All Things Financial

SELLING FOR TOP VALUE


INTRODUCTION
Over the last 30 years Aldes Business Brokers have seen fabulous businesses receiving a fraction of their asking price and other very ordinary businesses achieving high prices with one very important aspect standing out - the attitude of the seller:

Why don't most sellers achieve top value for their business ?

The answer in most cases is simply because they treat a buyer as if he were a fool and expect him to make serious decisions without providing quantifiable information. It's like showing someone the outside of your house and saying to them:

"It's got 3 large bedrooms, main en suite, plenty of cupboards, a very nice view, lovely lounge, fitted carpets throughout and airy, fully fitted kitchen. Now if you are a serious buyer, give me an offer in writing and if it is acceptable to me, then I will let you inside to see what you have bought".

Remember, it is the figures that are the inside of the business, not just the premises.

This is how most sellers of businesses are treating buyers and it is the seller who loses out, for the buyer's reaction when there are delays in getting the information, is that there must be something wrong with the business and the seller has something to hide. The buyer's enthusiasm for the business wanes and he looks around for something else.

To create further interest the seller starts dropping his price, offering terms and providing
information which he should have supplied in the first place.

By now the business has been on the market for over a month or more, now buyers' want
to know ' if this is such a good business, why has it not been snapped up, what's wrong with it?'

CONFIDENTIALITY
Sure, as a seller you must demand that your business is treated in a confidential manner and that details are only given to qualified buyers, but once it has been established that the potential buyer has :

♦ the necessary expertise or management to run your business
♦ the necessary cash and the collateral to raise that finance
♦ signed a confidentiality mandate to respect the sensitivity of your business

Then he must be given the information to make a decision.

A seller must remember that his business is in competition with every other business for
sale within the same profit range and if his price is completely out of line, the business
will sit on the market.

FINANCIAL
Nearly all buyers are going to raise some sort of finance to purchase a business. Generally they have a certain amount of cash 30 / 40% and the balance may be raised by means of a
2nd mortgage bond on their home etc. This is perfectly normal. Few buyers are running around with cash in their hands and those that are, want to gear up and go for a larger business. The fact of the matter is, for a buyer to raise money against assets, ie his home and pay you cash, he is going to need financial information about the business.

It doesn't matter how large the collateral he has in his home and how small his present bond is, the financial institutions are not going to lend him a cent until they are satisfied that he can afford to make the repayments from the income he is going to receive, ie from the business and that the business will be able to meet the bond repayments plus give the owner a livable income. To obtain this they require financials.

STEPS TO TAKE TO ENSURE TOP VALUE
You must understand that:

1. no matter how good you think your business is, it will take hard facts to satisfy a buyer;
2. you are entitled to insist that your information is only provided to suitable, qualified buyers;
3. you must establish a realistic market value for your business by getting a valuation
from a reliable business broker;
4. he in turn must give you a detailed basis on how they arrived at their estimate of value. Too many sellers are influenced by high values which are completely unrealistic in the market place. The longer your business is on the market the lower the price you will realise - very often the first offer is the best offer;

The following information is necessary for a buyer to make a decision:

♦ balance sheet/income statements for the last 2 years;
♦ management accounts up to date;
♦ a breakdown of monthly expenses if the above is not available;
♦ monthly turnover figures for the last 12 months, backed up by VAT returns;
♦ list of fixtures & fittings, plant & machinery, ie an asset list with valuations;
♦ age analysis of any debtors carried;
♦ copy of the lease of the premises;
♦ details on present staff, not names, but salaries/wages, length of service, any special
incentives or perks and employment contracts;
♦ write up on the business, ie how long the business has been established, present sales,
how they are achieved; what future prospects are there; why you want to sell.

If you are dealing through a broker you must obtain commitment from them on how your
business will be marketed and what feedback you will receive. You will be asked what terms you would allow to a buyer of your business.

Sellers' often have the same reaction:

No, I want cash. Does that mean for example, if you were selling your business for R1million and someone had R800 000 in cash you wouldn't want to deal with them?

Based on the above example:

♦ most sellers will give a certain amount of terms;
♦ interest rates charged are normally current fixed deposit rates, not current prime plus
rate.

It is important that you as the seller decide what terms you would be prepared to give.
The greater the amount, shows the buyer that you have faith in your business's ability to make the payments, it also widens the scope of buyers one can draw on.

The object is to make your business attractive to as wide a group of buyers as possible thereby obtaining the best possible price.

CONCLUSION
The above is the minimum information a buyer requires before he can make a decision on making an offer on your business. However until the buyer has signed an accepted offer to purchase, which your attorney has approved and the funds have been secured, do not release sensitive information about your business, ie formulae, list of client names, where stock is purchased etc.

In many years of business sales and covering many thousands of negotiations, two areas stand out as the main cause of sellers' not receiving top value and sales collapsing, these are:

♦ problems with the lease on the premises
♦ lack of financial information

If you wish top value, you must have top information prepared before you start selling.