Selling Your Business

Selling your business is one of the most important decisions you'll have to make. Deciding how much your business is worth is one of the main issues you'll need to consider.

Assetxcel recognises this is a major decision particularly for individuals where the sale of the business may be the realisation of a lifetime's work. We will work closely with your management team to evaluate the best exit strategy for you, which may include: a trade sale, offering equity to key employees, a management buy-out or an initial public offering.

If selling is the best strategy for you Assetxcel can provide specialist advice throughout the sale process from reviewing the business and advising you in relation to changes which will increase value, valuing your business and identifying potential acquirers or investors, through to completing the transaction.

Other factors to consider when selling your business include when is the best time to sell and whether you should make use of a broker or other professional to maximise selling opportunities.

The sale of a business typically involves the following key stages:

• Restructuring the business and reviewing its presentation to optimise the sale value
• Preparation of an information memorandum
• Identification of potential buyers
• Approaching potential buyers
• Entering into confidentiality agreements
• Assisting purchasers with an initial review of business
• Receiving indicative and revised offers
• Entering into a heads of agreement
• Assisting purchaser with due diligence enquiries
• Finalising sale negotiations
• Completing the sale

1. When is the best time to sell?

The general economic conditions including interest rate levels, consumer confidence and the like, as well as industry specific circumstances will be factors in determining the appropriate time to sell.

2. What information will buyers need?

Most buyers will insist on seeing the recent financial statements and the last 3 years taxation figures of a business including financial projections for the current year and preferably financial and cash flow projections for the forthcoming year or two. The latter applies to larger businesses. Buyers will also want to know the information they consider relevant to making a decision to acquire a business. Assetxcel has the expertise to prepare a detailed Information Memorandum which would include a summary of all the main information that a buyer will need.

3. What are the main steps in selling a business?

The main steps in selling a business include familiarisation and research, preparation of an Information Memorandum, preparation of a marketing plan, marketing the business, signing confidentiality agreements with prospective purchasers, extensive negotiations, contract negotiation and execution and finally, settlement of the sale. In many instances it is recommended to engage a profession lawyer to eliminate any legal complications.

 4. How long does it take to sell a business?

The time taken will depend on how quickly the vendor can collate all the necessary documents and how smoothly the negotiating process takes place once the potential buyers have been found. A transaction is not normally completed in less than 3 - 6 months from receiving instructions. Assetxcel provides a complimentary and confidential advisory service to answer this question. If you are interested in this complimentary service, click here.

5. Will I have to stay on after the sale of my business?

Sales of most businesses normally include a goodwill component and as buyers are concerned to maintain and grow that goodwill, it is normally important to put in place a handover period from the key vendor, director and/or significant employees. This is usually a period of 4 weeks and there after on a paid consultancy basis.

6. What warranties will I have to give to the buyer?

The buyer will normally want a number of warranties relating to the business, including warranties in relation to the accuracy of information provided and the absence of legal claims. These detailed warranties are normally negotiated in conjunction with the lawyers for each party.

7. Will I pay tax on the sale of my business?

The question of whether tax will be payable on the sale of the business will depend upon the structure of the sale. This includes whether the sale occurs by way of the sale of assets or the sale of shares. It is normally appropriate to take independent professional advice from your tax accountant in this regard. Although GST is normally not payable by a company where a business in sold as a going concern, independent advice from your lawyer and/or tax accountant should be sought on this matter.

Valuing Your Business

There are a number of different methods used to value businesses in today's marketplace, depending upon the size, profitability and nature of the business being valued.

Ultimately, valuations attempt to value the future maintainable profits of an enterprise. Generally the market accepts the latest year's profit as a basis for valuing small to medium-sized businesses, whereas for larger businesses, the average of the last two or three years profit together with a detailed and realistic operating budget may be preferred.

Asset Valuation Method

Under-performing businesses (where the profit derived from the business is not commensurate with the capital invested in the business by way of plant and stock) are valued according to the Asset Valuation Method. There is no goodwill component and the value of the business is derived solely from the value of the plant and equipment (usually at current market value) and stock.

This method is used when other valuation methods give a value that is less than the net tangible assets of a business. This is based on the concept that a business owner is highly unlikely to sell his business for less than he can receive by way of an orderly disposal of the business assets.

Stock is valued at invoice cost, but may be discounted depending upon the amount of slow-moving or dead stock.

Plant & equipment is usually valued by an independent valuer.

Discounted Cash Flow Method (DCF)

This method is favoured by the large accounting firms, although it is generally not applicable to small and medium businesses. In theory it is one of the best valuation methods. It attempts to put a value, in today's terms, on future cash flows in an enterprise. A DCF valuation is based on the concept that the value of a business depends on the future net cash flow of the business. Future cash flows consist of two elements:

• The net cash amounts generated each year
• The net cash expected from the ultimate sale of the business at a point in the future

This method is useful where future cash flows can be predicted with reasonable accuracy, such as mining companies or large stable companies.

It could also be applied where a small or medium company has long term contracts for the supply of goods and services or where the company has a history of regular cash flows.

Unfortunately, it is generally not suitable for valuing most other small to medium companies because of the difficulty of estimating cash flows some years into the future, the difficulty of estimating the sale price of the business in the future and the difficulty of assessing a suitable discount rate.

Return on Investment (R.O.I) Method

This is the most common method used to value businesses worth up to about $2 million. It should more correctly be called the Return to an Owner/Operator Method (R.O.O.) as it is based on a return to an owner before he draws a wage. It reflects the percentage returns to an owner on his capital investment in the business. The net profit used in the calculation is not the same as shown on the Profit & Loss Statement. A number of adjustments and “add-backs” are made to the P&L Statement to reflect the return to an owner and to add back non-business expenses and one-off expenses.

This is calculated as:

R.O.I.’s for specific industries are based on sales evidence from previous business sales.

Given the R.O.I. for a specific industry (and making adjustment for special features of a particular business), the valuation is arrived at by transposing the above formula.

This figure is the total price of the business, including plant, stock and goodwill. The goodwill is derived by subtracting the value of plant and stock from the calculated purchase price.

For businesses in this price range the net profit or operating profit is defined as the return to an owner-operator before interest, tax, depreciation and owners’ salary. Hence a number of add-backs are made to the net profit as shown on the tax return.

For businesses in this price range, usually only the business assets are valued and sold. Assets include plant & equipment, stock, work-in-progress, trading names, goodwill and intellectual property.

Debtors are not included. These are retained by the vendor, who also pays out the creditors at settlement.

Price to Earning (P/E) Method and the EBIT Method

The EBIT Method

This is the most common method of valuing private businesses worth around $2 million and above. Relatively few add-backs are made to the book profit when valuing a large business. Interest is added back and depreciation in some cases. Owners’ wages are not added back (but may be adjusted to bring them in line with commercial rates) as these businesses are valued as running under management.

There are two related profit figures:

• EBIT - earnings before interest and tax
• EBITDA – earnings before interest, tax, depreciation and amortisation

The EBIT figure is usually used in valuation calculations, although the EBITDA can be used.

The EBIT method of valuation is simply calculated by the following formula:

Value of business = Profit x EBIT Multiple

For example, if the EBIT is $2.5 million and the multiple is four, the value is $10 million. This is the value of the business assets comprising stock, plant & equipment and goodwill. Debtors and creditors are not usually included.

It is becoming increasingly common for the purchaser to buy the entire company by way of purchase of the shares in the company. In this case the final price is adjusted to reflect the other items on the balance sheet, including debtors, creditors, accruals for staff entitlements and perhaps company debt.

The EBIT multiple to be applied to value a business can vary from around two up to around six, and sometimes higher, depending upon a number of factors, including:

• The total figure (a business earning an EBIT of $10 million will attract a higher multiple than one earning $1 million)
• The quality of the management team
• Stability of sales and profits
• The type of industry
• Barriers to entry
• The ability of the business to generate profits without the owner’s involvement
• Growth potential
• Market dominance

Price to Earnings (P/E) Method

This is the method used to value public companies. It can also be used to value private companies. The P/E method is essentially the same as the EBIT method except that the after-tax profit is used in the calculation and a different ratio is used to compensate for this.

The P/E ratio to be used in the calculations is extracted from sales evidence. It can also be extracted from published public company information. This method requires locating a few public companies similar to the one being valued. The average P/E of the public companies is derived. This figure is then discounted anywhere from fifty to eighty per cent to reflect the generally smaller size of the business and the lack of share liquidity compared to public companies.

Some private company owners get carried away when they see P/E’s of 12 to 15 for public companies similar to theirs. They need to bear in mind two factors:

• The discount factor mentioned above
• The fact that a P/E is equivalent to about 1.3 times an EBIT because of the after-tax nature of P/E. That is, a P/E of 10 is approximately equivalent to an EBIT of 7

Rule-of-Thumb Method

This once-popular method simply values a business as multiple of its gross income, with each industry having its own multiple. It has fallen out of favour because the overheads required to earn the same income can vary significantly from one business to the next, even within the same industry. It is now used only to value accounting practices and real estate rent rolls. Virtually all other businesses are valued by using one of the methods above.

Due Diligence

In business transactions, the due diligence process varies for different types of companies. The relevant areas of concern may include the financial, legal, labor, tax, environment and market/commercial situation of the company.

Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labor matters, immigration, and international transactions.

Confidentiality

• Confidentiality is crucial
• Confidential information will not be released without your approval

We understand that maintaining your confidentiality is crucial. Initial contact with Assetxcel is on a 'no obligation' and confidential basis. If you wish, we are happy to discuss our approach to proactively selling a business and how it might be appropriate to you on a completely anonymous basis.

Once engaged as a client, we manage the release of confidential information relating to your business during the sales process in a structured and controlled basis.

Confidential information will not be released without your approval. The objective is to only release sufficient confidential information necessary to progress the deal.

If you have any specific concerns about confidentiality then please let us know when you contact Assetxcel and we can then discuss the options available. Call us in confidence on 1300 799 078 to discuss your next steps.

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