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We have been operating a business brokerage firm for nearly ten years. We are the longest trading firm specialising in business sales on the Sunshine Coast, Queensland and I personally have been involved in this industry for over 15 years.

There are easy ways to sell a business or very difficult ways, not too much in the middle. As a business broker who has operated a business brokerage firm since June 1993 I can honestly say I've just about seen it all.

Due to the vast different types of businesses available in the market place it would be nearly impossible to explain how to sell a business successfully that covers all businesses. Therefore I will discuss an overall strategy that will give you a pretty good indication.

Usually when an owner decides they have had enough and would like to sell they jump on the phone and call their business broker. They are usually motivated and would like something to happen the same day, well nearly, they may give you a couple of days to "sell" their business. Unfortunately it doesn't happen that smoothly.

For the purposes of this article we will assume the business for sale is a non-franchised retail shop not connected to a shopping centre.

Usually the ingoing owner will ensure when they buy the business in the first place the business offers some sort of tenure (a lease). After all you wouldn't want to hand over a substantial amount of money to find out a week later the Landlord can ask you to leave. If the business has a previous owner this would usually involve the existing owner transferring the lease to the new owner. We will assume that is the case in this example. So, owner "A" would transfer the lease in place to owner "B." Sounds easy enough doesn't it? Well it's not quite so straightforward. The Lease will accompany other documents, usually a Deed of Assignment and a Deed of Covenant. There could be many other Deeds or documents but if you had to use the word "standard" this would cover it. A lot of Vendors don't understand when they sign a lease 99 out of 100 times when you sell your business to the new purchaser you are guaranteeing that person will pay the rent. Simply, if they default paying rent the Landlord is quite entitled to sue you and others until he/she discovers who has the money and that person can pay the rent until either a new tenant is found or he/she releases you from the lease agreement. For example say if you are the third owner of the business in the five years the lease originally was for. If you defaulted on paying rent and there were three other owners prior to you the Landlord would probably sue the lot until one of you could pay; that could be say four years after you have sold the business.

With the introduction of the Retail Shop Leases Act there are other documents and requirements by law. The main document required is the Landlord's disclosure document." This disclosure document spells out all the costs such as outgoings (always was a contemptuous issue). I won't go into detail why the Government legislated this Act except to say it is to protect the consumer, that's you.

Step 1: Make sure you have a genuine (or original) copy of your lease and any other Deeds or documents that accompany the lease.

I should also mention there are many other certificates, licenses,permits and council permits required to be transferred to a new owner when a business is sold. If the business operates a food outlet it is usually mandatory to have the Health Department visit the premises prior top settlement.

So, we've got the lease organised now we have to look at another major area; can you guess? Of course the financials. Brokers and Accountants approach this area (sometimes) very differently. If you ask your Accountant to prepare financial figures for the sale of your business they will often delete items such as Depreciation, Interest, Borrowing Expenses, sometimes Accountancy Fees, Bank Charges and Wages. Oh and I mustn't forget Motor Vehicle expenses. Whilst I'm not here to challenge an Accountants role to their client I do find these adjusted Profit & Loss sheets a waste of time. Why, well let me explain. In today's world due diligence is on the up; that is to say people want proof of financial figures represented. Whilst it is impossible to prove beyond any doubt the income and expenses of a business tax returns sure help the wary Purchaser. Also from a Vendors point of view with the way litigation is going he/she would be better to disclose every expense so as not to be accused of misrepresenting the business. Here's a classic example. Business for sale with adjusted Profit & Loss (P&L) sheet, P & L shows motor vehicle expenses deleted. Arrive with Purchaser, Vendor driving out says "Hey Chris, just doing a delivery around the corner back in a flash". SUNK! And who would blame a Purchaser for feeling cheated? Tax figures with a fair Financial Adjustment Sheet takes all that fear and suspicion away.

Step 2: Have 3 years, if possible, of detailed Profit & Loss sheets with Balance Sheets, Depreciation schedules, full list of Plant and Equipment (should match your Depreciation schedule) Bank deposit statements available, selection of Invoices, goods purchased, rental statements. You should be prepared to provide the Purchaser's Accountant with the businesses taxation returns if requested.

We still have a long way to go to be ready to start marketing the business to the marketplace. The first two steps however are the big ones. As you can imagine if you own a business no two businesses are the same so the amount of information to collect varies greatly from business to business.

I can hear you saying, "this is all fine but how do you value a business for sale?" Glad you asked. The real truthful answer - nobody can tell you the exact value on any business and get it exactly right. We are in a market just like the stock exchange with perhaps a slightly less fluctuation of prices than the stock exchange itself. Public sentiment drives the stock market as well as the business market. With that said there are various ways to value a business; let's look how the Accountants apply capitalisation methods to a business. For the sake of ease I'll explain the real quick version. But first a word of caution. To explain the actual process would take pages and pages and probably a lot more than you are prepared to read so don't rely on this and think you can apply it to your business, ask us or see your Accountant.

Basically it's all about return for risk, return on investment (R.O.I.). Let's say a business has a net profit of $100,000.00, it's not a specialised business or anything protected like a post office or newsagency. Here's how it works:

This is a common method that Accountants use and to be fair it's a pretty good result for the Vendor. The trouble is Purchasers refute this method and are supported by the Purchasers Accountant, confused. Well stick around and I'll explain the terrible conflict an Accountant faces when dealing with a vendor and or a Purchaser.

When an Accountant acts for a Vendor the Accountant has to value the business based on Australian Accounting Standards, that's not to say the good ones will probably say to the Vendor you may not attain that price it might be more like x or y. But, to save their skin they usually rely on this capitalisation method; that's appropriate and fair. Now, when a Purchaser asks advice about buying a business it's so so different. Some and I stress some Accountants have great difficulty with goodwill and the capitalisation of same. They also struggle with plant and equipment and have very different views how to value same. Now before you think I'm having a go at them I'm far from that; Accountants have a very difficult job advising people. Imagine if they were allowed to act for a Purchaser and vendor on the same business - chaos!

So, now that we are all confused how is it that so many businesses sell if there are problems trying to establish a price. Fortunately business brokers are hands on and deal with the buying and selling of businesses every day; assuming they specialise in that area.

Valuing a business from the business brokers' perspective has "on the street values" and "instincts." We also use capitalisation methods where appropriate but the best analysis to use is comparable sales; just like homes, cars and so on. As is the case we're back to market forces again.

Closing Summary :

The best advice if you are considering selling your business is to:

1. Call two to three business brokers to inspect your business;
2. Check to see if the agency is licensed and the salesperson is to;
3. Ask if they have sold your type of business and when;
4. See how long the agency and the salesperson has been there;
5. Ask what systems they use to sell your business; Internet, Email, Window display, Admin backup, client notes;
6. Ask what information they provide to a buyer;
7. Ask how they qualify a buyer;
8. Ask them to provide written answers to the above and how they feel the best way to advertise and market your business.

There are a lot of questions to ask but just think if you were buying a large item you would ask a lot of questions so selling your business is important so ask the question. You must qualify the business broker. A good business broker can achieve a lot more than a bad or middle of the road one. Here's a tip; go to their office and look at their workplace; if you can see the desk they work from check it out too; is it messy, are their messages all over the place, probably unanswered inquiries. Ask them for a reference from a vendor or Purchaser, be nosey and ask plenty of questions. A good business broker will take delight in your interest of him/her and the firm they work with.

Chris Greenfield

Mobile phone 0407 793 994
chris@encompassgroup.com.au