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Getting the best price for your business

Written by: Rudy Weber

Article Overview: The main thing to keep in mind when selling a business, is the same thing you need to keep in mind with whatever you are selling - what is the buyer looking for? You get nowhere when you focus on what you want from your buyer; but you can get what you want if you focus on what your buyer might want from you. The basic conundrum is that, here you are - you have a business, and you want to improve your position by converting it to cash. On the other hand, there is a prospective buyer, they have cash, and want to improve their position by converting it into a business - hopefully yours.

Getting the best price for your business

The main thing to keep in mind when selling a business, is the same thing you need to keep in mind with whatever you are selling - what is the buyer looking for? You get nowhere when you focus on what you want from your buyer; but you can get what you want if you focus on what your buyer might want from you. The basic conundrum is that, here you are - you have a business, and you want to improve your position by converting it to cash. On the other hand, there is a prospective buyer, they have cash, and want to improve their position by converting it into a business - hopefully yours.

The perception of value

Your "circle of interest" represents the value of your business to you, and the distance between your circle, and the buyer's circle, the "Price Barrier", is the difference between your perception of the value of your business, and the buyer's perception of its value.

You might start off with a very high value on your business, but your price expectation eventually diminishes (your circle moves to the right, towards the buyer's circle), due to such factors as:
You want to retire
You are sick of this business
Changes in family or partnership circumstances
Frustration at working too hard
Difficulties raising capital to fund further growth
You are offered sufficient price which, combined with any of the above, motivates you to part with your business.
The buyer's "circle of interest" represents their accumulated wealth, and all the effort which has gone into raising it, along with their very real fears of losing with it.

Their interests will move closer to your interests (circle move to the left) when their fears of losing their money are outweighed by confidence factors to an extent where they will begin seeing positive value in your business.

The factors which might shift their perception of the value of your business closer to yours might include:
Synergies with their own business
Wanting to build on your client base
Wanting to acquire new technology
Reliable and attractive profit figures
Experienced personnel.
On the other hand, the factors which might shift the buyers perception away from yours might include:
The perception that your business requires too much of your personal involvement
Lack of systems which would enable a new owner to "slot" readily in
Unreliable profit figures
Insecurity about your suppliers or customers, or position in the marketplace.
For a sale to eventuate, your two circles of interest must eventually meet, at a point where the buyers perception of the value of your business meets your minimum requirement for compensation for all the effort you have put into building up your business.

Whether you have to move further to meet the buyer, or the buyer can be persuaded to meet you, depends upon how much evidence you can produce, to justify your position. The greatest barrier to getting the buyer interested in your business is their fear of losing their money. The best way to prove to them the value of your business, to the extent that they will pay your price, is to give them confidence in his/her ability to make a success of it.

The buyer knows very little about your business, so it is up to you to prove these things to them. The way to do this is through evidence.

Setting a realistic asking price

Setting a realistic asking price is the first, and probably most important step in the selling process.

The price should be set high enough to allow you room to negotiate, but not so high as to frighten off prospective buyers. But at all costs, you want to avoid the risk of UNDER selling your business.

For this reason, as the first part of our selling process, Lloyd's provide a free, no-obligation appraisal of your business, so that you can:

Make an informed decision as to whether selling is indeed a viable option for you at this time, and

Ensure that you can price your business to sell quickly, and for FULL VALUE

Preparing for sale

1. Make yourself redundant

The buyer's greatest fear is that you are the heart and soul of your business and that when you walk out the door, so will the business.

In many cases this is true, because you have built the business around yourself; you have all the knowledge and skills to run the business, and you have great difficulty in delegating the various functions.

What you have is not a business, but a very demanding job from which you can't resign. No wonder you want to sell it! And if it appears like this to the buyer, why would he want to pay perfectly good money to rescue you from your plight? The answer is to...


2. Systematise your business

When you have all the various functions within your business systematized and thoroughly documented, delegation is no longer such a problem. Each person should have a clearly defined role, a chain of command, and a designated set of tasks and procedures which, when carried out competently, leads to measurable and desired outcomes.

A buyer can then see himself fitting comfortably into this business.

3. Document your business

You need to have a business plan, so that you, and everybody in your team, knows exactly where you are headed and how you propose to get there.

As well as documenting your procedures, it also helps to document your relationships with other parties in your marketplace:
With suppliers. Your verbal, or "handshake agreements" look very flimsy to a potential buyer of your business. Converting these into written agreements wherever possible will make your business confidence-inspiring, and at the same time, the very process of putting them into writing will enable you to cement these relationships even further, and perhaps even improve your lines of supply.


With customers. If you can negotiate written agreements with your customers, you can make your business look that much stronger, and of course, the process of securing your outlets can often give you power to go back and re-negotiate your supply agreements.


With other parties. Document your relationships with Industry Regulators, Trade Organisations, Quality Assurance, Therapeutic Goods Administration, Environmental Protection Agencies, Health Department, and a whole host of other parties who have some power or influence over your business. Document these relationships so that a buyer can not only see where your business stands within its industry but also feel confident that its existence is not under any undue threat.


4. Document your profit performance

We are all more or less tax driven, but the trap we set for ourselves is that it then becomes difficult to prove the true profitability of your business to a buyer.

The solution is to adopt transparent, legal, tax avoidance strategies that will enable you to minimise your tax burden, whilst retaining the ability to clearly demonstrate your true profitability to a buyer through "add-backs".
Produce monthly profit reports. Within an open framework, you can produce monthly reports to demonstrate to your buyer your ability to monitor and manage the performance of your business. In hiding things from the taxman (not that you would do such a thing, of course!) it becomes too easy to lose sight of them yourself.


Write up your stock to full value. It is common practice to defer tax liability by undervaluing your true stock levels. By gradually bringing your closing stock figure to full value you retain more effective control, and do nice things to your Gross Profit reports along the way.


Document capital expenditure. Rather than expense capital improvements as repairs and maintenance, capitalise them. This will add value to your balance sheet and improve your demonstrable profit. If you don't fear tax, you can present a much better picture to your potential buyer, his Accountant and Bank Manager.


5. Do your housekeeping

Just as with selling any other sort of property, first impressions count. There are a number of practical steps you can take to create a good first impression to a prospective purchaser. They may seem obvious, but then again, look around, you might be surprised.

By taking these steps, you can not only increase the perception of value to your buyer, but also convert into cash and improved figures, many items which would otherwise be handed over at "no value" to the buyer on settlement:
Tidy up your stock. Sell off obsolete, or slow moving stock items. This will improve both your sales and your Gross Profit. Your buyer will be impressed that you are not holding any unsaleable stock. And it will eliminate any possible arguments over the valuation of such stock during the sale.


Tidy up your plant and equipment. Make your workplace into an efficient working environment. Add a little paint here and there to make things look well maintained. Ensure that you eliminate oil leaks. Anticipate Health Dept. requirements, and sell off and convert into cash any scrap, redundant or obsolete machinery and parts that are cluttering up the place.


Tidy up your staff. Where possible, get your staff to take up their leave and other entitlements prior to sale. Get them to wear uniforms, and make sure they wear safety gear when required.


Tidy up your premises. Have a look around with the eyes of a prospective purchaser. What would it look like to a critical new observer? The condition of your premises can say a lot about your profitability.


Tidy up your debtors. An area of great concern to a prospective purchaser is the state of your Debtors. Based on your figures, the buyer will have to do his cash flow and working capital forecasting to justify the purchase, and may be very nervous about taking on customers who look as though they take forever to pay their accounts. Now is a good time to bring them into line. You can use the improved cash flow to...


Tidy up your creditors and even take those early-settlement discounts. This will create a positive impression of the inherent strength of your business.


Tidy up your balance sheet. It would also help if you could remove from your balance sheet any items which are unrelated to the business being sold, and include, possibly through an asset revaluation reserve or similar, any assets which are not currently listed at their proper value.


Fear and uncertainty

The greatest obstacles to selling your business are fear and uncertainty, and until you can allay these in the mind of your purchaser, price does not even enter into the picture.

There are only two ways you can overcome fear and uncertainty when selling your business:
You can price your business so low that the "Bargain Factor" overcomes the buyer scepticism, or:


You can prove the value of your business through adequate documentation.
Once the evidential quality of your documentation increases, scepticism on the part of your buyer can turn to confidence. And then, in the best scenario, into enthusiasm. Once you can instill enthusiasm into your buyer, you can demand full price for your business.

We hope to give you the tools to convert your prospective buyer into a true enthusiast. The irony is that once you have your business running in a state where it is ready to sell at the best possible price, there is a very good chance that you will no longer need, or wish to sell your business.

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