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Article | 6-minute read

What to consider before selling a business

As challenging as buying a business can be, selling one is usually even harder. Here are some handy tips which may help make the sales process quicker and easier.

ANZ Financial Adviser, Kyle Vause, says Australian business owners may run into trouble when it comes time to sell for two main reasons. Firstly, they may not be aware how hard it is to find someone to purchase their business. Secondly, an emotional connection to their business may make it difficult for them to consider sale terms objectively.

The valuation conversation

Setting a reasonable selling price is the first and most significant stumbling block for many business owners. They may be unaware of how flooded the market is with the type of business being sold and unable to imagine how their business would be reviewed for purchase by a potential purchaser.

“Even before the pandemic hit, it had long been a buyers’ market,” Vause says. “Baby Boomers are disproportionately likely to be business owners and lots of them are now retiring. People need to understand that selling a business could take, on average, six to nine months. In my experience, a substantial proportion of business owners never manage to sell their business at all. I often find that many others make only a modest amount selling the equipment, premises, client list, or IP connected to their business.”

Vause says business owners are often prone to overestimating the value of their business despite the economic uncertainty created by the Coronavirus.

“That’s not surprising; people can overestimate how much their homes are worth,” Vause says. “But the market for businesses and the market for residential real estate are very different. Business buyers tend to be a lot less inclined to become emotionally invested and pay over the odds.”

Vause suggests that business owners should get their businesses valued by an independent professional and take that professional’s opinion and rationale behind the valuation seriously. “If a business broker says you’ll struggle to get more than, say, $500,000, assume that they are telling you the truth rather than undervaluing your pride and joy to get a quick sale,” he says.

Finding a buyer

Reasonably enough, many sellers are focused on selling their business as quickly and profitably as possible. But Vause suggests they take a step back and consider what drives buyers.

“Some business sellers have previously been a business buyer, so this shouldn’t be too difficult,” Vause says. “Nonetheless, sellers can derail the sales process by failing to understand the fears and hopes of a prospective buyer.”

A common fear of buyers is that the seller is ‘talking up’ the current and likely future financial position of their business.

“It’s a lot easier selling a business that is on the way up,” Vause says. “So, you want to sell at a time when the business is doing well and the financials are looking as good as they can. Ideally, the business is growing and is either already making a healthy profit or well on the way to doing so and the books show this.”

Once they’ve been convinced they aren’t buying a money pit, buyers typically look for evidence the business is likely to continue to be profitable. “The performance of a business, particularly a small business, can be highly dependent on its owner or a key staff member,” Vause says. “If you haven’t already got good systems in place – the kind that ensure the business can continue to function smoothly regardless of the comings and goings of particular individuals ­– you should ‘systematise’ your business preferably before going to market.”

Vause also recommends fixing any broken equipment, moving on any underperforming staff and resolving any legal issues well before putting a business on the market. “Homebuyers will sometimes buy a fixer-upper, but few people in the market for a business want to inherit problems from the previous owner,” he says.

As soon as they have convinced themselves your business isn’t a dud, be prepared for an interested party to start planning significant changes to it.

“If you’re selling, say, a café, the new owner is probably going to want to put their stamp on it,” Vause says. “That may mean they don’t want to buy the memorabilia you have decorating the café’s walls. 

Or that they intend to replace the existing staff with their family members. Or that they will change the name of the business and remove any evidence of its previous owner.”

Vause’s advice to sellers in such situations is to be ruled by their heads and not their hearts. “If they’ve been offered a fair price, I suggest sellers bite their tongues (within reason) and be as accommodating as possible,” he says.

Getting the timing right     

The events that have unfolded since early 2020 have reminded everyone of just how unpredictable the global economy can be. But Vause says many business owners may still make the dangerous assumption they will be able to sell their business, for a handsome profit, at a time of their choosing.

“Business owners can and do get injured, contract serious illnesses and get divorced,” Vause points out. “It’s also not uncommon for them to get burnt out. Or to decide that they want to return to their old career or start a new one.”

Given individuals can abruptly find themselves unable or unwilling to carry on running a business, Vause suggests they remain open to selling when conditions are favourable.

“If the economy, their industry and their business are all humming along nicely and they’re thinking about selling in the next few years, business owners should consider getting out while the getting is good,” Vause says. “Hanging on until they turn 67, or their youngest child finishes high school, or they finish a university degree won’t necessarily end badly. But there’s always the possibility of something – a new strain of COVID, a US housing market collapse, a trade war with China, a natural disaster – suddenly making their business far less saleable.”

Thinking past the sale

Given how all-consuming running and then selling a business can be, business owners may not give a lot of thought to what comes next.

“Business owners may fantasise about retiring, or landing a low-stress employee role, or even buying another business,” Vause says. “But they may not devote much thought to whether they should use any windfall to pay down their mortgage, or top up their super account, or buy an investment property.”

Just as a good business broker, solicitor and accountant can be invaluable while selling a business, an experienced financial adviser can be helpful after the sale has gone through.

“Whether it’s providing advice on managing an unnecessarily large capital gains tax bill or helping determine how much money to lock up in super, financial advisers have the expertise needed to help former business owners achieve their financial and lifestyle goals,” Vause says.  

An ANZ Financial Adviser will be happy to talk to you about your post-business-sale finances. Find out more and book an appointment. 

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Kyle Vause is an ANZ Financial Adviser. 

ANZ Financial Advisers are representatives of Australia and New Zealand Banking Group Limited ABN 11 005 357 522, holder of an Australian Financial Services licence. 

This information is of a general nature and has been prepared without taking account of your personal objectives, financial situation or needs. Before acting on the information, you should consider whether the information is appropriate for you having regard to your objectives, financial situation and needs.

© Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522.