central to what kind of return you will get for your investment. So when choosing when to sell your business, if you want the highest price possible, don’t be afraid to make a move whilst your business is improving. It can make the difference between negotiating with one buyer who wants to pay you less, and choosing between a handful of buyers who are fighting to pay you more.

By Zoran Sarabaca
Xcllusive Business Sales
Sell your business with certainty

 

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Selling accounting practices in today’s environment: Five things you can do so you never need clawbacks.

The past few years have seen some changes within the business sales industry, with a noticeable swing in favour of business buyers. Though is more true for certain industries, it couldn’t be less true for accounting practices. The increasing demand for accounting practices for sale has lead to a number of changes in the way that buyers are seeking these businesses, as well as the way in which they’re valued.

Historically, accounting practices were valued at between 50 – 120 cents in the dollar based on market value. So, for example, if the turnover was $1M and the business was valued at $0.70 to the dollar, the business would sell for $700k. This method, despite being used by most professional practices is not without its drawbacks. Being based heavily on the turnover, this method often does not take into account the efficiency of the practice in that higher profit margins are not necessarily rewarded. Furthermore, accounting practices are also hit with clawback clauses under this valuation method, with only 55-70% paid up front. The remaining percentage is usually paid after a 12-month period or similar, subject to the success of the business during that time. Clawback clauses can often be something of a problem for accountants wishing to sell their practice, particularly as once the business sells, the departing owner has no control over its success or failure, despite being financially tied to it.

Overall, this valuation method, though effective, has often left business owners out of pocket due to these clawbacks and a lack of reward to practices with higher profit margins. With an increase in demand for accounting practices however, and a newer generation of buyers entering the industry, it appears that this method is being phased out in favour of Return on Investement (ROI).

As it does with other business types, the ROI method of appraisal takes into account risk versus profit, as opposed to Market Value versus turnover. This shift heralds a substantial change in the way that accounting practices are valued and though there are a number of factors contributing to it, the reason for this change seems to largely be the result of the newer generation of buyers entering the market.

The newer generation of buyers are increasingly accepting ROI valuations for accounting practices. Being that it is the more common valuation method across all industries, these new buyers bring with them an expectation that they paying a price based on the potential future profits as opposed to the current turnover.

With this shift, comes a handful of advantages to well structured businesses. The immediate advantage is that well structured, more profitable practices will be rewarded under this valuation method. The secondary advantage is that it effectively removes the need for clawbacks as the risks that are usually associated with clawbacks (ie. loss of clients), are factored into calculating the ROI. This opens up accounting practice owners to higher immediate returns when it comes time to sell, but it also means that different approaches need to be used during the sale in order to take achieve those returns.

The main issue with circumventing the expectation for clawbacks is the culture of clawbacks associated with accounting practices. In almost no other field are these expected, and though there are good reasons why clawbacks are used in accounting practice sales, there are things that business owners can do to remove their necessity.

The primary reason that clawbacks are used is that there is minimal certainty in regards to which clients will remain with the practice one you have left. In order to address this uncertainty an appropriate handover method must be devised and more in-depth sales document needs to be prepared. The idea is to remove uncertainty through information.  Here are five tips to follow if you are considering selling your practice and want to avoid clawbacks all together.

1)   Be more transparent. Provide an in-depth break down of current clients.
Though this information is usually provided during the due diligence phase, a breakdown of client numbers is absolutely essential to lessening the need for clawbacks. This information is used by buyers to make their biggest purchasing decisions, and should be made as transparent as possible in order to reduce uncertainty in the purchase. You should endeavour to provide, to the best of your abilities, the following information: 

  • Breakup of clients per return type
  • Spread of fee Income
  • Geographical Location of clients
  • Client time with the practice
  • Taxable income per client

2)   Provide accurate descriptions of your relationships to your top clients.
There are two primary reasons why clients will leave a practice after a handover. The first is everyday reasons (change of situation, bankruptcy, death etc), the second is as a result of the handover.  Everyday reasons are addressed in point four of this list, but for the most part, these are just a part of the business. What buyers are really worried about is losing bigger clients as a result of the sale. It is for this reason that they need to be firstly made aware of your relationship to your biggest clients. This means a description of tasks you undertake for them, your history, primary points of contact and the steps you intent to take to enable the new owner to forge a new relationship with these clients. The types of steps you can take are as follows.

3)   Devise a handover period designed to help the incoming owner keep as many clients as possible.
The handover period begins prior to the conclusion of the sale and concludes after the sale has taken place. The primary outcome of a good handover period with accounting practices is to help the incoming owner retain as many clients as possible. It is also advisable that you arrange to call your biggest clients or even visit them with the new owner to facilitate the introduction.  This type of handover period will involve more work from your end, but you keep in mind that if you do it well, you will be significantly reducing the risk of loss of clients to the new owner. By reducing this loss, you are removing, or at the very least, lessening the need for clawbacks.

4)   Provide realistic projections of loss of clients based on history of lost clients.
With your client base protected to the best of your abilities, it may also be worth preparing a projection of client retention over an average year. Include, to the best of your knowledge, how many clients were lost/became inactive, how many clients were gained and the ways in which they were gained. It is important to be open and frank with your analysis. If the majority of your clients are gained through standard marketing then fantastic, however, if a notable portion of new clients are gained through professional referrals it is worth reporting. This type of warts and all approach will increase a buyer’s trust in you and the business, and allow them to make educated decisions rather than risky guesses.

5)   Prepare a sales document outlining the business to be given to enquirers. Make sure you cover the above four points.
Having prepared your clients as well as your business, the final piece of the puzzle is to present it. It’s important to remain frank and open in your sales document. Obviously, the primary purpose of a Sales Memorandum is to sell your business, but it must present the business realistically. Put yourself in the buyer’s shoes. Who’s opinion would you trust more: a mechanic who tells you all the good and bad about a car, or a used car salesmen who tells you it’s a ’dream to drive’? Don’t simply ‘sell’ your business to a buyer, but help them understand it from the inside out. The only reason for having clawbacks in the first place is to offset risk, and if you can remove the risk, you will not have to negate it. As part of this document you should also endeavour to provide, to the best of your abilities, the following information:

  • Full P&L for at least the last three years and YTD
  • Marketing breakup and explanation
  • Annual income month-by month for all three years
  • Skills and qualifications of all the staff within the practice
  • Skills and level of involvement of the owner.

You may find that you feel uncomfortable reporting negatively on your business in this fashion. This is absolutely understandable, and indeed, you should be painting the best possible picture of your business for prospective buyers. Consider this though: Clawbacks exist to protect against risk. If clients are lost during the clawback period you will not get paid for that portion of the business at the conclusion of that period anyway. During this time you have little to no control over any aspect of the business or economy in general and if, heaven forbid, the business suffers severely after you leave, you are held financially accountable despite having no input. The alternative offered here is that you provide a reasonable and honest opinion of the businesses future performance and factor that into your price today. This approach could be the difference between getting paid less later, or more today.

By Zoran Sarabaca
Principal of Xcllusive Business Sales Pty Ltd
Sell your business with Certainty


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Survey 7: With buyer confidence in the pricing and availability of businesses for sale dipping, could this be an opportunity or an indication of things to come?

The past six months worth of results had begun to show some very clear trends, all of which have been completely inverted this survey period, making this one of the biggest turnaround periods we’ve had. Some of these dips may seem alarming, however when it comes to business sales, every cloud has its silver lining.

One of the larger turnarounds came from the ability-to-finance-a-business-purchase question (4), in which confidence had been climbing steadily since June. This survey, confidence in this field dropped almost 8%.  The unique property of this question is that lending restrictions in Australia, set by the larger lenders, haven’t changed much at all in the past two years. This would suggest that responses to this question are often one of sentiment rather than practice. Perhaps the regular media coverage of the worsening financial situation in Europe is affecting perceptions here in Australia; we’ll just have to wait and see.

Questions (1) and (2) which pertain to the likelihood-of-buying-a-business and the positivity-of-buying-a-business-today followed their usual trend of moving in tandem, only this month their upward trend took a small downwards turn. The good news is that though confidence in these areas has dropped, they were only small drops and though it’s only by a hair-width, they remain in the positive.

Confidence in business pricing and availability (5) dropped over 6% this survey period heralding its first drop in 12 months. The results to this question have always been a point of interest for us as it is widely accepted that it is a buyer’s market in the business sales industry. (see AIBB’s Australian Businesses for Sale – Market Indicator) Businesses that used to sell for four and five times profit are now selling for two and three times. The fact is, there are some very well priced businesses out there, with a handful of confident buyers taking advantage of them. Five years ago you were paying as much as twice as what you’re paying for businesses now, meaning that if you can finance your purchase, now may be one of the better times to buy low. Though this is not assured, we can assume that once confidence returns, it is likely that business prices will begin to rise again. Which brings us to the final question.

The big surprise came from the question relating to buyer positivity towards the business and economic climate over the next six months (3), which saw its first serious rise since the survey started over 12 months ago. Jumping almost 9% in positivity, buyers’ perceptions of the changing market have moved swiftly back into the neutral after a year of increasing negativity. It could just be a one off result, but it could also be an indication of things to come.

So, is ‘now’ a good time to buy? Realistically, it could go either way and it’s anybody’s guess until we see economic stability return. That said, the fact still remains that businesses are selling for less than they were five years ago, but as to whether you should buy now; that’s up to you.


As usual, we are happy to bring you an analysis of these bi-monthly results as they come in, but we can’t do it without the results. If you have an interest in the outcomes of these figures please take the time to fill in the survey. It’s just five quick questions and it should take you under 60 seconds.  Your ongoing assistance in gathering this information is extremely important to us in that it enables us to present up-to-date and relevant information to you. Thanks again in advance for your time. Click here to take the survey.

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Survey Month 6: It looks like the upward trend is continuing!

This most recent survey draws to a close the first year of testing and remarkably, has returned to most positive results yet.

The biggest surprise comes from the ability-to-finance-a-business-purchase question (4) in which respondents reported that it would be 4.6% easier to purchase a business than it was two months ago. This rise may not sound like much, but considering that as little as six months ago the finance question was returning steadily falling results, this rebound is extremely positive.

In the business related questions, the question pertaining to business pricing and availability (5) returned a 4.7% increase on the last survey, and the likelihood-of-buying-a-business question (1) jumped 4.8%. The smallest increase came from the positivity-of-buying-a-business-today question (2), returning only a 2.1% increase. That said, question (2) is still returning the highest results of all other fields

The only question to continue returning declining results is the question relating to buyer positivity towards the business and economic climate over the next six months (3). This decline is interesting considering that all other fields are on the rise. It remains to be seen whether the expectation will follow the trend, or the trend, the expectation.

It should be noted that despite all of these increases, the results, though improving, are still only returning average, or slightly above average results. The exciting thing is that if these results continue on their current trend we could be seeing some very serious improvements within the next few months. The reason we can predict this is that in all the results returned, we are starting to see some very clear trends, and the most part, all of those trends are on the up.

The next survey will see the first results returned that would allow us to compare the current market directly with the results a year ago. Once again, we can’t do this without your help so if you’ve got a minute, we’d love to hear from you.

Click here to go to the survey
(just five quick questions)

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Survey Month Five – The Results are looking up!

The end of our tenth month of survey results has seen the upward trend in buyer confidence continue- even after the US stock market crash. The big surprise came from the finance related question. Buyers’ positivity towards their ability to obtain finance for a business purchase increased by a surprising 8.45%, easily the biggest increase yet in any field. Though this still leaves it at around 50% positivity we’re quietly hoping that this is the beginning of a new trend, as an increased ability to obtain finance would reduce the strain on both business buyers and business sellers alike.

Unsurprisingly, of all the fields asked, the only one to trend negatively was the question pertaining to how buyers see the economic and business climate changing over the next six months. This saw almost a 3% drop.

All other fields (likely hood of finding a business, positivity towards buying a business, impressions of the current supply of businesses) saw, on average, an increase of positivity of 3.17% leaving them not quite as good as they were ten months ago but certainly better than six months ago.

So what could this mean for you? As buyer positivity increases we may begin to see more sellers taking advantage of the opportunity of finding a buyer in a positive market. This could mean more good businesses on the market but only time will tell.

We’re really interested in how you feel the market is progressing and would love to get your opinion on it. If you’ve got 30 seconds and would like to go into this year’s final draw to win one of SIX iPod shuffles (that’s right, one more this time) click here to take part in the survey!

Click here to take part in the 2012 survey.

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How can you agree on a price in a market where it’s almost impossible to agree on a price? Part 2.

Last featured article we covered a range of different approaches to designing a handover method in order to aid negotiations using terms of sale. If you missed that article click here for Part 1. This week we’ll be looking at some of the more complicated ways of pushing business sales through. A word of caution though; these next options if mismanaged, can be riskier to the seller, though as with last week’s article, if a price cannot be agreed upon they should be worth considering if the alternative is losing the sale.

2. Vendor Finance

It’s almost common knowledge now that bank finance for businesses is becoming increasingly difficult to obtain. The result of this is that many business sales that should have gone through are now failing because the buyer cannot fund the purchase. One possible solution for this is vendor finance whereby the business seller can provide finance to the buyer with a repayment plan. Usually this is no more than 30% of the business price. Though the seller will often remain a part owner of the business, they generally will not be participating in the profits.

The big advantage of this approach is that it removes the financial hurdle for prospective business buyers. By taking it out of the equation, the seller effectively widen their pool of buyers considerably by making it easier to buy. In a have now, pay later society it sets you apart from the rest. The downside is that it is riskier to the seller, can take a long time finalise, and if the contracts aren’t prepared properly can leave either party open to legal issues. Because of this the seller will charge an interest rate of 2% higher than the current commercial interest and wherever possible, the lent money should ideally be floated against the equipment value in the event that the business takes a downturn.

This solution can be used for businesses of any size, though it should only be considered when absolutely necessary. If you’ve found yourself in a position where vendor finance might have to be used it is absolutely vital that both buyers and sellers have their solicitors construct an airtight contract.

3. Earn-outs

Earn-outs are generally reserved for businesses of bigger consideration. Though earn-outs have their similarities to vendor finance they are not necessarily designed to circumvent the issues with raising finance. More so, they are designed with two things in mind.

a)    To reduce the risk to the purchaser by redistributing it both purchaser and seller

b)   To allow the vendor to maximise the business sales price by carrying some of the risk themselves

So how does it work? In instances where there is high uncertainty regarding the businesses future performance, business owner and buyer agree upon a discounted sales price under the proviso that the amount discounted be settled when certain conditions are met. These conditions are usually related to contracts or profits. Under these circumstances a risky element to the business that would have otherwise lost the sale or resulted in a substantial drop in asking price can now be used as a bargaining chip.

For example, a business makes a $200,000 profit from a yearly contract but this contract is never assured. A buyer perceives this risk and asks for an equal reduction in the asking price. The owner knows that this contract will be renewed, refuses to drop the price and we have a stalemate. Generally, when a business is sold, all risks associated with the business are sold along with it. An earn-out dictates that the seller maintains some degree of risk after the sale. So in this instance the seller could agree to a $100,000 reduction in the asking price on the provision that when the contract is renewed the remaining $100,000 be paid out by the buyer. So rather than force the buyer to swallow a $200,000 risk, both parties now share the risk equally.

This example is just one of many ways that a business earn-out can be structured, meaning that it can cater to a businesses individual needs and situation. The downside to an earn-out is that though the seller does not retain a share in the businesses, they are inevitably tied to the success or non-success of the business. The situation proposed by an earn-out is also ripe for breeding distrust and can often result in relations going sour between buyer and seller. As with vendor finance it is absolutely essential that both parties involved have their solicitors design an airtight contract with all bases and outcomes covered. Earn-outs are complicated and time consuming, but if managed correctly can allow the buyer to alleviate risk, and the seller to maximise the selling value over an extended period of time.

As we covered at the beginning, not all of these approaches may be applicable to your business. For the most part, a well-designed handover could be all that you need to get your business over the line and in many cases, the difficulties involved in a vendor finance or earn-out situation make them more trouble than they are worth. In today’s climate however as the distance between the seller’s lowest price and the buyer’s top price becomes harder to reconcile they are more frequently being utilised as solutions to otherwise unsolvable problems.

The main thing that should be taken from all of these solutions is that there is always a way to get a business across the line. Negotiations should therefore be approached with a problem-solving and positive attitude. It’s a little extra time at the end, but in the scheme of things, if having the business change hands for the best price possible is the goal, it will definitely be worth it.

- 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.

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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.

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