Pricing Your Business: Why leaving room for negotiation can leave you out of pocket

As a broker I deal with this issue every day. I’ve seen it with every business type and size, so when I say this, you can know that I’m speaking only from experience: If you don’t price your business correctly it won’t sell.

Allow me to illustrate. You’re selling your business. Broker A performs a thorough valuation and values your business at $315,000. Broker B doesn’t perform a valuation and tells you they can sell it for $430,000. You look at these figures, and you remember all the hard work, money, time and effort you’ve put in and you think to yourself, “The buyers will probably talk me down anyway, but maybe there’s someone out there who’s willing to pay it.” You begin advertising your business at $430,000.

Meet Jim. Jim is looking for a business type just like your own around $300,000. Jim is the person who will buy your business; you will not find a more appropriate buyer. The problem is, that Jim never enquires about your business because it’s priced well out of his price range.

Meet Mark. Mark is looking for a business type just like your own around $400,000. Mark immediately enquires about your business because it’s priced exactly within his price range but straight away sees that it is over priced. He does not enquire further because a) he is not looking for a $315,000 business and b) because he is not comfortable making an offer so far below the asking price. Mark is not at all suited to buying your business, but he, and others like him, are the only people who will enquire because they are the only people that your price is advertising to.

After about four months you decide to drop the price to its valued price of $315,000 in the hopes to attract Jim again. Will it work? Unfortunately not. If Jim hasn’t already bought another business, he’ll have just seen the business drop in value by nearly 30% of its originally advertised price and he no longer sees it as a safe purchase.

After about six months, every applicable buyer, including Jim, will have seen your business advertised at least once, and will no longer be interested. The business is now suffering from what is called ‘the stale business effect’. So you do what most sellers in your position do; drop the price again to regain interest from the buyer pool.
Does this work? Yes, Jim finally enquires, but not about your $315,000 business, a price which he would have happily paid six months ago. Jim enquires about your $280,000 business that has dropped in value twice; a business that he knows you are desperate to sell. Thanks to the six months on the market, he can safely assume that there are no other interested buyers and as a result, can continue to push you down on the price without any sense of personal urgency.

Business sales is an industry in which one in three good businesses sell. So what puts that ‘one’ ahead of the other two? The price.

Anything can sell if it’s at the right price, and you have to remember that as a business seller, your business is worth more to you than anyone else. You have put in all the hard work, money, time and effort. So when someone tells you they can sell your business for 30% more than it was valued, your instinct will be to choose that price.

When it comes to price, logic must always take the place of instinct. So how can you avoid this outcome? Ask yourself, ‘would you pay the price that you are asking for your business?’. Knowing all that you do, if the answer is no, then you can’t expect someone else to.

If you would like to talk to us about valuing or selling your business don’t hesitate to call us on (02) 9817 3331.

- By Zoran Sarabaca

DISCLAIMER: The information contained in this blog is for information purposes only. It is not meant to be considered as business advice. The points of view expressed represent reactions to the current business market and it should be noted that the market may be subject to change in the future. Reader’s specific circumstances may be different and have not been taken into consideration. Always consult with your professional advisors for any business advice.

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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.

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Vodcast: Everything you need to know about selling your business but never asked.

From The Vault: Back in 2010, Dr Greg Chapman, Director of Empower Business Solutions spoke to Zoran Sarabaca about how to sell a business. The result of that interview is a series in-depth, common sense pieces of advice that EVERY business owner should know.

The vodcast covers everything from what buyers are looking for, to how to calculate goodwill, to marketing approaches, to what you should be doing 12 months in advance of selling. A full list of topics can be found at the bottom of this page by clicking here.

Part one is packed with awesome tips and advice for business owners and sellers and if you’re really keen there’s a link at the end and below the vodcast to Part 2 where the advice and tips continue.

Watch the video bellow for Part 1. At the end of the video you can click the link for Part 2.
Interview conducted by Dr. Greg Chapman (MBA)
Suite 22 / 738 Burke Rd,
Camberwell, Victoria 3124
www.gregchapman.biz

If you would like to speak to Zoran Sarabaca about your personal business sales situation please don’t hesitate to call us on 02 9817 3331 or fill in an enquiry.

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


Topics Covered In Vodcast Part 1:

  • What are buyers actually looking for in a business?
  • How do you price a business?
  • How is goodwill calculated?
  • What types of businesses get the best price?
  • What should you do to plan for you sale?
  • How do you sell a business that is dependent on the owner?
  • Planning 12 months in advance of selling?
  • How do you avoid a business on the market going ‘stale’?
  • How to market a business for sale. (Passive Vs Active)
  • The top 3 things to prepare before you sell.

Topics Covered in Vodast Part 2:

  • What problems occur during due diligence that can kill the sale?
  • How to manage the business handover?
  • Examples of past good business sales.
  • What are the costs involved in selling a business?
  • What is the 1st step to selling your business?
  • How do you tell the difference good and bad business sale advice?
  • Suggested resources for business sellers.
  • Where to go for more advice.

 

 

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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

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Why are Today’s Business Owners Turning Down Their Best Offers?

‘Holding Out’ can be a very successful negotiating technique, but when it comes to business sales, if you’re not careful, it could cost you more than just your hottest leads.

Six Months ago, I was approached by a client who wanted to sell her business. After the necessary preparation, it was placed on the market for $160,000 and the first wave of offers, though good, came in at around twenty percent less than she had wanted. Against our best advice, the seller contacted the buyers directly and instructed them to look elsewhere, choosing instead to hold out for better offers. Four months later, her business went into liquidation and was sold for stock. What did she do wrong?

This problem stems from, what can only be described as a limited buyer pool, a great example of which can be observed in the advertising undertaken for the business.

The business in question had a three-week run in the classifieds. The first week it received seven enquiries. The second week: three enquiries. The last week it received only one enquiry. Though this is a perfect example of buyer interest dwindling, it’s not the best. The best example of diminishing buyer interest was observed when a revamped advertisement was run again, three months later. Over the course of the three-week run, it did not receive a single enquiry.

In six weeks of paid advertising there were more enquiries in the first week than the following five.

This phenomenon isn’t reserved solely for newspaper advertising. It’s exactly the same story for web advertising and direct mail also.

What can be drawn from this is that the pool of buyers looking for  certain business types is not unlimited. At any given time, there are as little as fifty viable buyers in the market and this group isn’t self-replenishing. If your business has been on the market for six months, the people looking at it are, nine times out of ten, the same people who saw it on the market when it was first placed. The first wave of offers is usually the best because by the time the second wave comes, the buyers making those offers have been watching your business not selling.

At this point it would fair to ask what to do when the first set of offers doesn’t meet expectations. Keep in mind that if you receive an offer that is lower than your asking price, the buyer making that offer is not out to insult or swindle you; it’s just part of the game. Furthermore, it is this first run of leads that give you an indication as to what the market sees your business to be worth. As a seller, it’s your job to present your business in such a way as to show the buyers why you feel your business is worth what you say it’s worth. Work with them, as opposed to against them and nine times out of ten, you will find a price that’s good for the buyer, and good for you.

- Zoran Sarabaca

Principal

Xcllusive Business Brokers

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SELLERS BEWARE: Dispelling the top 5 Myths of Business Sales.


Most business owners that decide to sell have never sold a business in the past. This sale is arguably the most important of your career, and what follows, are the top five exit strategy mistakes as observed by Xcllusive Business Brokers.   

Myth #1: “Find the price you’re happy with, then double it to leave room for negotiation”

This myth is responsible for countless businesses selling for well below their value or worse- not selling at all. What may seem like a very clever negotiation technique in actuality becomes a very effective method of pricing oneself out of the market. Consider this example- Your business has been valued at $500,000. You place it on the market at $1,000,000. What happens next?

Firstly, the buyers who are looking at businesses that are worth $500,000 won’t be looking at your business because it’s well above their price range. Secondly, the buyers who are looking for businesses worth $1,000,000 WILL look at your business, but will quickly see that it is horrendously overpriced, and move onto another business. Thirdly, after a period of usually about six months, you will slowly be forced to drop your business back down to its original valuation of $500,000 which is what you should have received in the first place. By this stage, the buyers will have seen your business HALVE IN VALUE whilst on the market, and will justifiably think that there is something wrong. Finally, you will be forced to sell the business for something between $300-$400k; a great deal less than it is actually worth, because the buyers confidence in your businesses apparent plummeting value doesn’t allow for much more. In the end, it’s a choice between selling it quickly for what it’s worth, and selling it for considerably less than it’s worth after close to nine months on the market. This scenario makes it sound like we’re just trying to scare you, but we see it time and time again.

Myth #2: “Businesses constantly sell for many times their real value- well over the price that the owner was willing to accept”

This one stems from the human tendency to buy on emotion rather than logic. Yes it’s true that occasionally we will indulge and look at that article of clothing that’s a little above our budget. The same is true for cars, TV’s, furniture, even houses, BUT, the likely-hood of somebody indulging on what is a fairly substantial investment- like a business, is slim to none. When buying a business people will always carefully examine, evaluate and compare every tiny facet of their potential investment. For the most part, they wont even make a purchasing decision without acquiring external advice. They, their solicitors and their accountants will be far too busy gauging the business risks and benefits to even think about making an emotional purchase. The potential for big losses and the extended timeframe of the buying process means that an emotional purchase is highly unlikely.

Myth #3: “Keep problems with the business to yourself, the buyers probably won’t find out.”

This myth is dangerous for two reasons. Firstly, if you don’t disclose the problems from the very beginning, it is almost guaranteed that as the buyer delves deeper into the buying process, and follows through with due diligence, any issues will be discovered. From here, one of two things can happen- either the potential buyer is lost completely, or you will be drawn back to the negotiating table to substantially discount the final figure.

The second reason could be even more damaging. If the buyer doesn’t discover the issue during the business investigation process, and suffers a loss due to an undisclosed issue, the business seller could be liable. It’s important to remember that the legal consequences and financial losses at this point are often substantial.

In the end, disclosing all issues and future known business difficulties will increase your credibility as a seller and aid you considerably during negotiations.

Myth #4: “I don’t need to prepare anything, if buyers like my business, they’ll buy it”

At Xcllusive, we ran a survey of businesses on offer on the market and found that, amazingly only two out of ten businesses had some sort of sales information prepared for potential purchasers.

On the other side of that, when asked, buyers expressed that their number one complaint was that they were not able to get enough information from sellers. What buyers want, is an in depth understanding of the business so as to instantly assess their level of interest in the business on offer. Without such available information many are not prepared to make any purchasing decisions. In fact, many buyers have had the experience of finding a business that they wanted, but not proceeding with the sale because the seller made it difficult to acquire all the information needed to asses the opportunity.

Myth #5: “Buyers wont get access to any documents, and be given only limited information until they’ve paid a non-refundable deposit.”

This common mistake stems from the genuine fear that the confidential information will leak out, and as a consequence they could loose customers, employees, or the business altogether. Though it is important to be careful regarding to whom you disclose information and how you go about it in order to protect your asset, the fact is that people need to understand your business in order to pay money for it. It’s unrealistic to expect people to pay a non-refundable deposit prior to receiving any important information. When it comes down to it- would you?

To summarise- if you wish to be successful in selling your business-

•    Ignore the misconceptions and hearsay you may hear from acquaintances.
•    Get good advice from professionals.
•    Prepare yourself and your business.
•    Price your business realistically.
•    Be prepared to reveal some business secrets to potential buyers.

And most importantly, employ a good team to help you throughout the process.

By Zoran Sarabaca
Principal Xcllusive Business Brokers Sydney
Sell your business with Certainty

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Shortage Of Good Businesses

With the fallout from the GFC finally beginning to settle, buyers are returning to the market, but leaving empty handed.

As it stands today, there are still not enough good businesses to meet the ever increasing demand from buyers. “Why is this the case?”

The current trends suggest that sellers have been reluctant to put their businesses on the market because valuations have dropped. Valuations, based primarily on trading profits, were strongly affected by the global recession in the 2008-09 financial year. Now however, with business confidence returning and financial indicators pointing to a good recovery in the Australian economy, the majority of business profit and loss statements are still reflecting the image of a far bleaker period; an image no longer indicative of their current value. Valuations under these circumstances, though certainly not incorrect, are more often than not, less than what the seller is looking for. This directly results in potential sellers being forced to to hold on to their business as they wait for profits to re-build.

As in a classic supply and demand scenario, well-performing businesses need not take that path. The ever increasing numbers in the buyers market opens the door for businesses that have performed solidly during the economic downturn.

Good businesses are selling and they are selling extremely well.

The primary hurdle within the business sales sector, until now, has been restoring buyer confidence. With the proper preparation a good business will sell high, and sell fast.

The past 12 months have been exceptionally good for clients of Xcllusive with the sale of several businesses occurring within a matter of weeks from being placed on the market. Good brokers everywhere will tell you similar stories, but the one common theme sung over and over again is that these businesses were priced correctly and adequately prepared for sale. The sellers knew what they were selling and the buyers knew what they were buying. When it comes down to it, if you have a strongly performing business, with the right preparation, you will find a buyer, and you will find them fast. The shortage of good businesses on the market assures it.

-From Xcllusive Newsletter Autumn 2010

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What’s your business worth in the current economic climate

In spite of reports that consumer spending is buoyant, governments around the world, at their highest levels, are not prepared to forecast a date for full recovery from the current Global Financial Crisis.  So, how is ‘near recession’ impacting on the worth of your business?

The economic situation has killed the market, When the bottom fell out of the US stock market in August, 2008, the global shockwave brought everything to a shuddering halt. When we tracked inquiries from buyers in our office we found that inquiries dropped 80 per cent last year.

This is good news for businesses surviving the current economic downtown. Businesses experiencing steady or increased profit margins could be worth even more than they were before the financial crisis.

It is true that the Global Financial Crisis (GFC) knocked the stuffing out of the share market when it hit in 2008. and it is true that there is no leading economist prepared to forecast an end to the current ‘near recession’. It is also true that the value of most business has declined. however, good businesses could still hold their price.

For businesses deciding to sell, the good news is that financial uncertainty always breeds investors and potential business owners who see tough times as a chance to get a good deal. And if your business is surviving these tough times, the news gets better.

As long as it is not going down and makes a sustaining income, the business is valuable and buyers will always have you on their radar. Purchasing any business during a financial slowdown is often motivated by the desire to realise a good profit when times get better. The downside is that when selling now you will have to be even more realistic about your price. This does not mean giving away your business to bargain hunters. It means truly satisfying yourself that you are getting what it’s worth.

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You will close the deal if you let the buyer see everything

Playing your cards close to your chest may be the way to go in business, but not if you are trying to sell it for the best price.

So you have a potential buyer for your business. Congratulations! Marketing or advertising your business has paid off…so far.

Only when a prospect is sure that your business is going to go on making money into the future will you be able to close the deal. So the mantra is: “Don’t look as if you are holding back. Give them everything.”

Getting people to look at the sale of your business more closely is admirable, but getting the deal across the line is a whole other ball game. It usually means full access to all paperwork. Be prepared to go into everything, so the purchaser of your business can see where the good supersedes the difficulty.

Transparency

Your business operations must be transparent. If it’s all too much homework, raises too many questions or just looks too har, the chances are you may lose your buyer.

If they don’t understand your business quickly they will lose confidence.

You can give a buyer “everything” without having to give away your best trade secrets if you focus on what’s in it for them. Brush up your track record. Lay out your business potential. Reveal hidden strategies and point out where further savings can be made.

Zoran Sarabaca

Principal

Xcllusive

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Cheap Coffee is Hurting Business Value

Today’s Coffee shops and restaurants are more popular and busier than ever. To see evidence of this just walk down any of the popular eating places in Sydney’s Inner west, Eastern Suburbs or any other popular eating area in Sydney and you will hardly be able to find a place without reservations. 

Both supply and demand for these types of businesses are high yet the prices they sell for are very disappointing for the owners that have put in many hard working years of their life building them. 

So why is this the case?  Because, the price of coffee and restaurant food hasn’t followed the inflation rate, increase in rents and labour cost. 

Over the last decade the rise in commercial property value has pushed commercial rents up, especially retail rents, not only in the shopping centres but also on the street. The increase in rents together with increase in labour cost has made margins for the small retailer much lower than a decade ago. 

Nowhere is this squeeze more obvious than in the family owned restaurants and coffee shops. Goodwill of these businesses is tightly connected to the location, which makes rent negotiation very hard for the tenant when the lease comes up for review. They are also highly labour intensive. 

The logical step to combat shrinking margins would be to increase the prices to compensate for the increasing costs. However, because of the personal connection felt between the business owner and their customers and the unfounded fear of losing them to the competition if the price of coffee is lifted by a few cents has made many owners absorb this cost over the years. 

To compensate, operators are working longer hours and increasing services that they are offering. Restaurants and coffee shops that in the past have never offered takeaway food or space for functions are doing so now. Establishments that have been operating with one or two days off during the week are now open seven days. Yet you still in Sydney can find coffee for the same price that you could ten years ago. So when the owner decides to sell their business, they receive a rude shock when they realise that their business is worth less than what it did when they bought it 10 years ago.

A decade ago they were working normal hours and making good money. Today they are burned out by the hard work and long hours and still making the same amount of money, except that the average wage is much higher today than what it was when they started so their good earnings then are not so good now. This directly affects the business sale price and pushes it downwards. 

So in order to achieve a good price for your food business, good margins must exist. Good margins will ensure that the owners work reasonable hours and achieve good financial reward for the hard work they put into running their business. It is inevitable that the price of food and coffee in restaurants and coffee lounges have to go up. Even if this may prompt the Australian Reserve Bank Chairman to raises the interest rates again to stop inflation from getting out of control.

Zoran Sarabaca

Principal

Xcllusive

Sydney Business Brokers

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