Getting the best price for a small business

The price difference between a poorly presented and a well presented business can be up to 10 times. By ANDREW KENT.

By Andrew Kent

There can be a ten-fold difference between the lowest and highest prices people are paying for small businesses.

The latest BizExchange Index revealed an alarming trend of an increasing number of small business owners selling their businesses for less than a year’s earnings – they were virtually giving the business away.

The market punishes vendors who are poorly prepared and rewards those presenting quality businesses in a professional way.

When you are selling a business, it is very important to consider your potential buyers. For small business, the likely buyers fall into four categories.

1. Your employees, suppliers and customers.
2. The large number of potential new owners currently working for someone else.
3. Experienced business owners.
4. Family members.

In Australia, the first group tends to be the last to know that you are selling, despite the fact that they are recognised as a key buying group. Getting the best price from this market is complicated, which is why it is often the market of last resort.

The complication relates to the sharing of key information during the negotiations when it is still possible that the deal may not proceed and you may be left with a key stakeholder having significant unwanted knowledge of your business.

If this trust issue can be overcome then your knowledge of them can play a part in presenting the business in a positive light. For example, if one of your employees has an open ambition to be their own boss, then you can emphasis this aspect to them.

Alternatively, if a supplier or customer has shown significant interest in the operation aspects of your business, you may be able to demonstrate the advantages of them combining the two businesses.

By far the largest market for people looking to sell a small business is people currently employed elsewhere. Typically they are looking for a business that can provide a reliable income stream and a role that they will enjoy doing.

Unfortunately, the large volume of potential buyers is not necessarily translated into high prices. There are a number of reasons for this, the most significant one being that many of the potential buyers simply cannot finance the purchase.

While it is possible to get a better price by selling under terms – for example with payments spread over a period of time – this also introduces some risk in that the value of the business may be adversely affected by the new owner before you are paid in full.

A safer alternative is to assist them to obtain finance elsewhere. To do this, be prepared to provide some financial history to assist your prospective buyer to get their bank onside. You might also suggest they apply for a loan through BizExchange, which enables them to seek loans from multiple banks by filling out a single form.

If your potential buyers are in a position to afford the business, then the other key thing to promote is the lifestyle potential that the new business may offer. Perhaps it can offer them a sea-change or a tree-change, or the simple appeal of being their own boss.

Be aware that this is a very competitive market, with franchisors commanding most of the attention through high-profile marketing. To get the best price you are going to need to put forward a more compelling offer than the franchisors.

A significant part of this is that as an independent business owner they will truly be their own boss, and their business will be entirely theirs. At the same time, you will need to put some effort into matching the franchisor lifestyle messages in relation to the day-to-day experience of the business owner.

Experienced business owners will pay good money for things they value. The key is understanding what they value. Unlike the first time owners, they won’t be seeking a lifestyle. More than likely they will be looking for a business that can run itself day to day. They want a business they can bring into their existing business structures with a minimum of fuss and some immediate benefits, not only in terms of profit, but also in relation to potential cross promotions, referrals, and joint project work.

A business that depends on the owner operator on a day-to-day basis will not get top dollars. The market is demanding financial history, client lists, forward projections, documented procedures and methodology, etc. Buyers are looking for proof that the business is well run with a good track record and positive outlook.

All of the buyers are wary of deception; any dishonesty on your part will undermine their faith in the business and your presentation of it.

Buyers will discount a business that they don’t trust to try and cover for the unknowns. To get the maximum price it is also important to keep the unknowns to a minimum without drawing attention to the negatives.

A difficult one in this regard is how you handle declining industries. For example, revenue in the Whitsundays diving industry has declined by more than 50% in the past 10 years, with an even greater decline in the number of businesses. Sellers will be emphasising the lifestyle rather than the trend in revenue. But it is one thing to avoid an issue, another to lie about it.

To get the best price, be prepared to present your business so that it attracts the most buyers that can afford to purchase it. A great way to do this is to list it on an independent marketplace that will generate inquiries for you.

This will require that you having plenty of information at hand to respond to various inquiries about different aspects of the business. How you respond to these questions will often determine the price that people will be prepared to pay. If you are not comfortable with this process, then you should use a business adviser or business broker to present your business for you.

Andrew Kent is a director of BizExchange, an independent marketplace for business for sale or seeking investment.