How to get a business ready to sell

By Staff Writer

HOW TO GET A BUSINESS READY TO SELL

By Cris Dillon, chief operating officer of Coast2Coast, a private equity company which acquires and nurtures established entrepreneurial businesses

While tips for starting a business are very easy to find, it is harder for entrepreneurs to find advice about how to get their business ready to sell when, for instance, they want to retire, emigrate or diversify their capital. And, since selling a business is one of the most important financial deals a business owner will ever make, it is essential that they get it just right.

Separate business and personal expenses

For at least a year before the planned sale, the owner should take great care to keep all personal affairs completely separate from those of the company. Forget paying for overseas trips or doing dry cleaning on the company account, the owner should only pay themselves a salary (the size is up to them) and keep all non-business expenses separate. Doing this will ensure that the company books reflect exactly what has been happening in the business - and only that.

Understand the price

The value of a business is calculated in three main ways, price earnings multiple, net asset value and discounted cash flow. All three are important and the final price offered by a prospective buyer will generally be based on a combination of the three.

The price earnings (PE) multiple, calculated before interest and after tax (EBIAT) looks at the profits of a business over the past year and multiples them by a certain figure. So if a company has profits EBIAT of R10-million, using a PE multiple of four, the enterprise value of the business would be R40-million. PE multiples vary depending on the earnings growth rate of the business.

Net asset value (NAV) calculates the market value of the business taking all debts and assets into account. To work this out, all the company's debt is totaled and all the companies assets are added up and the difference is NAV.

The third way to value a business is using discounted cash flow (DCF) which is the value calculated by discounting all future cash flows at an applicable discount rate.

Don't become fixated on a round number

Many business owners make the mistake of getting fixated on a single round number which they believe their business is worth and they refuse to budge from that number. So, if they have decided that the company is worth R20-million, they won't sell it for any less. Even if they are being offered a very good price of, say, R19.5-million. This is often an emotional response rather than a practical one and owners should try to consciously keep an open mind during the sale process.

Also, they should try to be pragmatic about the value of their business.

Of course they have often built it up with blood, sweat and tears, but if they are heavily in debt and their profits are down, they may just need to lower the expected selling price.

They should remember that selling a business is really no different from selling a property. If a home owner owes R500 000 on a R1-million house, they would only ever expect to get R500 000 in their pocket. The same is true for a business. Prospective buyers will review a company's books and know what is owed to the bank and they will definitely take this into account when working out their offer. The value of the business excluding debt and cash is known as the enterprise value and the equity value is calculated by subtracting debt and adding cash.

Use professional advisors

While this may cost slightly more in the short term, in the long term it will be more than worth the investment. The owner should consult good lawyers and accountants for advice at every level of the sale - from preparing the books, to making sure that they get the best possible deal. Also, it is a good idea to be cautious of business brokers because they are often not as highly skilled as a lawyer or accountant. Going straight to the professional is, in my opinion, a better idea.

Convert into a Pty Ltd

If a business is registered as a CC the owner can only sell it to an individual or individuals. However, if the buyer is another company the business will need to be converted into a Pty Ltd. This process takes about four weeks so it is advisable to get this bit of admin out of the way while in the process of preparing for sale.

Understand earning warranties

Earning warranties will very often form part of a sale agreement. What this means is that certain earning targets have been put in place which, if they aren't reached, mean a portion of the sale price will not be paid. Owners should, therefore, make sure they truly understand these warranties and they feel confident about their ability to meet them.

Sell to people you can do business with

This is particularly important if the owner is going to stay on in the company, working under the new owners. The chemistry should be right between the two parties, they should trust each other and trust in each other's ability to do a good job. This will make a huge difference to the quality of life at work and impact on staff morale and possibly also the performance of the business.

Dress up smartly

Every bit of the business - from the owner and staff to the offices and factory - should look organised, clean and a bit spruced up during the selling process. While this is purely a cosmetic factor, first impressions do count and they do more to guide perceptions of how well a company is run than we often realise.

It can also be an emotionally difficult process if you've spent years building up the business so it is extremely important to make the process as smooth as possible. Hopefully this advice is helpful. For more information on Coast2Coast visit www.coast2coast.co.za

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