Is my business sellable

As a business owner, you are passionate about your business. Your business is most likely the fruit of a rollercoaster ride of highs and lows, from finding a bank which has enough belief in your business to make it happen, to finally achieving those targets you only dreamt of... to taking a knock from a competitor... to starting again. For most business owners however, there comes a day where you have to consider selling your business.
 
Because your business is the result of your blood, sweat, and tears you have to make sure that you will be able to receive a value that is fair compensation for the real worth of your business. A person is more productive at the last minute, but when it comes to preparation for the sale of your business, you will have to make an early start. There are a couple of key steps you must consider closer to sale date:
 
Consider the Reason for the Sale
 
It is very important to consider the timing of the sale of your business in terms of the readiness and ability to sell. As noted, businesses are put up for sale for different reasons and are carefully considered by buyers. Reasons for sale include:

  • Death or sickness
  • Retirement
  • Ownership disputes
  • Boredom

As a business owner, you should try and find ways to make the sale of your business more appealing to the buyer such as showing the buyer a history of growing profits, consistency of earnings and reliability on customer and supplier loyalty.
 
Business owners should be careful not to fall in to the trap of keeping profits as low as possible to reduce annual tax bills at the cost of not being able to prove consistent profitability and earnings.
 
Consider the Timing of the Sale
It is important to ensure that you have reliable financial records for a period of at least two years before the planned sale. You should ensure that you have sound business structures and customer and supplier loyalty, as this will promote confidence in the buyer that he/she will be able to transition into your business smoothly after the sale. It is a good idea to consult your financial advisor on possible improvements you can make to your business structure and financial records in order to prevent possible shortcomings. Good preparation of your documents include gathering your financial statements, tax returns and assessments, a list of all equipment to be sold and all possible supplier and customer contracts.
 
Determining the Value of Your Business
There are three main methods of valuing a company. The first method involves valuing a business, based on sales. A multiple is determined and multiplied by the company's annual sales. The multiple depends on many factors, including the type of business, the predictability, sales etc. Generally the industry multiple is the starting point and it is then adjusted, based on specifics for the company. If your business has low fixed cost, few assets and little retained earnings, the sales multiple technique may be appropriate.
 
The seller then projects this stream of cash for five years or more. The future cash flows are then discounted to the present day, based on a discount rate. This method of valuation is often very subjective and two different experts may have different values based on seller projections. It is advisable to appoint a trusted advisor to assist you with this type of valuation.
 
Where a business has no history of profits, the assets may be used to value the business. This is the third method of valuing a business. Where the assets will be used to value the business, a professional valuator will have to be employed to value the assets.
 
Corporate Advisors
It is advisable to appoint a corporate advisor to assist with the valuation of the business and the negotiations for the sale thereof. The valuation and negotiation process can be very complex and often an experienced advisor can assist with getting the best price for your business.
 
The Buyer
When finding a buyer, it is important to keep your emotions out of the equation. It is best practice to at the very least have two proposed buyers. Consideration should be given to the buyer's ability to buy the business-whether the transaction will be a cash or financed purchase. Remember that the sale of a business is subject to negotiation. Flexibility, within reason, is required for the sale of your business.
 
In summary, your business is sellable when your plan to sell is accompanied by good planning and surrounding yourself with experienced advisors to negotiate the best possible selling price for your business.