The business-buying-decision is heavily biased towards perception of risk as well as understanding the benefits of a business. This means that you must help buyers understand the real risks in your business – you must try to minimise their fear of the unknown. The more they understand the real business risks the easier it is for them to appreciate the benefits.
The benefits for buyers are not only financial. Benefits may include personal success, independence, or self-fulfillment. They are looking for a particular type and size of business that fits their needs, skills and experience as well as their future plans.
A buyer will be concerned about a range of issues. They may be concerned that goodwill and intellectual property are linked to the owner and won’t transfer after a sale – or perhaps the business has a bad reputation in the market. The buyer may perceive the cost of acquiring goodwill as too high.
Then there are human resources issues: what if there is a large turnover in staff after the sale; what if the managers leave; what are the staff’s long service leave, superannuation and workers compensation liabilities.
Xcllusive uses a model to explain how the two opposing thoughts compete. The overemphasis on risk due to the fear of the unknown creates mistrust. The feelings of mistrust dominate the buyers understanding of the business and their desire to achieve its benefits.
Over the sale period we seek to reduce the buyers’ mistrust and increase their understanding of the benefits. This should help them to make a balanced decision to buy your business.
In contents of the business transaction, Due Diligence (DD) is a term used for an investigation or audit of a potential business that a purchaser is looking to invest in.
Due diligence serves to confirm to a purchaser all material facts in regards to a business. Due Diligence is always done before entering in the agreement for the purchase of the business. Its purpose is to prevent unnecessary harm to all parties involved in the transaction, especially the purchaser.
The facts verified during DD process will vary for different types of businesses. The most common areas of concern are financial, legal and compliance. It is common to use specialist outside adviser for each of specific areas of due diligence.
The cost and timing of DD will depend on the complexity and size of the business being investigated. If any anomalies or undisclosed facts are discovered through the DD process, the purchaser will ether attempt to re-negotiate the price or decide not to proceed with the business purchase.
In a recently undertaken survey of 100 businesses that have been offered for sale by business owners 2 years prior to our survey, of those businesses participating in the survey that were sold, we have found that the average time it took to sell the business was 8.6 months. The advertised price range of the businesses that sold was between 45K and 790K.The data collected has reviled that 47% of the businesses were sold within 6 months, another 35% between 6 months and 1 year and 18% of the businesses took over 1 year to secure the sale.
The following are points that you should pay attention to in order to reduce the time it takes to sell your business.
- Make sure that your business is priced right and not overpriced
- Present your business to buyers transparently
- Have all paperwork and financial records ready for inspection
- Address all issues and uncertainty prior to putting or your business on the market
- Be co-operative and make it easy for buyers to inspect your business
A good business agency or a broker can make the business selling process not only shorter but also help you achieve a sale result that you will be happy with.
It is as if the value of a business is the worlds biggest kept secret. Business owners can spend all their business life (in many cases decades) and not really know the real value of their business. By real value I don’t mean book value, but how much would somebody pay to own it.
Often the owner has a overly optimistic value of what the business could sell for due to anecdotal and inaccurate information they have heard from colleges and acquaintances, mostly not first hand but from somebody who has heard of someone who has sold a business. It is more rumour then the real information.
Another way that business owners guess the value of their business is by looking for businesses advertised in daily papers and on the Internet, searching for a business that is similar in size and in the same industry and then comparing those businesses with their own.
There are two reasons why this method wont give you good indication of your business value. The first is there are no two businesses alike. They all rely differently on their owners, have different customers and different risks associated with them, so you’re not comparing apples with apples. The second reason is that businesses often sell for a price quiet different for the one they are being advertised for or don’t sell at all.
So, how do you than gauge how much your business is worth at any given time of its life?
Like this, first detach yourself emotionally from the business then ask yourself the following question:”Knowing what I know now, about my business, it’s profits, advantages and disadvantages, all its benefits and drawbacks, comparing it to other businesses and investment opportunities that I could invest my money in, how much would I pay for it”
If you answer this question without emotional attachment and honestly, you will find the answer to the biggest mystery for any business owner… the answer to real value of your business.
Losing a crucial employee can be costly to any business. Losses from the business elements that the employee is crucial for together with cost of recruitment and training of the new team member, could be measured in tens of thousands of dollars if not more. Not to mention the difficulty in explaining to buyers the sudden drop in profits due to this event and decrease in their confidence in sustainability of the future business (If the loss of one employee can cost a business so much how much will a change of ownership will cost?)
So reading the above, one could argue that there is no case to be made for telling the employees about the business sale. But lets look at this from the employee’s point of view. What they want is a good environment and income security. It is not the possible change of ownership that makes them nervous but it is the possible LOSS of their JOB that makes them nervous. They will start looking for a new job if they feel that their job security is being threatened.
So if you can assure your employees that they are necessary for the running of the business for the new owner as much as they are to you, this will reduce the chances of the loss of crucial staff through the process and you will also make the whole process much easier.
If your employees know that you are selling the business, you wont have to meet potential buyers in secrecy, the due diligence process will be so much easier, buyers will be able to talk to your employees and form a better judgment of your business.
One more point to consider, very often businesses do sell to management or employees so you never know maybe your buyer is your current employee. The only way to find out is to ask.
Selling a business can take time so you need to make sure you attract and negotiate with suitable buyers from the start. If you don’t the process could blow out to years and result in you receiving less than market price.
Many business owners find it takes several years to sell their businesses and when they do the price is a lot less than their expectation and often less than the market value. How does this happen?
The first few weeks of selling your business are critical. Most buyers are monitoring the market and waiting for suitable businesses to become available. Your best buyers are the ones that show interest as soon as the business goes on the market. They are seeking to invest in businesses with sustainable incomes, with definable risks and good returns. They will be either speculative buyers looking for a bargain or more conservative buyers looking for a secure investment. They are sophisticated and unlikely to pay more than the market value of a business.
If you overprice your business you will first attract buyers who are looking at larger scale businesses. They will not see value in your business. At the same time you will not attract buyers who can afford the true value of your business because of the high advertised price.
Inevitably the business stays on the market with little interest being shown. You therefore drop the price to the true value of the business. Now buyers who can afford it will notice the business but will perceive it to be flawed because it has been on the market for a long time. This will prejudice them against buying it.
With no alternative you drop the price to less than market value to encourage interest. The property is now snapped up by bargain hunters.
At Xcllusive we recommend that when selling your business you need to demonstrate the value of your business to a potential investor and price it accordingly. This ensures you attract the right buyers at the right time and receive the true value of your business.