The 6 most important steps you must take when buying or selling a business...increase your chances for success!

Whenever I am talking with clients about buying or selling their business, I am rarely surprised to find that the vast of majorty of clients have little idea as how to go about the process. Many small business owners initially struggle to understand how to sell their business, the steps they need to take, the preparations they need to make, the way that they will market their business and invariably the process for deciding the value of their business. The same can be said, however in the inverse, for those contemplating buying a business. This is especially true for 'first time' buyers.

There are some critical things that every seller and potential business buyer MUST do.

SELLING:

1. Ensure you have properly prepared your business for sale. This includes making sure all your financial reporting (revenues, cost and assets) are properly recorded, classified and detailed. Ensure you have an up to date copy or original of any leases for property, assets or plant & equipment. Make sure your employee records are up to date and ensure you have sufficient accruals for salaries and all on costs and you can demonstrate this to a buyer. Make sure you are properly compliant with all necessary statutory bodies including, local council, planning & permits, licensing, legal, health & safety, reporting (including ATO - Tax, BAS/GST etc) and these records are up to date and available for review by a potential buyer. The list of information you will need to present is dependent on your business type, size and complexity, but the above list should serve as a good start.
2. Ensure you prepare a detailed Information Pack (IM) which will be used to present your business in its best possible light to potential buyers. It will usually include extracts of the above information plus other salient points and data which will show your business is worth buying and more importantly at the value you seek.
3. Selection of a representative, usually an accredited business broker, is also very important. Making sure you select a broker who knows your particular business industry is an advantage. Check that the broker is a proactive marketer of businesses (website format, presentation and listings are always a good guide), check their terms and conditions and what they will charge you to represent you and to sell your business. A face to face meeting when selecting a broker is always important. Building a strong relationship early with clear expectations for the way your business will be represented and managed is critical. The broker will be your key contact with potential buyers and you will also rely heavily on the broker during negotiations. It's important you are both on the same page from the start. Selling a business is a highly emotional experience.
4. Where possible remove as much emotion from the process. You have developed a good and marketable business, it is an asset, but it is not personal. Emotion brings ambiguity, uncertainty and causes disruption to the selling process. It's all about the final pay cheque. In most cases the sale will be a means to an ends for you. A ticket to the next stage of your life. Remember as the saying goes... "a bird in the hand is always better than two in the bush". So, never let emotion, stubborness or pride get in the way of a good deal.
5. Finally, make sure the physical state and presentation of the business is as good as it could be. Expect at any time during the sale process a potential buyer will want to visit the business and make an inspection. Always be ready to show it at its best!
6. Negotiating the sale - see below under "Buying"

BUYING:

1. The most important thing when buying a business is to carefully match the type of business you want to buy to your needs and capabilities and be clear the reasons why you are buying that particular business? It's important to be clear on the skills and experience you have when buying a particular business and in a particular industry. If you have never operated a restaurant before, don't want to work long hours, don't want to deal face to face with customers, don't know anything about food preparation and safety, then it's probably advisable that you don't look at buying a business in the hospitality industry. Be clear on what you bring to the business and what you want out of the business (be it lifestyle, a solid income, an opportunity for family etc). Take some time matching businesses to your needs (personal, professional and financial).
2. When you have found the business you want, approach the broker and make an initial enquiry. Request information regarding the business for your review. Hopefully, if the sellers and the broker have followed the advice given above under "selling" you should get some good information. If you don't get at least 2 to 3 years of the business financials and other information as outlined above, then you need to be insistent on having this information. Without it, you cannot properly assess the quality and value of the business.
3. Competitor check the business against others on the web. Buy now you will know what price the seller is asking and compare this to other like businesses in the market and specifically in the geographic area your business target operates. Is it over valued or under valued when compared to other like business being offered for sale?
4. Undertake a full due diligence on all the financial, commercial and business information and data you have received from the seller or their representative. Your due diligence should not necessarily be limited to the information the seller provides you. There are many additional things you may need to check to ensure the business is commercially solid and sustainable. Due diligence should include physical inspection/s of the business. For due diligence you will need a detailed checklist to ensure you have reviewed all necessary aspects of the business and to ensure you understand any risks, deficiencies and ultimately the potential of the business to perform as you need it to and how it has been presented by the seller when you take over.
5. You will need to determine a value you want to pay for the business. There are many ways to achieve this, but typically the purchase value can be set as a multiple of either the reported revenue or income, or the net profit. This might include some inputs such as revenue or one time costs being extrapolated from the business financial statements to reflect the business at what is termed 'normalised value'. Most industries have and do apply assumed multiples to net profit. For example, in hospitality (restuarants/cafes/bars) it is generally assumed value is 2.1x operating profit, but of course this does not always apply to every hospitality business. It can be a useful starting position.
6. Negotiating the sale. Again, this can be an emotional time for a buyer, especially a 'first time' buyer. Having an advocate or advisor in your corner can be very helpful. There are many ways value can be presented and negotiated and there are also many ways that the terms and conditions of the sale can be set out and agreed; whether this be via a Contract of Sale, Heads of Agreement, or hybrid of both. Both parties will want maximum protection and leverage during the lead up to completion of sale. Remember, a deal is only likely to be struck when both parties have reached a relative 'status quo'. It is very likely that the seller will want very tight and unambiguous conditions forcing a completion of sale quickly and the buyer will want to have maximum flexibility and 'quit' options (e.g. sale pending clauses such as finance, due diligence etc). A Heads of Agreement preceding a Contract of Sale is a good process for aligning these needs between the parties.

During the dilgence and review process, it is also wise for the buyer to start developing a practical business plan as a mud map for how the business will be run post purchase; and outlining the commercial and investment expectations for the business. In many cases this may be required by the buyer's financier (bank or other) to support a loan.

It goes without saying that the buyer and seller will each want to have solid financial/accounting and legal advice along the way.

These are just a few critical steps that business buyers and sellers should consider when involved in the process of a business sale. The process can be, and usually is, an emotional and complex journey; and no less difficult than buying a larger business. Much of the time, the business represents a primary asset for the seller and is the largest capital outlay a buyer will make (apart from the family home). The process and contractual requiremets can also differ from state to state.

BizVet can help both buyers and sellers navigate this complex process and can support due diligence, business preparation and negotiation through our advocacy services. If buying, we can help you develop practical and effective plans for your business. If intending to sell, we can help you develop an exit plan. We can provide end to end services if required.

If you are thinking of buying or selling a small to medium sized business why not contact BizVet by visting us at:

• www.bizvet.com.au
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Let us help you buy or sell your next business.

Written by Daryl Bird. Daryl is a principal advisor with BizVet, advisory and consulting services for small business.

Bizvet provide advisory, review, advocacy and due diligence services for small business.

The BizVet Team