How to sell your small business for big bucks
Tuesday, January 13, 2015/
So, you’re thinking about how to sell a business. You’re not alone.
In fact, figures showed an increase in the number of businesses for sale in Australia in 2014, hitting an all-time high of 41,200 enterprises up for grabs in October last year.
But in an overcrowded market, how do you get the best price for your business? And more importantly, how do you make a play for the big bucks?
SmartCompany takes a look at all your burning questions.
So, I think I want to sell my business. Where do I start?
When SmartCompany asked the experts, they resoundingly told us the first thing you need to do when selling your business is prepare yourself – mentally.
Nicole Kersh, who successfully sold her e-commerce site 4Cabling for an undisclosed sum in September last year, told SmartCompany the financial aspect of selling your business is just one side of the coin.
“The emotional part is huge,” says Kersh. “It can be a very confronting experience because you do lose a little part of yourself.”
Kersh, who believes she suffered separation anxiety when she let go of the business she launched at age 21, says the best way to prepare yourself mentally is to think about the end game long before you decide to sell.
“As an entrepreneur, you need to think about it at the start. You always need to know your exit strategy,” she says.
Zoran Sarabaca, principal of Xcllusive Business Sales, agrees a business owner should think about selling long before they are actually ready to get out or don’t have an alternative option.
Sarabaca say the best place to start is by asking yourself a few important questions.
“Consider, what’s your starting position? What’s your exit position? What is the deal below the one you ideally want, or your lowest acceptable offer? And what’s the plan if you don’t get that?” he says.
He says the key to preparing a business for sale is to look at it from the seller’s point of view.
Okay then, what are buyers actually looking for?
Sarabaca believes the most attractive businesses are those with the least amount of risk and uncertainty for the buyer, and those that rely as little as possible on the owner.
“The least reliant it is on you, the more people can buy your business,” he says.
Jason Cunningham, the founding partner of full-service financial firm The Practice, agrees buyers look for a business that does not rely on its current owner – as well as some other wish list items.
“A great business for sale has also got kick ass employees, the best type of clients, the right people following right process and the most amazing cash flow,” says Cunningham.
“Someone will give you a dirty big, life changing cheque for that sort of business, so drive towards that and, if you don’t sell, it’s not so bad to have a business like that, is it?”
He says sellers should keep an open mind about the type of buyer they will appeal to, pointing out buyers can range from your employees, existing competitors or bigger listed companies that will happily “swallow you up”.
All right, then how do I work out how much my business is actually worth?
The broad value of a business can be determined by multiplying a business’s earnings before interest and tax (EBIT) by the growth potential of the business, and Cunningham says increasing that multiple is the key to getting a good sale price.
“How do you increase the multiple? Multiples will be higher if there’s an expected continuity of the business once the owner exits, if your customers are coming back, and if there is regular cash flow.”
Sarabaca says a more specific way to determine the value of your business is through a combination of the profit the enterprise generates and the risks associated with the venture.
He says while profit can be easily calculated, determining the risks for a potential buyer is not an exact science.
“For most business owners, it is unrealistic to know all the risks,” says Sarabaca, who suggests reaching out to as many sources as possible to help determine this intangible factor.
He suggests talking to more than one adviser when getting an independent valuation of the business; including your accountant, an independent accountant and a business broker.
“All the knowledge then combines together and you can figure out what your market value is.”
Sarabaca says just like in the real estate game, one of the biggest mistakes you can make is overpricing a business, leaving it to go stale on the market.
“If you were the buyer and not the seller, would you pay the amount? If you’d say yes straight away, it’s too low. If you’d say no, it’s overpriced. If you’d say yes but I’d want to check all the numbers, you’re in the right spot.”
But if I’m trying not to overprice my business, how will I know I’m getting the best price?
Our experts say the easiest way to know if you’re getting the best price is to watch the market and look at other comparable sales, just like house hunters do.
Cunningham believes the type of buyer also plays a big role in determining the best price.
“If I sold my business to a like business, you might be looking at three or four times EBIT. But a bigger business may be six to ten times,” he says.
Kersh says she was approached by a few competitors in the lead up to the sale of 4Cabling, which gave her an indication of how much she should be looking at.
“Every industry has different multipliers, and for us as a tech startup, the nature of the valuation always changes,” she says.
“But you need to align expectations with reality. It’s like selling a house, always try to get the best possible price while being grateful and realistic.”
So, when is the best time to sell?
Sarabaca says most businesses go through four phases: startup, growth, maturity and decline.
“The best point to sell your business is just at the start of the mature stage,” he says.
“Don’t wait for the decline of the industry, the product or the business. Don’t think about it [selling] during the startup stage when you’re just trying to stay alive. The best time is somewhere between the growth and the maturity stage – don’t wait until you’re on the other side.”
Cunningham reminds business owners there is never an ideal time to start or exit a business.
“You might miss the boat if you wait till it’s perfect. It’s never going to be perfect, so just do it when it’s right for you.”
I’ve seen businesses in my industry sell for a motza. What do the companies that go for the big bucks look like and how can I make my business as appealing?
Cunningham says it’s a combination of all the elements of your business that will attract the big offers, including your product development, marketing, sales, fulfilment, support and even your admin.
“Look at your business from horizontal perspective. The financials are important, but it’s the drivers of those financials that are vital.”
Sarabaca says the variables that will get you the big bucks include:
- having good management structure in place, such as a board of directors;
- still having an ‘upside’ to go in terms of growth;
- having high barriers to entry or being not easily able to be copied; and
- being within an expanding or niche industry.
“The list is long but anecdotally, the ones that really sell quickly and for a good price are the businesses with a niche.”
And, just in case I don’t get that hundred million dollar takeover bid, how do I avoid my business being left on the shelf?
Xcllusive Business Sales last year did a survey of 700 buyers that didn’t end up buying a business after looking at the market for a period of 12 months.
Asking the buyers why they hadn’t purchased a business, Sarabaca says only 20% said they couldn’t find what they wanted.
“Around 40% said they found businesses they liked but they couldn’t get enough information to determine if they should proceed or not, because the owners were too secretive to open up their books. Another 40% said they found a business they liked, but it was overpriced,” he says.
“If you do those things right – you give the right information and you don’t overprice the business – you will really improve your chances to sell your business, and sell it for more.”