Selling a Business

by Dr Greg Chapman, MBA

The real test of business success is to see the value others place on your business. That is, how much they are prepared to pay you to own it. However, few owners see the return on their money and time spent building their business when they try to sell it.

Someone buying a business has similar considerations to someone buying a home. If the home is new or well maintained, and little expenditure is necessary to make it they way they want before moving in, the buyer will pay more. If the house is run down, and requires substantial renovation, they will insist on paying much less. Taking the analogy further, if buying a vacant block, they will have to also budget for the house to be built.

When buying a business, the comparison is between taking over a going concern, building up a run down business or starting a new business from scratch. Buyers will consider the saving in time and effort through buying a going concern that provides predictable incomes and operates smoothly when compared with one that has been managed poorly, or the effort of creating a new business.

Unfortunately, most businesses are totally dependent on their owners. When they aren’t there, nothing happens or sales drop. When a buyer looks at such a business, they will value it on its physical assets and its existing customer base. The value of the customer base may be heavily discounted if it is believed that the customers have a strong personal connection with the owner. Little or no value will be placed on the future growth potential of the business as the owner has basically done nothing to tap it. Why should a buyer pay for value that the current owner has missed. The buyer must put in the effort to unlock that potential and take all the risk if they are to be a success. They will also discount the value where it is possible key staff may leave soon after the existing owner. If there are no systems, all they are really buying is a customer list of dubious value, plus a few used assets.

Compare how a buyer values a well managed business. Along with the assets and the existing customer value, the buyer will see a marketing system which has allowed the existing owner to grow their business. They may see year on year growth in sales and profit. They will see systems in all areas of the business so if staff leave, they can bring in new staff and train them to run the business in the same way. The buyer in this case may pay 3 or 4 or even more times the annual profit of the business in addition to its other assets. (Highly successful listed companies sell for 20 times their annual earnings or more).

The difference between these two scenarios is business systems that ensure that the business runs smoothly, that there is a marketing strategy that provides predictable sales growth and systems that manage the people within the business. These systems make the success of the business independent of ownership. Whenever risk is reduced, price can be increased. The time to put in these systems is not when you are trying to sell the business. You can’t fatten a pig on market day, as one politician is regularly quoted as saying. These systems should be put in place now. They are part of your Exit Strategy.

The best time to prepare your exit strategy is when you start your business, but it is never too late.

Find out more about these strategies at:

The Five Pillars of Guaranteed Business Success

This book, which has a forward from Tony Steven, the CEO of COSBOA, the peak small business organisation in Australia, comes with a $100 of business tools, and provides an easy to understand, step-by-step approach on how to improve your business, starting with your goals, right through to systems and sales.



Please visit Five Pillars for more information on “The Five Pillars of Guaranteed Business Success”

May Your Business be as You Plan It!

Dr Greg Chapman

Over to You. What do You Think? Post Your Comments Below.

Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems.

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The Australian Small Business Blog

A Business You Can Sell

by Dr Greg Chapman, MBA

We are told often enough as small business owners, that we must have an Exit Strategy. In fact, it is good practice that you have an exit strategy when you plan your business at start-up stage. But to have an exit strategy, you must have a business that is a Saleable Asset. What does that look like?

These are the key features that a business should have in order for someone to want to buy it. (And conversely, if you are buying a business, this is what you should look for.)

Firstly, does it make a profit? This might seem to be an obvious question, but just because it has a positive cashflow, does not mean that it is making money. Does it give an acceptable return on your investment in time, money and effort, after your wages? If not, don’t expect to receive payment for that from a buyer.

Secondly, would it still make money if you were not there? If the answer is no, what you own is not a business, it is a job with overheads. Unless you can demonstrate to someone else that you can be making money when you are not there, you will be asking a buyer to buy your job. How successful do you think you will be? You need a business model that will enable you to produce an income that does not rely solely on your own efforts

Thirdly, can you give a buyer an Operations Manual that if they follow, that they could expect to achieve the results you achieve, albeit with some training? This is what franchisors are selling. An operations system that dramatically reduces the risks for the franchisee when they follow it.

Fourthly, where are the customers going to come from? You might have a good number of customers today, but what guarantee is there that they will stay when you go? And, even if they do stay, they won’t stay forever. How will they be replaced, and how would the new owner grow the business? If you can’t answer these questions, this will have a very significant impact on the price you will receive. If you can show a marketing plan that the new owner can follow, show examples of past campaigns and their results, and the customer service strategies you use to keep people coming back, the new owner is likely to pay a premium for the potential for this business.

And lastly, how is the business controlled? Could you appoint a manager, and go away, and be sure that the business will continue to be a success in your absence? If you can do this, your business can be replicated, and this will increase its value by many times. This is achieved through a reporting system that lets you know what is happening in all the key areas of your business, even if you are not there.

Successful franchises have each of these elements in place and can charge 3-4 times the annual profit (after the owners’ wages). More sophisticated companies (I am referring to listed companies) regularly charge 15 times earnings and more. But businesses without these elements are often lucky just to get back stock and physical asset value- often highly depreciated, that is a fire sale valuation, with no value from the business at all. But, when you put all these elements in place, you will have a Saleable Asset which will reward you for your invested time, effort and money.

If you would like to post a comment on this article, please click on the Comments link below. Note that the best comment on any article in this blog during March, will receive a Free mp3 Player.

Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is a Business Coach and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems.

The Australian Small Business Blog