The decision to sell your venture can be an extremely difficult one – most business owners have put a significant amount of time, resource and energy into their venture.

Selling can be a lengthy process – and making this decision is long before you’ve found someone interested in buying.

How do I start?

Determining a realistic price should be your first step. Buyers are rarely sentimental, so it’s important to be pragmatic. Don’t start out expecting your business to sell for more, but never let your business go for less than it’s worth.

There are a number of ways experts can approach the provision of a business valuation, typically sizing up the two sides of:

a) Tangible assets

b) Intangible elements (or perceived value)

However, a common approach used in most industry sectors is called Earnings Multiples – a formula for how to value a business based on a multiple of net profits (the Price/Earnings (P/E) ratio representing the value of the business divided by its post tax profits).

Accountants can usually provide the multiple for your sector. If the multiple is, for example, five times net profit, then the business value calculation is simple.

Right, that’s all the conventional wisdom.

What really gets interesting is when you put in an equity building strategy that will increase the multiplier.

This happens when you embark on a plan to build the business assets.

However. while multiples of earnings can be used as a business valuation method, there is no standard P/E ratio figure that can be used to value every business.

Certain industries, such as IT and technology will usually command a higher ratio than bricks and mortar businesses like cafés or retail shops. If the business is very reliant on one main product or has a small number of key executives for example, the higher the risk of buying the business which will also mean a lower P/E ratio.

Watch the below video on how to value your business

Getting a higher multiplier

An owner-run business can ask for a higher multiple when there are staff who are able to run the business when the owner is not there.

When the business is not dependent on the owner, it is more valuable.

If the business has a unique system that sets it apart from the competition, that increases the multiplier further.

The next level of increase comes by having the business be capable of bringing substantial new product ranges to market.

After that comes the ability to create new distribution channels that bring new clients to the business.

Then, if the business creates a strong brand that affects everything about the business, the multiplier increases still further.

The multiplier peaks when the business proves that it is scalable and could be rolled out nationally, for example.

Asset valuation

If your business has a lot of tangible assets such as a property company, an asset valuation will give you the net realisable value of all assets minus the total value of liabilities.

But if you’re still not sure how much to sell your business for, consider getting advice from an accountant or broker.

Get your affairs in order

Before you start looking for suitors, ensure you get your affairs so that your cash flow does not put off potential buyers.

Make sure you also iron out any financial irregularities and to make your company look like an opportunity, not a risk. Whether you’re lacking detailed records, don’t know how much money you’re making, or can’t easily access the right report, you’ll put a buyer off even if there is no problem.

The same goes for calculating the value of a company if you’re looking to buy – if the company doesn’t have a good set of books, think carefully about buying it. If you’re selling, seek guidance from an accountant who can help prepare all the reports you’ll require.

“Before you start looking for suitors, ensure you get your affairs so that your cash flow does not put off potential buyers”

Reality check

Bear in mind though that ultimately the selling price is what someone is willing to pay. The Multiple Earnings method of how to value a business will typically provide a valuation of between five to eight times its annual post-tax profit, but there are many cases where external factors (e.g. the current economic climate, you company’s reputation, the reason for the sale, and so on) can override the calculation.

So if you are considering selling your business, it is sensible to include or estimate the effect of such external factors when coming to a final valuation.

Related Guides

• Valuing your business for sale – Rupert Cattell, managing director of business broker Turner Butler, guides you through a typical valuation process.
• How to sell your small business without a broker – Not every business needs to be sold through a broker. Many microbusinesses could be sold direct, saving you, the owner, thousands in fees.
• Why your business may be worth a lot more than you think – Clinton Lee discusses business valuation and why a small businesses can command a market price far in excess of the owners’ expectations.
• How to sell your business: Planning the exit strategy – The earlier you think about exit strategy, the better, says Simon Rigby, principal of SME Assistance.

This article was updated by Gary Turner, investor and board member of Xero.

The post How to value your business appeared first on Small Business UK.

Entrepreneurs are deluged with advice on how to start a business. From the direct approach of TV shows such as The Apprentice and Dragons’ Den to social media content on how to take your “side-hustle” more mainstream. Little is said however on the final stage of the process – selling your business – and how to say farewell when it’s time to leave the party.

A client recently described the sudden influx of money after selling their business like waking up to a 747 in your garage – something huge, overwhelming, complicated and exciting that you’ll have to learn how to make it work.

‘Seeing exit as a long-term strategy makes financial as well as psychological sense’

This encapsulates the challenges of selling your business which is why we work with clients from the very first glimmer of a plan to the final successful outcome. We’ve also now set up a specific Business Exit programme offering access to free tools such as videos and podcasts from successful business owners to provide guidance along the way.  

After 20 years of research into the experience of entrepreneurs as they exit their businesses, I’m ready to share with you the absolute key lessons I’ve learned.

#1 – Mindset comes first

Sitting around waiting for your life to change is unlikely to get you the results you are looking for, so at Coutts we help our clients to develop what we call an “exit mindset”, where you are actively thinking about the sale of your business and being proactive about the next steps, long before you actually sell.

Thinking like a buyer, rather than a seller, is key to getting this right. It’s by shifting into that mindset that you’ll start thinking about whether it’s better to focus on winning new customers rather than another big order from your biggest one – reducing the concentration risk in your income. Or paying more attention to GDPR, something which you may not consider a major issue in your business, but with global turnover-related fines, will be an area of real concern if a bigger player buys you.

It’s likely you’ll need advice on both the corporate and personal side to do this. We advise starting to talk exit through with the experts at least two years before you want to do anything.

That is because one of the important parts of corporate finance advice is to make changes in the business that make it more valuable to a potential buyer, and you need time for that to play through.

There are also tax-efficient ways to structure your exit when it comes to your personal finances, and some of these need to be put in place at least two years before as well. Seeing exit as a long-term strategy therefore makes financial, as well as psychological, sense.

>See also: Valuing your business for sale

#2 – Skeletons in the closet

Preparing a business for sale can be a daunting task, and you’ll need advisers you can trust. Personal chemistry is key when it comes to appointing them: the process is intense, and clients report that they often spend more time with the advice team than with their families.

Good advisers are worth their weight in gold. They will help you to work out who would want to buy your business, and then focus relentlessly on building value, showing you what you have that a buyer couldn’t build for themselves.

They’ll also help you to do what many of us can’t do for ourselves either: find those skeletons that lurk in the closets. By putting themselves in the shoes of a buyer, and testing every possible weakness, they’ll help you to tackle any potential issues before you start talking about a deal/ This is much better than having to explain them only after they’ve been found.

#3 – Boundaries are vital

Selling a business is stressful. During the process you’re riding two horses at once – running the deal and running the business. When the end is in sight, you’ll find the stress levels ramp up even more, so it’s important to be clear-eyed about what you want from the whole thing before you enter the eye of the storm.

The entrepreneurs we’ve worked with for 20 years say that not doing more of this is one of their biggest regrets, so I’d advise you to sit down now and think about what you really want to achieve from selling your business.

If it’s as much money as possible, be aware that this might come with many strings attached, such as remaining an employee for a long period of time and being given stretching growth targets.

If you want to walk away quickly – be clear on how much that freedom is worth for you.

Finally, think about your legacy. Is it important that the new buyer upholds your reputation for quality, for employment in a certain region or for employee welfare? If so, you’ll need to check you’re really happy with the assurances you are being given.

Everyone has red lines. Write them down today so that when it comes to the crunch, you know what you can give up – and when you need to walk away. It’s very easy to get swept along by the sale process, so keep your priorities front of mind, and be ready for the possibility that the deal won’t go through and you’ll need to start again. That way you won’t be crushed or agree to things you will regret.

>See also: How to sell your business: Planning the exit strategy

#4 – Don’t expect a clean break

Many entrepreneurs imagine that the day they sell their business, they’ll open a bottle of champagne and walk off into the sunset. In reality, the ending is rarely so clean cut. Many entrepreneurs need to stay with the business for a while, which means learning to have a boss again, while even those who leave immediately will still be tied to the company.

In most cases you’ll have to sign legal warranties to assure your buyer that they are really getting what you’ve sold to them. Until these expire, you may not feel like all of the money is yours.

Working with the best possible corporate lawyer will ensure you have as little exposure as possible to future risk.

#5 – Be ready for the phone to stop ringing

Once you do sell your business, life will be very different, and many entrepreneurs find it hard to adjust. Entrepreneurs dub it “stimulation shock” – when you go from 200 emails and 12 hours of phone calls a day – to finding yourself sat on the sofa, with money in the bank, but no-one clamouring for your attention and no management team to direct.

Finding your new role in life, and throwing yourself into it, is key to post-exit happiness. It might be philanthropy, angel investing, board seats, or the next idea. And the best way to think it through, is to talk to people a couple of years further down the track than you. They have figured it out and can share their experience.

#6 – Think about the children

Don’t underestimate the effect sudden wealth will have on your family. Post-exit founders often tell us that they wish they’d considered the impact of a business exit on their children and prepared them accordingly.

The way you live, and how you use your money, will rub off on them, while teaching them the value of money through dividing pocket money into thirds to spend, save and donate, will help to instil good habits.

#7 – Find a place to talk

Once you sell your business, great new opportunities will open up – and also bring new problems. You’ll worry about how to deal with your money, how best to invest it and whether you are making the most of your opportunities.

It’s a different set of challenges to those you faced in day-to-day business, and you won’t have a leadership team to discuss them with either.

Finding a new network is crucial – you’ll need a new place to ask questions and get the answers you need. That’s what we try to provide every day.

Greg Kyle-Langley is head of entrepreneurs proposition at Coutts

More on selling your business

7 of the most common myths around selling a business

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Most people start a business without an exit strategy. Suddenly they wake up and realise it’s probably their biggest asset, perhaps after their home but what are their options? Pass it on to a family member (can be complicated) or sell and reap the rewards.

I’ll split the question in two parts:

Planning the exit strategy

The sooner you start planning an exit strategy the more value you will get and the quicker the sale when you actually put it on the market.

There is much more to the value of a business than merely EBITDAR (earnings before interest, taxes, depreciation, amortization and restructuring/rent), which is often banded about.

These are the drivers to a better business value that you can plan to implement or improve.

Financials

As just mentioned, it’s not just how good your P+L and balance sheet look but also how good the reporting is. Do you receive these important reports in a timely, regular way?

Assets

The value of stock and equipment. Have you got old, redundant stock? Is the equipment up to date and in good repair?

>See also: How to value the goodwill

Location

Is it location dependant? Could it be relocated? If you are in leased premises, how long is left on the lease? If you own the premises are you going to retain the freehold and issue a new lease?

Systems and processes

How easy would it be for someone to take over the business and actually run it? Are the systems and processes mapped out? Are you using up to date software?

Dependence

What percentage of turnover is dependent on one customer, employee or supplier? Can you reduce that dependence?

Cash flow

Does the business swing between high cash/no cash? Could you improve the cash position by charging a deposit or reducing payment terms?

Recurring revenue

Is there a percentage of revenue that comes in every month without more sales effort, such as maintenance or service contracts?

Customer satisfaction

Do you have regular, happy customers who would recommend you?

Cost of entry to the market

For someone to start out would it require a big investment in capital equipment?

Growth potential

Are there new markets you can move into? Have you a list of lapsed previous customers who could be marketed to? When your business is on an up and growing it is easier to sell than one on the way down.

 USP

How strong is your Unique Selling Point compared to your competitors?

Finally, it’s all about you…

How dependant is the business on you being in the middle of it? Will customers, suppliers and staff only talk to you? What happens if you go on holiday? Can you change this?

>See also: Valuing your business for sale

How to sell the business

The options are a trade sale or a sale to someone new to your business sector. In both instances, get a non-disclosure agreement (NDA) signed before you get too far into negotiations.

Trade sale

This is to someone already working in your sector. It’s a much easier, quicker sale as they are aware of the good and bad in the sector already and don’t need to do time-consuming research. You could approach your competitors yourself and save on agent’s fees but be careful not to disclose too much about your customers and suppliers.

New to the sector

You will need to not only provide info on the business but also info about the sector itself – how large is the market? What’s the competition like? etc. Probably best to sign up with a business transfer specialist.

Don’t take your foot off the gas…

It can take time to sell a business, so have patience and do not “let your foot off the gas”. Keep moving the business forward and don’t let up – this is very important so that you can maximise the sale price.

Simon Rigby is the principal of SME Assistance

Further reading on exit strategy

How to sell your small business without a broker – Small Business guide

The post How to sell your business: Planning the exit strategy appeared first on Small Business UK.

Valuing your business for sale

I have been selling businesses for over 35 years and have by now probably sold more than 4,000 businesses. Valuing a business for sale is a key question for any small business owner. Obviously the first question all vendors ask is what’s my business worth?

The pat answer is what someone is prepared to pay for it but there are a number of useful methods that can refine and bring logic to the answer. We sell businesses worth anywhere between £100,000 to £7m and so what I say below doesn’t necessarily apply to higher value businesses.

Be realistic from the outset

In their heart of hearts it is my experience that most vendors have a pretty fair idea of what their business is really worth. They are really looking for affirmation from a broker. There are brokers who will prey on the vendor’s greed to get an instruction by suggesting a ridiculous price, or a vendor will be pricing his business on what he needs rather than what it’s worth.

I also often have the conversation with a vendor in which they say “let’s start high, we can always come down”. None of these strategies will do them any favours. Buyers are trawling through hundreds of business listings and will see a high number of opportunities. It is human nature that they will assume that they can discount the asking price by at least 10 per cent but if they see a business for sale at a price that is clearly out of whack with the market or which has no relationship with the fundamentals of profit and net assets, then they will simply move on to the alternatives. Buyers have only a certain amount of time and capital to spend and they don’t want to waste either dealing with a vendor with unrealistic expectations.

When valuing a business for sale, I often ask vendors what they would pay to buy their own business. The answer is usually fairly sobering.

>See also: How to sell your small business through a broker

P/E’s vs multiples

I have yet to encounter an accountant acting for a vendor who doesn’t think his client is under-selling and one acting for a buyer who doesn’t think they are over-paying.

Multiples and p/e’s are bandied around but there are often misconceptions and misunderstandings around these phrases.

A p/e is based on the profit after tax and after all imputed replacement management costs. A multiple is based on the profit before tax and sometimes before imputed replacement management costs. So the number being multiplied can vary widely as can the multiplying number.

In the sub £7m transaction range, we tend to use pre-tax multiples. Multiples vary from 1x to 6x. The size of the multiple will depend on a variety of factors:

#1 – Reliance on the vendor

Most vendors say that they are not critical to a business’s success. That is usually not true and like a skipper of a yacht, even though the crew does most of the work, they are needed for critical decisions and to ensure the boat runs smoothly. These types of vendors can be replaced over time but vendors with particular and specialised skills and expertise are much harder to replace.

#2 – Size and stability of the business

A business that can show 10 years of seamless trading and improving profitability is going to be worth more than a business that has had one epic year in five modest years, or a business that didn’t exist two years previously.

#3 – The sector you’re in is important

Some sectors just aren’t sexy and some are wagon wheel makers in the age of the motor car; while some businesses are right on trend and enjoying their moment in the zeitgeist. Certainly businesses with large manual processes and high overheads are going to be much harder to sell than businesses that are nimble and quick footed.

‘I often ask vendors what they would pay to buy their own business’

#4 – Location, location, location

Businesses in less populated parts of the country are going to attract fewer buyers and will command lower prices.

#5 – Customer spread and type

The age-old axiom of putting all your eggs in one basket applies equally well to customer spread. Even if that customer is ultra-blue chip or the government, buyers will see the risk that the customer could change its mind or suppliers at any time.

#6 – Previous years’ performance

During Covid, many businesses have seen a dramatic change to their fortunes. Some have done exceptionally well, and others have barely survived. Buyers will not value a business on just one year of exceptional performance but will look at previous years and the continued sustainability of the improved performance.

Meanwhile, perhaps unfairly, buyers will seek to buy businesses which have suffered at discounted values based on their latest numbers. It will be up to the vendor to decide whether to accept a fire sale price or wait until the business has improved and then sell off an improving trend.

Valuing business for sale – net assets

Some businesses like engineering companies will have significant assets and which may distort the valuation. Just because a business has a lot of assets or it would be expensive to replace those assets, doesn’t mean that the business is more valuable than a service business with little or no assets on the balance sheet.

Buyers are dispassionate and looking for a certain return on their capital. They will not pay inflated values for assets and will see assets which contribute to the ability of a business to make sales, as part and parcel of the overall goodwill value.

A business value is made up of a combination of Goodwill premium and assets. The value of the Goodwill can be depressed by the size of the assets. For example, an engineering business with £2m of assets making £200,000 profit per year is likely to be worth net asset value or less. On the other hand, a service business making £500,000 per year and with little or no assets is going to be worth a multiple of that profit.

Understanding what the balance sheet will look like at completion is a critical part of valuing a business for sale.

The simplest way to do this is to create a projected balance sheet assuming no cash and no debt, that gives you a projected Net Asset Value. You can then use a £ for £ ratchet on the final sale price to reflect any movement away from the Projected Net Asset Value in the final completion balance sheet. This methodology accounts for debt, net surplus cash and any rise or fall in net asset value leading up to completion.

Valuing business for sale – return on capital

Ultimately though the total enterprise value will be based on a return on capital. In my experience most buyers at the lower end of the market are looking for between 50 per and 20 per cent return on their money. Where a business sits in that range and the size of the return required by a buyer will depend on the risk factors, the sector, the opportunities and the keenness of the buyer to do the deal.

Rupert Cattell is managing director of business broker Turner Butler

Further reading

How to sell your small business without a broker – Small Business guide

The post Valuing your business for sale appeared first on Small Business UK.

When looking to buy or sell a business its value will be more than just the assets it holds. One of more intangible assets to value is goodwill – the magic sauce that makes one business attract a higher valuation than another that may appear to be similar.

Goodwill is the value that someone is prepared to pay for a business above and beyond the value of its assets. That will include the strength of a business’s brand, customer databases and those aspects of a business that add value to a buyer.

For most businesses, the value of goodwill is tied into its current and future earnings – what do the future profits of the business look like and can that profitability be increased – sometimes called “super profits”.

How to value the goodwill

In calculating goodwill, your accountant would start with the profit and loss accounts of the business, typically for the last three years. Some adjustments might be necessary to arrive at the profits for the goodwill calculation, sometimes called the average maintainable earnings.

The most usual adjustment is for payments to the owner or manager over and above a reasonable salary for the work they do.

Once you have the average maintainable earnings you will also need to find out the price/earnings ratio common to the industry you are investing in.

As a rough rule of thumb, the price/earnings ratio of most private businesses is approximately half the figure of publicly quoted companies in the same industry or business sector. The business valuation is “earning times multiple” with goodwill the difference between this and the fair value of the assets.

Goodwill can work both ways

A word of warning: it is also important to note goodwill can work both ways. Negative goodwill is when the consideration paid for the assets is lower that the assets being acquired. Items like off-balance sheet debt, pension liabilities and future earnings that may not be as high as anticipated could push valuations downwards and into negative territory.

But valuations, although often presented as precise calculations, need to be viewed with caution. In the end, a business is only worth what a willing buyer is prepared to pay and a willing seller is prepared to accept.

Once a goodwill valuation determined and the net assets specified, you should view the total of the net assets and goodwill and to work out whether, all things considered, the business represents good value in terms of its future earnings potential.

Goodwill is the magical ingredient when a business is purchased for more that the net worth of its assets. The purchaser will need to consider how much finance they can raise.

James Johnson is a director at Hiller Hopkins

Further reading

How to Sell Your Business

The post How to value the goodwill appeared first on Small Business UK.

As the pandemic swept the world, we were bracing ourselves for the very worst. Would anyone really want to buy or sell a business during the COVID-19 crisis? Recessions come and go but this was looking like an economic tsunami.

In the immediate aftermath of the lockdown in March, traffic to BusinessesForSale.com halved from 1.3m visitors to 700,000 in a matter of days. But the fact that there were still 1000s of business buyers searching the website looking for a business was not just a relief for us but also quite fascinating.

A massive online marketplace to buy from during COVID-19

What was going on? The answer lay in the fact that BusinessesForSale.com was a mirror of the real economy.

While businesses that were instantly shut down – such as pubs, restaurants and hotels – which saw interest suddenly fall off a cliff edge – we saw a sudden spike in enquiries to tech and e-commerce businesses as well as convenience stores, pet shops and petrol stations.

What we discovered in the next few weeks and months was a revelation. Buyers had cash and they were moving in to make quick gains – and they still are.

So, to get a better idea of these trends we started reaching out to the buyer market with surveys. We wanted to know how much money business buyers had as cash to invest, what sort of businesses they were looking to buy during COVID-19 and why.

In the UK, we discovered that over 54 per cent of the business buyers we surveyed had more than £50,000 in cash to use as a deposit and with 80 per cent of them believing that prices would come down as a result of COVID-19. Over 38 per cent of them intended to finance the entire purchase of a business using their cash reserves only.

Buyers with cash to invest

What we were seeing was the sudden emergence of an aggressive buyer’s market. It was evident in specific sectors such as campsites and campgrounds or tech and e-commerce opportunities.

As CEO Andrew Markou said: “Because of the uncertainty of Brexit in the last three years, people have generally held onto cash and this pandemic has accelerated that. But with interest rates at such historic lows, the cash in the bank is seen by entrepreneurs and those looking to start or buy a business as a liability rather than an asset, so it makes sense to put that cash into a business, especially if sellers are willing to reduce their asking prices for a faster sale in this climate.”

However, our surveys also revealed a healthy appetite for banks to get involved.

One person surveyed was Ben Harding, 34, from Devon, who was looking at campsites for sale in the £500,000 to £850,000 range. By his own admission he was in a position to put down a ‘healthy deposit’ but banks were still very keen to lend.

“I have spoken with two commercial brokers who have said we are in a strong position to buy. It was suggested we could borrow up to £1.3m,” said Ben.

COVID-19 business impact report

Another one of those business buyers surveyed, Muhammad Amjid Qazi, an experienced entrepreneur from Canada, highlighted what every buyer was thinking across the world:

“Any business plan template should clearly highlight the COVID-19 impact on revenue forecast wherever the revenue stream is in order to gain trust and confidence. The goodwill of a business will have changed dramatically as a result of the crisis and banks will certainly be critical of it,” he said.

When it comes to constructing this business plan, you should:

• Provide details of the history of the business and its performance before COVID-19
• Explain the strategies that the business has put in place in order to deal with the crisis
• Look forward and talk about possible future strategies for growth in a post-COVID-19 world
• Establish whether the business’s aim been affected by COVID-19. If it hasn’t, point this out
• Define the opportunities that can be created from a market after the pandemic

Be as honest as possible but you should also think carefully about and include all of the ways that your business will be able to develop and grow in the future. Creating a picture of the future for possible investors is how you will be able to close the deal.

As we start to gently and ever so carefully come out of lockdowns around the world, buyer traffic is returning to pre-COVID levels. However, it is still a buyer’s market and will probably continue to be so throughout the next 12 to 18 months.

Read here for more information on the business buying process.

Matthew Hernon is an account manager at Dynamis.

Read more

Guide to selling a business part 1: Why are you selling up?

The post Are people buying or selling a business during COVID-19? appeared first on Small Business UK.

In the last of a three-part series in association with BusinessesForSale.com, we focus on best practice when completing the sale.

The first part explored the most common reasons why entrepreneurs decide to sell their businesses.

Part two takes you through every key stage of the sales process, from hiring a business-transfer agent to closing the deal.

Now we’re going to linger a little longer on the final stage of selling your business: completing the sale.

Due diligence

Before the buyer commits to one of the biggest investments of their life, they’ll want reassurance that they’re getting what you’ve promised. Any deal agreed in principle is made on the basis of certain claims made about the business’s financial health, physical and non-physical assets and reputation, among other things.

The buyer will therefore request to conduct due diligence. This the process by which your buyer examines your business closely to check the veracity of those claims.

The process involves an inspection of your physical assets (premises, equipment, inventory and so on), as well as all paperwork (financial accounts, tax records, licences, employee, customer and supplier contracts, etc).

As a seller you shouldn’t agree to due diligence until you have agreed a price and terms with the buyer. The duration of the process is negotiable and generally undertaken in tandem with the preparation of the legal paperwork needed to close the sale.

For clarity, here is a list of things the buyer will probably request evidence of:

• Accounts
• Historic and projected financial performance
• Valuation of property and other assets
• Legal and tax compliance
• Major customer contracts
• Intellectual property protection
• Any pending legal action against the business
• The final sale agreement

The more cooperative you are with the buyer (within reason) the quicker you can close the deal, and the lower the chance of a frustrated buyer pulling out of the sale.

Cooperation also requires preparation, so get your documents up-to-date and in order and your premises in a fit state for due diligence.

Be prepared

Before the buyer requests to carry out due diligence, you need to be ready. It is wise to have a professional look through your books, legal affairs and other business to make sure that there are no red flags that will put a buyer off or give them too much leverage in the negotiations.

Preparing for due diligence will be easier the earlier you start. Running your business with the exit in mind means that you will have been recording all your transactions in meticulous fashion and have all your contracts up to date.

Your employees should have clearly defined roles and secure contracts and any intellectual property should be protected with trademarks or copyrights.

The sale agreement

When the due diligence process approaches its conclusion, this is the time to finalise the sale agreement with the help of your advisers. Outline clearly the precise terms of the sale, as the agreement is broadly based on what was initially sketched out in the heads of terms.

Even though you’ve already reached an agreement over the heads of terms, be sure to consult with the buyer in the formulation of the sale agreement. And be clear in your own mind of exactly what future liabilities, indemnities and warranties you are taking on as part of the agreement.

Professional advice is invaluable when it comes to preparing and finalising paperwork in consultation with the buyer. Even if you’ve got this far without professional assistance, it might be worth appointing a solicitor or business transfer agent to help you get the deal over the line.

On rare occasions, buyers will try to renegotiate the price downwards based on something uncovered during the due diligence process.

If it’s something genuinely at odds with the information you’ve already provided, there could be justification for renegotiation – that’s a judgment call to make with the help of your advisers. However, if their reasoning seems spurious, resist their overtures, even if they threaten to walk away.

Once a final price is agreed by both parties, the buyer will sign a binding contract of sale. At this point the deal is done and all those years of graft and financial investment will finally reap you a well-deserved financial reward!

Further reading on selling a business and completing the sale

• A beginner’s guide to buying and selling a business

The post A three-step guide to selling a business: completing the sale appeared first on Small Business UK.

To many people, becoming a business entrepreneur means setting up your own business and beginning to trade in your own right.

But while this is what plenty of entrepreneurs actually do, many others choose to buy an existing business as a means to becoming an independent business owner.

So which option is best? In reality, the answer usually depends upon your own circumstances and expectations:

Option one: buying a business

With buying an existing business, the first problem you may encounter is actually raising money for the purchase. By implication, buying a profitable business implies that it has a value. So, if you wish to take advantage of a ‘going concern’ as a source of income, you will need to be able to afford to do so.

However, even though raising money to buy any business is rarely plain sailing, you will find banks and other lenders much more likely to offer a loan against an existing business. Provided you have solid evidence that your chosen business for sale is profitable and forecast to remain in good business health, any lender should see this as a reasonable investment.

What this means is you must always ensure that any business you intend to buy is financially stable. And in addition, you must be able to show potential lenders how you plan to both make a living and repay the loan once you start trading.

If you are intending to set up in business as an outlet for your creativity, then buying an operational business may not always be your best option. Much will depend upon how well the existing business framework meets your needs and your medium-term plans.

Provided there is a reasonably good fit, the chances are you may well succeed. For example, if you take over a popular but fairly nondescript café in a rundown city area, it may not be wise to attempt to immediately transform the premises into a fine dining destination. But if you know that part of the city is ‘on the up’, you might well justify taking over the business as it is with a view to gradually moving upmarket as the area improves.

Your own business experience will impact upon any business venture you plan. Furthermore, your relationship with lenders, suppliers and even perhaps your customers, will also be affected by your track record in business (or lack of one).

So, if you have trading experience, and qualifications too, you may be free to choose between the start-up and buy a business routes. But as a novice your best bet might be to buy an operational business with a ready-made income – and preferably one where you will be supported by skilled staff.

Option two: starting your own business

Striking out on your own is not for the faint-hearted and will always make the heaviest demands in the early years as you struggle to get established. One barrier will be financing: lenders are rarely keen to fund an embryo business which cannot show any past trading figures. Those entrepreneurs who are able to fund a substantial part of the start-up costs from their own resources may be better placed for getting a top-up loan, but this can still be challenging.

If your reason for going it alone is to do things your way, then a start-up will offer you plenty of creative freedom. But how well you do in terms of generating a profit will ultimately depend upon how well you have researched the market and whether you are able to create and market your product or service at the right price.

Working for yourself, you may be able to get by without much experience of trading in your chosen sector. So much will depend on your ability to market the benefits and appeal of a fresh approach. Nevertheless, you can expect it to take a while before your gathering reputation earns you the respect (and perhaps the income) you may feel you deserve from the outset.

Whichever option you choose, you are sure to need good business advice and you must be prepared to thoroughly research the pros and cons of any opportunity or pathway before you commit. In either case, an entrepreneur who understands the risks and rewards of any decision will always be in a much better position to make a rational, informed judgement.

Jo Thornley is Head of Brand and Partnerships at Dynamis.

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7 essential checklist questions to ask when you’re buying a business

The post Buying a business rather than starting up – is this a better route? appeared first on Small Business UK.

You may put your business for sale for a wide range of reasons, and sometimes several motivations converge.

Those reasons can fall into one of two camps: an entrepreneur’s personal circumstances or the business’s health in the wider economy.

These can include personal reasons, some that you could have accounted for and others that were more of a surprise. For example, retirement, relocation, illness or you are simply looking for a new challenge.

As for commercial reasons, a business owner may have always planned to sell once the business had reached this stage of development. On the other hand, they may be looking to sell because the market conditions are becoming increasingly challenging.

Business owners, however, are far more likely to sell for personal reasons. It’s only natural that people want to sell when it suits them.

Growth phase

In an ideal world, an entrepreneur’s desire to move on will emerge when the business is climbing a growth curve. More specifically, Rob Goddard, CEO of Reading-based business transfer agents, Evolution CBS, thinks that it’s better to time a sale so that the business is in a growth phase, but not at its peak.

“A typical business growth curve is a repeat of growth-plateau-investment-growth. Businesses grow in the early stages, then plateau and need investment to get to the next level.

“So, if you look at this scenario from an acquirer’s perspective, the business is unlikely to warrant a premium price. Equally, if the business is at the top of the growth curve, an acquirer is also unlikely to pay a premium price because investment for growth will be required immediately. In many ways this should be the starting point for the timing decision.”

Putting a plan in place

The moment you think you may want to sell in six, 12 or even 18 months’ time, it’s worth putting a plan in place for how you should prepare your business over that time period.

Start with your personal objectives – for example, ‘I want to retire by the age of 60’ or ‘I need a sale price of £150,000 to afford that house in the Cotswolds’ – and then work backwards.

So, find out how much your business is worth now. With this information you can put longer-term plans in place to reach the price you want.

Remember to take into account the fluctuating market in your sector but increasing your business’s value can include: cosmetic improvements with renovations, upgrading your systems or fixtures and fittings or business expansion.

Create a plan with milestones and steps you must take to hit them – but keep them realistic. And don’t panic if your timetable slips. Periodically review and amend your plan in light of any turn of events.

The ideal time

The ideal time to sell a business is usually when you will be able to get the most money for it. If you have had a consistent history of growth and a recent growth trend in the last year, your business will have more value to potential buyers.

Sometimes, however, you might need to exit your business without much time for preparation, such as ill health.

In this instance, you may need to settle for a slightly lower figure in exchange for the lack of preparation, but ensure you take a look at the vital aspects of your business primarily, such as things being able to run smoothly without you at the helm.

Finally, and though this is rare, you may get an unsolicited offer that is too good to turn down. So however much you enjoy running your business, everything has its price, and you may end up selling up several years earlier than you expected.

Whatever your situation, the reason behind your business sale will create a ripple effect on your exit strategy and the overall outcome of the sale, so ensure that you are prepared for all foreseen, or unforeseen, circumstances for a smooth and profitably exit.

Jo Thornley is head of brand and partnerships at Dynamis.

Further reading on selling a business

• A beginner’s guide to buying and selling a business

The post Guide to selling a business part 1: Why are you selling up? appeared first on Small Business UK.

For many entrepreneurs, selling a business is a major decision. Given that many sell a business just once, it can be hard for even experienced businesspeople to understand the business sales arena and its established norms. Myths about selling a business, perhaps based on the evidence of one isolated transaction, are often voiced as general truths.

Make sure you don’t walk into traps by learning these seven common business sale myths.

1. I know the type of buyer I’m looking for

This could be ‘a clone of me’, a major player in your field, or someone with a large wallet and a string of companies. But why restrict your options? Someone else with good credentials, sound finances and new plans may be just the shot in the arm your business needs to move to the next level.

More generally, it can be reassuring to everyone if a change is largely cosmetic and it’s almost ‘business as usual’. But if maintaining your legacy and securing staff futures are your priorities, you may have to settle for a lower price to get such guarantees. That can be tough if cash is your key consideration. Remember a seller paying top dollar won’t often feel obliged to make any promises about what will happen to your business assets down the line. So it’s your call, but take care.

2. I can get a better price if I wait for X

‘The sale price will be higher after Brexit …’ Indeed, it might be. But the market could be saturated with business sellers wishing this to be so – which means prices could drop. Good timing is clearly one important issue if you want to optimise the sale outcome. However, anticipating market conditions is an inexact science.

What is usually more important is advice from business brokers who stay in touch with the business sales market over the long term. Yes, it would be foolish to ignore things like seasonal trends. However, professional marketers will advise you to develop a basket of features which will count in your favour rather than hoping to cash in if the timing goes well.

3. My business is different from others

Perhaps this may be true in some respects. But no business is entirely immune to the effect of market forces, for example. Buyers are savvy and cautious people. So, if your business really is like no other, who would bet on that remaining so once you’re gone?

Furthermore, the professional mindset of any buy-side due diligence team means they will assume all businesses have some weaker areas. So, their job is to find supporting evidence to create an alternative perspective which helps a prospective purchaser evaluate the true worth of what’s on offer.

Surely, it’s wiser to promote your company’s strengths (as generally defined and accepted by your industry) than to totally rely on a claim your business is ‘unique’.

4. The asking price is the cash I receive

This is rarely the case. Marketing professionals consider the asking price as – almost always – subject to a negotiation phase which arrives at a mutually satisfactory figure below the original quoted price. Recent data suggests many sellers settle for around 90pc of their asking price, with some sales falling below this level.

5. The buyer’s finance isn’t my problem

If true, you are fortunate indeed. However, the reality is that you will be ultra-keen to ensure a potential buyer can secure the financing required to close the sale. Given the chance, you will want to make the case showing your business will grow further under new leadership. Because that will reassure the prospective lender that loan repayments will be met. And if you are told that part-financing some of the sale price yourself is the only way to close the deal, you are sure to give that option serious consideration.

6. I can sell my business without help

You may have set up a staff buyout or arranged a sale through your own network. But it’s most likely that you will have to try many avenues to find a buyer. This is where the services of a well-connected professional business broker can offer valuable strategic advice. With such an expert promoting your business, your chances of selling for a good price are immediately increased.

7. I’ll be able to sell my business in a few weeks

Some companies sell almost overnight. But realistically, it can take months to attract an approved buyer and close the sale at a good price. Most professionals say this process can take from six to ten months.

Jo Thornley is head of Brand and Partnerships at Dynamis.

Read more

Guide to selling a business part 1: Why are you selling up?

The post 7 of the most common myths around selling a business appeared first on Small Business UK.

Selling a restaurant business for a reasonable figure might at first glance appear to be something of a gamble.

But just like the process of buying a restaurant, negotiating a deal becomes a lot easier if you put some time and effort into the preparation.

Put another way, there are a number of things you can anticipate (and thus be prepared for) before they arise. So, with that in mind, here are a few things you should think about well before any sale negotiation takes place.

Business valuation

A solid business valuation will form the cornerstone of any later negotiations you conduct with an interested buyer. After all, your negotiating strength will just melt away if a potential purchaser is able to undermine the logic and rationale upon which your estimate of the value of your business is based.

Having a clear understanding of the value of your business is very important when it comes to negotiating the terms of the sale. So, obtaining a professional valuation from a respected valuer should be your first priority. Not only will a professional familiar with the restaurant trade be more likely to produce a reliable valuation, your valuer should also be able to give you vital detail which clarifies precisely where that inherent value actually lies. That information will prove invaluable during any sale negotiation.

Determine your bottom line

Once you know the true value of your restaurant business, you are in a position to set how low you would drop the price, if that were necessary. Unless you establish that figure in advance, without (of course) disclosing it to any would-be buyer, you are at a potential disadvantage if a smart buyer catches you off guard – for example, with a ‘take it or leave it’ ultimatum.

Provided you know your bottom line, you will have the confidence to refuse absurdly low offers. You may even have the confidence to close down negotiations and look for another buyer if it becomes clear no pricing agreement can be reached.

Accept that money could be only part of the deal

While selling a restaurant enterprise you have worked so hard to build is important, you may legitimately hope the deal brings you more than cash. For instance, one of your priorities may be that your present staff are kept on and treated well by the new owner. Or you may be keen to see the trading name of your business retained, even if the restaurant is sold to someone acquiring a chain of food-oriented businesses.

While such aspirations are understandable, any buyer may ask for price concessions to meet your ambition to influence the future in some way. Therefore, you must decide beforehand how much business value you might be prepared to forego to achieve your aims and close a deal.

Decide what you would be prepared to lose

Leading on from the previous point, you should look at any concessions and compromises you might be prepared to make to achieve a sale. Having such a plan in place will keep you one step ahead of your buyer. It will also make you appear more confident, and you can often use such confidence to help swing a negotiation your way.

For example, would you be prepared to retain some valuable equipment (to dispose of later) if it meant you could bring the sale price down to a level your buyer could afford? If you know that in advance, you may be able to clinch a deal. If not, a promising negotiation may fizzle out and you may lose a serious, if somewhat cash-limited, buyer.

Thoroughly research your buyer

You need to know a lot more about your buyer than the fact they are keen to purchase your restaurant business. Are you negotiating with someone who knows the food and catering business well, or a first-time entrepreneur with some dreams he/she wants to try? Is your buyer an individual or are they acting for a corporate chain wishing to acquire a new entity? And what motivates your buyer in the first place? Are they perhaps wanting to move into the restaurant sector? Or are they buying to grow large enough to compete at a new level in future?

These are important questions because the better you understand what the buyer really wants, the easier it will be for you to frame negotiations accordingly. For instance, knowing in advance what your buyer is looking for will enable you to tailor the USPs your restaurant offers to meet precisely those needs. And that means you could be more than halfway to securing a deal.

Jo Thornley is the head of brand and partnerships at Dynamis.

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Restaurant website: things to do and things to avoid

The post How to negotiate the best deal when selling a restaurant appeared first on Small Business UK.

After years of hard work, you will probably be on the lookout for the best buyer possible when you’re selling your business.

Spending time on preparing your business for sale is one way that you can do this; another way is to know what questions to ask interested parties.

It is usually the buyer that comes with the right kind of questions to ask. However, if you are prepared, you can have a list of questions yourself so that you can easily spot the serious buyer from the window shopper.

So, if you’re thinking of selling up, read these pointers of what to ask a potential buyer.

1. Why are you interested in buying?

Asking a direct question such as this one will help you to quickly understand the buyer’s intentions. For example, if you are running a marketing agency and they have years of marketing experience, they might be looking to go out on their own. Or, they could be hoping to acquire your business in order to expand their already existing agency.

In both these cases, however, they should be able to approach you with a considerable amount of information as to their plans for the business. If they are looking to expand their own business, they will be looking for a business that can easily synergise with their own and bring something new, such as customer base or services, to what they already offer.

Be wary of the buyer who does not have a well thought out and specific answer to this question. If they are simply ‘having a look’ you might very well have a time waster on your hands.

2. How will you go about your due diligence process?

Finding out what the buyer is planning on for the due diligence process can be very helpful. Start-off with broad questions but then, as they answer, try to get specifics. Take notes that will enable you to hold the buyer accountable later.

A buyer that is able to clearly answer these questions will be easier to handle and prove they are serious. Often first-time buyers are less able to answer this question. Once you have asked it, however, it will prompt them to figure it out sooner rather than later.

You can even be specific and ask for a list of the things that they will need from you so that you can begin preparing. This will force them to be as organised as possible.

If, for example, you run a manufacturing business, they will want a clear report on your machinery and when it was purchased and last serviced. They will also want to know exactly what contracts you have with suppliers and customers.

3. How will you finance the purchase?

Buying a business is a costly endeavour and, therefore, any serious buyer will have a clear plan of how they will pay for it. You will also be able to quickly ascertain whether they are planning to negotiate some kind of seller financing.

If they are looking for seller finance, this is something that may work in your favour as a negotiating chip. No matter what, though, you should be prepared for the negotiations.

4. What are your plans for the business?

Ask this question to make sure that you have found not only a serious buyer, but also the right buyer. When you have built up a business over the years it will be somewhat important to you that your legacy continues.

Find out whether the buyer tends to keep on all of your employees and customers. You can also get a sense of whether they are planning to expand your business or if this is only an investment to them.

If your business is in the retail sector, you can find out how they plan to adjust to changing shopping habits in the face of online retail. Or you can find out if they are passionate about what it is that your business sells.

Selling a business can be an arduous task that can take months or even years to complete. By asking these questions, you can at least make sure that you don’t waste your time on buyers that are not serious or are not of interest to you.

Jo Thornley is the head of brand and partnerships at Dynamis.

Read more

Should I use a broker when buying or selling a business?

The post 4 questions you need to ask buyers when you’re selling your business appeared first on Small Business UK.

Without a doubt, buying your first business can be an intimidating process. We’ve produced a checklist of vital enquiries you should make to simplify the process.

Why are they selling their business?

You may expect to hear the seller wants a different challenge, plans to retire, or maybe has health issues – all of which may stack up within the context of all you see and hear. But if the present owner is looking to exit the sector when the business income seems to be falling away, or if new entrants are starting to build their own presence in the market, these are clearly factors that will need to be carefully investigated.

So how will you judge the truth of what you’re being told? Unfortunately, you can’t really make a definitive judgement. However, an experienced due diligence team should be able to test the seller’s official position against the tale told by the financial records. So, don’t be afraid to get a professional second opinion to investigate.

What’s included in the sale?

This question encourages a response beyond a mere listing of assets. It also makes it easier for you as a potential buyer to ask to hear more about anything mentioned. Furthermore, even though the components of the sale will be noted in the particulars, this enquiry invites the owner to ‘sell’ the business.

Hearing the kind of pitch they deliver to describe the enterprise they have nurtured over the years should tell you far more than any catalogue description.

How did they arrive at the asking price?

Of course, your team will produce an independent valuation of their own if you decide to progress your purchase discussions. Nevertheless, it can be very instructive to hear an explanation about how the seller’s valuation has been calculated.

The figure could be based on income capitalisation, total value of assets, takes a multiplier approach or it could use some other method appropriate to your sector – the more insight you can gain, the better. It’ll give you an idea of what the seller prioritises as valuable to the business as well as extra info to negotiate.

What outcomes is the seller looking to achieve?

You might assume the seller is hoping for a really good price. However, in many sale negotiations the vendor may have a menu of aspirations, especially if it’s a potential ‘retirement’ sale.

For example, a departing owner may be keen to see the business expand or they may wish to see a certain trading style retained. They may also be seeking reassurance that any new owner will want to keep the existing workforce and has no plans for large-scale redundancies. In such circumstances, any buyer prepared to meet some of the seller’s proposed outcomes may thus find it easier to negotiate a slightly lower selling price.

Are they willing to commit to a non-competition agreement?

As a prospective new business owner, you will want to be sure the present owner is not planning to set up a rival business sometime after the sale has taken place. Such an enterprise would not just be a potential commercial rival, but the amount of ‘insider’ knowledge available to that business could also threaten to poach your customers and your supplier relationships. Any agreement will, of course, be time-related and must also specify the geographical limits which apply.

Is the business consistent throughout the year or does it experience seasonality?

Many businesses have peak periods when customer demand is at its highest, such as weatherproof clothing during the winter months. But some businesses, such as floristry, may have more subtle busy times related to special occasions like Mother’s Day and Valentine’s Day.

And with certain food-related businesses, such as restaurants, the source of supply may vary according to the time of year. Stability throughout the year will be easier to accommodate, whereas seasonality usually requires more careful business planning.

What are the biggest challenges currently facing the business?

Any genuine business owner will outline the market challenges they face. After all, business rivalry and trying to negate economic disadvantage are recurring trading problems and a frank discussion should yield some sound strategic advice for the future.

Just beware of any seller who can’t offer a convincing response or wants you to believe you’re buying a licence to print money.

In addition to this list of largely generic information, you will of course have some sector-specific questions of your own you will wish to ask. However, these prompts should give you a head start when you reach that important stage of assessing your best purchase options.

Jo Thornley is head of brand and partnerships at Dynamis.

Read more

Buying a business on a budget: what are your options?

The post 7 essential checklist questions to ask when you’re buying a business appeared first on Small Business UK.

Established principles of buying and selling a business still apply with an online company – for instance, the need to dig deep and do thorough research – yet there are some differences.

The lack of bricks and mortar, for example, may make the process a little cheaper, and you may not have any significant staff employment issues to consider. Nevertheless, on the buy side or the sell side it’s mostly a matter of identifying the core issues to consider.

Here’s a rundown of what you need to take into account when buying or selling an online business.

Buying a business

Traffic

The success of an online business is measured in traffic volumes, which roughly equate to high street footfall.

But there’s good and bad traffic. So, you and your team will need to do your own analysis and verify any historic traffic data you receive. In essence, you will want to work out what percentage of the traffic generates business income.

In addition, you will want to establish that business arrives from a healthy mix of sources. Until you have such information, you can’t value the business.

Growth

As with any business, you should be able to track the figures over time. It’s essential to understand whether the business income is consistent or growing from month to month. Whatever the owner claims, you should be able to track and verify through the figures. Ask questions to test your understanding and to gauge the quality of the responses you receive.

SEO

Online marketing requires a knowledge of SEO and allied disciplines and analysis. Make sure you know how business is generated, what Google ratings have been achieved and ask for evidence to show how the system performs. And if you’re not clear on the technical issues, employ specialist help.

Domain name

A good domain name means a lot in online business, and as a buyer you will therefore want to know who owns what, and precisely what rights you are buying. Be sure to check whether that domain name has previously been used for anything else.

For instance, you won’t want to buy a name once linked to adult Internet content. You can also Google the domain name terms used to check what business rivals might have done with the same terms, which could potentially undermine your traffic volumes.

Valuation

On the financial side of things, you will need to understand how the valuation is arrived at. It is not unknown to find some online businesses asking high prices when they’re barely making a profit, so make sure you consult specialist advice on valuations.

It’s also important to understand what costs the prospective business has. For instance, what are their hosting costs, and how much do they invest in paid-for advertising?

Selling a business

Valuation

As a seller, you will need to value your business as appropriate to your sector. This is essential if you wish to retain the confidence of interested buyers. But online businesses can rarely be valued just by applying the same criteria as you would to a bricks-and-mortar enterprise. It would be wise to get specialist help to produce a valuation supported by a rationale you understand and can relay confidently to potential buyers.

Preparation

Before thinking of selling you need to carefully review your business model to make the enterprise as attractive as possible for interested buyers. Are there any tweaks or adjustments you could make? Have you got your financial records in order? Is there any core business equipment or technology you should perhaps have in place to convince your buyers you are closely in touch with your market?

Analytics

An online business relies upon web traffic volumes, so you will need to be able to produce detailed web analytics to verify your website performance.

In addition, you will need to show how your business is currently marketed, and how well that strategy currently performs. And just as importantly, you should be able to demonstrate how you gather data and use it to increase your sales.

Systems

Just like any other business, your online business for sale should have well-established systems in place.

For instance, have you got a CRM (customer management) system? Is your web analytics data used as a tool to optimise your business? Have you EOP and other web security systems in place to protect your business from online threats? And do you use safe and secure payment systems which are also customer-friendly and simple to use?

Finding a buyer

You should also consider whether to work with a broker to sell your business. If you choose wisely, you may sell your business quicker with the benefit of a broker’s advice and contacts, and perhaps gain access to specialist channels.

When selling, you should also have a clear idea about the profile of the potential buyer you wish to attract. This information will help you prepare your business to appeal to that person and sell to the right area of the market. That should make it more likely you will sell and realise the price you want.

Jo Thornley is head of brand and partnerships at Dynamis.

Further reading

A beginner’s guide to buying and selling a business

The post Buying and selling an online business: what to be aware of appeared first on Small Business UK.