Selling a Business Guide – 4 Recommended Guidelines

Selling a Business Guide – 4 Recommended Guidelines

by | May 25, 2020 | Selling a Business

How to sell, why to sell, to who and for what price are key factors when selling a business.

Table Of Contents

1.0 BUSINESS SALE PRICE

The price a business sells for is the price that the Seller and Buyer agree on.

Otherwise, a sale price is an approximation based on the ROI (Return on Investment) profitability that comparable businesses are sold for. For example, a business sold for $2 Million dollars on expected annual profits of $650,000 is sold on an annual 32.5% ROI basis.

In New Zealand business brokers licensing rules require them to:

  • Provide the Seller they act for with a realistic current Market Sale Price Appraisal, with a description of the method of appraising.
  • Advertise an asking price that clearly reflects the Seller’s expectations

This is to ensure that there is clear communication between all parties (Seller, Broker, and Buyer) about the expected sale price. The appraisal is based on the ROI (Return on Investment) from owning the business, based on the profits expected to be earned by the Tangible and Intangible Assets excluding Stock. Business sale prices are normally advertised as an asking price + stock.

Most SMB (Small and Medium sized Businesses) are Asset sales.

On a Business Sale Agreement, the total sale price is broken down into 3 parts – Tangible, Assets, Stock in Trade, and Intangible Assets.

  • Tangible assets are the physical assets needed to operate the business e.g. premises, premises fittings, equipment (including machines and vehicles).
  • Stock in Trade are the products (including the raw materials for making the products) sold by the business.
  • Intangible assets represent the balance of the total sale price other than Tangible assets + Stock. That includes intellectual property, contractual rights, and goodwill. It is the agreed sale price difference (from Tangibles and Stock) for the expected prospects (opportunities and threats/risk) of the business to maintain, exceed, or reduce the ROI profits of the business.

Business can be also be sold (in full or in part) as Shareholder Equity, a share (rather than ownership of specific assets) of ownership of the business ROI.

2.0 HOW TO SELL A BUSINESS

selling-a-business

Tell Prospective Buyers what’s for sale at what asking price.

Identify the assets being sold, Tangible, Stock, and Intangibles.

Describe the opportunities and threats in and of the market and the strengths and weaknesses of the business assets regarding their effect on ROI.

Describe the costs and benefits of owning the business, including why the business will continue to sell and profit by how much, the surety of continued ROI and investment payback.

2.1 SELLING A BUSINESS BEST PRACTICES

Sooner or later the points numbered below are included in what a business buyer needs to know about a business sale to make a buying decision & most (if not all) of the points are needed by a business broker to appraise a market sale price and write an information memorandum or business profile that describes the business ROI expectations.

Information should be confidentiality provided to prospective buyers in stages.

Initially, an investment memorandum (business profile for smaller ‘selling a job’ businesses) should be provided, They should detail and/or summarize the information listed below.

More detailed information (e.g. financial statements) should only be provided after serious interest is indicated from someone the Seller will sell to, some information only provided at DUE DILIGENCE stage when a conditional offer to buy the business has been agreed to.

  1. Indicate a sellable or near sellable asking price, a price that the Seller will agree to sell the business for.

2. Provide consistent facts about what’s for sale.

  • A list of assets with asking prices
  • A summary of historical financials, including working capital needed (for receivables minus creditors, etc.), financial profit performance – matching what is shown on tax return Financial Statements, GST returns and other reporting
  • A copy of Financial Reports e.g. Statements and GST returns
  • A copy of contracts needed for continuing the current going concern business, including leases and employment agreements

3. Provide a strategic outline of the prospects for future ROI.

  • Provide a reason for selling
  • Describe the ROI situation – with some form of SWOT Analysis of the market (Opportunities and Threats) and business assets (Strengths and Weaknesses) to earn future ROI.

4. Continue operating the business as usual, in good repair, for continued performance and best future prosperity.

5. Propose an appropriate handover and training period.

6. Propose an appropriate non-compete period.

2.2 APPOINT A BUSINESS BROKER TO SELL A BUSINESS

Selling a business is a specialist area so it’s worth getting expert help.

A good business broker should understand how to describe the strategic business situation, the strengths and weaknesses of business assets to prosper in the market’s opportunities and threats, explain the ROI that a buyer needs to know to make a buying decision, and be licensed to draft an AGREEMENT FOR SALE AND PURCHASE OF A BUSINESS.

Experts specializing only in business strategy and management, or finance and accounting, or law are worth getting help from too.

Help from a lawyer licensed to practice law and give legal advice should be sought before signing a sale agreement. A business broker’s license does not license them to give ‘legal advice’.

It’s worth getting a business broker to appraise a current market sale price.

It’s worth getting a business broker to prepare an investment memorandum (business profile for small businesses) with details about your business, that outline what buyers need to know to make their buying decision. The information should be big on facts and forecast opportunities and risks for growing the business.

aAgents.Biz Business Brokers can help business by Appraising Business Value, Valuing a Business, writing Information Memorandums, and Business Profiles, acting as a Business Seller’s Agent.

3.0 WHO TO SELL A BUSINESS TO

Buyers may be:

  • employees — this is known as a management buyout
  • competitors
  • suppliers or customers
  • entrepreneurs
  • investment groups.
Who Will Buy Your Business? A job-buyer or a general investor?

Finding and negotiating with potential buyers is time-consuming and specialist work, so think about hiring a business broker to do it for you. A broker will know which type of buyer will be interested in your business and how to approach them. 

4.0 COMPLETING A BUSINESS SALE TRANSACTION

A licensed Business Broker is licensed to draft the AGREEMENT FOR SALE AND PURCHASE OF A BUSINESS (ASPB).

Their licensing rules require them to recommend and give parties a reasonable opportunity to take legal and technical advice before signing an ASPB.

AGREEMENT FOR SALE AND PURCHASE OF A BUSINESS

AGREEMENT FOR SALE AND PURCHASE OF A BUSINESS

by | May 25, 2020 | Selling a Business, Buying a Business

An ASPB (AGREEMENT FOR SALE AND PURCHASE OF A BUSINESS) is the most common form of SMB (Small to Medium-sized Business) sale agreement in New Zealand. It is an agreement to sell/buy assets used for operating a business identified as Tangible, Intangible, and Stock Assets – excluding creditor liabilities, cash, and debtor assets.

Standard TERMS OF SALE are changed and deleted, and FURTHER TERMS OF SALE are added to account for unique terms of a sale.

Some businesses are sold (in full or in part) as Shareholder Equity, a share (rather than ownership of specific assets) of ownership of the business Those sales normally include most (if not all) assets and liabilities of the limited liability company being sold, including cash, creditor liabilities, and debtor assets.

Agreement for Sale and Purchase of a Business Fourth Edition 2008 (6)Download
Agreement-for-Sale-and-Purchase-of-a-Business-Fourth-Edition-2008-6

Valuing $1M+ Businesses

Valuing $1M+ Businesses

by | May 25, 2020 | Buying a Business, Selling a Business

Valuing a business is a process of determining an appropriate measure of profit and a multiple to multiply it by to approximate the ROI a business valuation is based on.

Businesses are bought and sold based on ROI, the return/profit someone will earn from owning a business.

The strengths and weaknesses of the business assets to prosper in the opportunities and threats of the market help determine the multiple and the expectations of maintainable and growing profits.

Profits are determined by the historical financial performance of the business. Forecasting profits will be based on the historical profits plus expectations of maintainability and growth from the strengths and weaknesses of the business assets to prosper in the opportunities and threats of the market.

A $1M+ business valuation is based on multiples of EBIT (or EBITDA) rather than the EBPITD basis of buy-a-job business valuations.

Measures of Business Profit Used in Appraising a Business Sale Price

  • ROI is Return on Investment
  • EBIT is Earnings Before Interest and Tax
  • EBITDA is Earnings Before Interest, Tax, Depreciation, and Amortization
  • OCS is Owner’s Cash Surplus, also referred to as EBPITD
  • EBPIDT is Earnings Before Proprietors Income (wages or drawings) Interest and Depreciation. (This is sometimes called the Sellers Discretionary Cashflow.) This determines the basic earning capability of the businesses before any other variables – including 1. Net Profit before taxation 2. Proprietors income (including salary, wage, directors fees) 3. Any Interest paid 4. Any depreciation claimed
Valuing $1M+ Businesses

Valuing Small (Less than $1m) Businesses

by | May 25, 2020 | Buying a Business, Selling a Business

Valuing a business is a process of determining an appropriate measure of profit and a multiple to multiply it by to approximate the ROI a business valuation is based on.

Businesses are bought and sold based on ROI, the return/profit someone will earn from owning a business.

The strengths and weaknesses of the business assets to prosper in the opportunities and threats of the market help determine the multiple and the expectations of maintainable and growing profits.

Profits are determined by the historical financial performance of the business. Forecasting profits will be based on the historical profits plus expectations of maintainability and growth from the strengths and weaknesses of the business assets to prosper in the opportunities and threats of the market.

A small (Less than 1M+) business valuation is typically based on multiples of the Owner’s Cash Surplus (EBPITD) rather than EBIT (or EBITDA). These businesses are more buy-a-job businesses than larger businesses where the owner is buying an investment where they don’t need to work in the business rather than a job investment.

Measures of Business Profit Used in Appraising a Business Sale Price

  • ROI is Return on Investment
  • EBIT is Earnings Before Interest and Tax
  • EBITDA is Earnings Before Interest, Tax, Depreciation, and Amortization
  • OCS is Owner’s Cash Surplus, also referred to as EBPITD
  • EBPIDT is Earnings Before Proprietors Income (wages or drawings) Interest and Depreciation. (This is sometimes called the Sellers Discretionary Cashflow.) This determines the basic earning capability of the businesses before any other variables – including 1. Net Profit before taxation 2. Proprietors income (including salary, wage, directors fees) 3. Any Interest paid 4. Any depreciation claimed
Valuing $1M+ Businesses

Which Profit To Use for Valuing a Business?

by | May 28, 2020 | Buying a Business, Selling a Business

Valuing a business is a process of determining an appropriate measure of profit and a multiple to multiply it by to approximate the ROI a business valuation is based on.

Businesses are bought and sold based on ROI, the return/profit someone will earn from owning a business.

The strengths and weaknesses of the business assets to prosper in the opportunities and threats of the market help determine the multiple and the expectations of maintainable and growing profits.

Profits are determined by the historical financial performance of the business. Forecasting profits will be based on the historical profits plus expectations of maintainability and growth from the strengths and weaknesses of the business assets to prosper in the opportunities and threats of the market.

A $1M+ business valuation is based on multiples of EBIT (or EBITDA).

Smaller buy-a-job business valuations are based on OCS (Owner’s Cash Surplus, EBPITD).

Measures of Business Profit Used in Appraising a Business Sale Price

  • ROI is Return on Investment
  • EBIT is Earning Before Interest and Tax
  • EBITDA is Earnings Before Interest, Tax, Depreciation, and Amortization
  • OCS is Owner’s Cash Surplus, also referred to as EBPITD
  • EBPITD – Total Cash Surplus or Sellers Discretionary Cash of business including 1. Net Profit before taxation 2. Proprietors income (including salary, wage, directors fees) 3. Any Interest paid 4. Any depreciation claimed.