Selling a Business?
You’re not alone. You only have to look in the “Business Opportunities” section of the daily paper on Wednesdays and Saturdays to see hundreds of business’s for sale. Buyers can pick and choose from many different types and prices. They all make a profit and are easy to run!!!! Well………some are, but how does a potential buyer recognise them?
Buyers Today
Buyers today are better educated and more generally more aware of the pitfalls. Buying a business is something they don’t do every day so the logical thing to do is to get professional help when they assess a business. This can involve the Business Broker, Accountant, Solicitor, Finance Broker, Financial Institution and Settlement Agent among others.
Give your business the best chance of selling.
Preparation and planning are the the key. Plan well in advance to put your business on the market. This will give you time to compile all the information you need to present to potential buyers. Try and see your business through the eyes of a purchaser and do what ever is necessary to present it in its best light. To give your business the edge over other business’s for sale the following is a list of must haves.
Well documented businesses sell!!
At least 3 years full financial statements including Profit & Loss, Balance Sheets, and Depreciation Schedules need to be available plus personal tax returns and bank statements. Also, year-to-date financials to confirm gross sales to the end of the last month. If your last financial statements are dated 30 June of the previous year how old are they now?
Also, if the purchaser of your business needs finance the more information they can provide a lender the better chance they will have of getting the funds.
| Example of private owned Small -Medium Business (SME) | 2019 | 2018 | 2017 | |
|---|---|---|---|---|
| Gross Sales | $ 500000 | $ 450000 | $ 400000 | |
| Cost of Sales | $ 200000 | $ 175000 | $ 150000 | |
| Gross Profit | $ 300000 | $ 275000 | $ 250000 | |
| Expenses | $ 200000 | $ 200000 | $ 180000 | |
| NET PROFIT | $ 100000 | $ 75000 | $ 70000 | |
| AD BACK | ||||
| Borrowing Costs | $ 5000 | $ 3000 | 0 | |
| Depreciation | $ 25000 | $ 28000 | $ 30000 | |
| Interest | $ 21000 | $ 18000 | $ 16000 | |
| HP Charges | $ 6000 | $ 6000 | $ 6000 | |
| MOTOR VEHICLE REPAIRS (ONE OFF) | $ 7000 | 0 | 0 | |
| Owners Wages | $ 60000 | $ 50000 | $ 50000 | |
| Owners Superannuation | $ 20000 | $ 10000 | $ 4500 | |
| TOTAL AD BACKS | $ 144000 | $ 115000 | $ 106500 | |
| TOTAL SURPLUS | $ 244000 | $ 190000 | $ 176500 |
Once you have established your total surplus or “Adjusted Net Profit” you are in a position to calculate the goodwill your business
ROI and Goodwill
Goodwill is generally based on the expected “Return on Investment” (ROI) of a business then deducting the value of plant, equipment and stock. The balance would then be allocated as goodwill. ROI varies with different types of business’s. For example if the business above was a strong demand business such as a manufacturing or wholesale then the buyer could expect a ROI of say 30% This equates to a multiple of 3.33 (100 divided by 30). The asking price for this business then could be up to $812,000. The goodwill component would be calculated by deducting the value of the plant, equipment, fixtures, fittings etc.
ROI is a percentage and is normally expressed as range. ie 30%-60% The individual characteristics of a business would then determine the ROI used.
What Should I look for?
Well documented, well presented and organised business’s can make the decision to buy or not to buy reasonably straight forward. Look for complete financial statements for at least 2 or 3 years plus year-to-date financials for the current year. Why are they selling? Are the premises and lease suitable? Get professional advice from an Accountant or qualified person. A few dollars spent now could save you a substantial sum in the future. See our useful links for more information or if you have a particular question please email
The above business could range from $466,000 (60%ROI) to $812,000 (30%ROI)
Plant and Equipment?
Plant and equipment, fixtures and fittings are normally priced at either written down value (depreciated value) or “market value” depending on age and condition.
Stock
Stock is normally determined as stock at valuation (SAV) to be determined by an independent stock take on the day of settlement. An estimate of expected stock value is required.
G.S.T.
Sale of a business as a going concern is generally GST free provided:-
The vendor supplies to the purchaser everything necessary for the continued operation of the business. The vendor carries on the business until the date of sale and: Both parties agree in writing that the supply is of an ongoing concern. Purchasers must be registered for GST at the time of settlement.
GST Update:- We have mentioned before that under current legislation business sales can be GST free where:- “The vendor supplies to the purchaser everything necessary for the continued operation of the business. The vendor carries on the business until the date of sale and: Both parties agree in writing that the supply is of an ongoing concern.” Purchasers must be registered for GST at the time of settlement. Note that the Vendor is responsible if, at a later date, the sale is determined to be taxable. However, now GST clauses have been incorporated in some “General Conditions for the Sale of a Business” (used by many Real Estate Agents and Business Brokers) the GST condition now includes a clause that basically says “…. should the sale subsequently be deemed to be taxable under the GST legislation the vendor has the right to demand the amount of GST from the purchaser who must pay the “said” amount within 30 days of receiving notice in writing. The clause has an effect for up to 10 years from the date of the settlement of the business.
Market Assessment – Benchmark your business
The next step is to get an appraisal from an experienced Business Broker to determine the demand for your type of business and the goodwill factor. Your Broker can outline a suitable marketing plan to give your business exposure to potential buyers as well as offering tips and suggestions to make the sale process as smooth as possible.