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Anyone that tells you that selling a business is like selling a house hasn’t sold a business before…

Business Owner's Diagnostic

Business Owner's Diagnostic

A Four Stage Program for Owners Considering Selling Their Business

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At some point after owning and running your business for 10, 20 or more years you will consider selling. As you think about whether you do or don’t want to sell there will be lots of questions, both business and personal. There will be uncertainty and stress. That’s to be expected, as most of you will only own and sell one business.

On some days you will be totally convinced that selling up is the best thing to do.

On others you won’t be so sure. You might think "I actually enjoy being here most of the time, and there are a few deals in the pipeline – maybe I can hang in for another two years?"

If you have thought of selling and had similar questions or uncertainties then we can help. Our quality advice and practical answers will ensure that you don’t make a costly mistake with a knee-jerk reaction or emotional decision.

Rushed decisions to try and quickly sell an unprepared business always cost the owner precious time and money.

Our Business Owner’s Diagnostic (B.O.D.) will help you answer a lot of the personal and business questions like:

  • When is the right time for me to sell?
  • Is the business actually valuable to buyers?
  • What needs to be done and when to ensure the best result?

It will help you understand everything that’s involved in a sale process, how it will impact you personally and if there are other options.

From there you are much better placed to make the right decision on this once-in-a-lifetime opportunity.

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PROGRAM OVERVIEW

  • What is the Business stage about?

    Obvious questions for most business owners when thinking about selling their business include; "How much is it worth?", "How do I increase the value before selling?" and "When is the right time to tell everyone?".

    In this first stage of the B.O.D we analyse your financials to give you an appraisal (i.e. an indication) of what the potential range of values might be. This is not a formal valuation but an appraisal based on the information you provide, any available comparable market data and our extensive experience in the small business sale market.

    Our appraisal will help you understand how buyers might assess the value of your business to them. It will also help to avoid the costly implications of relying on common but extreme views on the potential value of your business:

    1. Overvaluation. If your business is advertised for an over-inflated value you just waste your precious time and lose legitimate buyers who will quickly move on to other opportunities.
    2. Undervaluation. If your business is undervalued you lose some or all of your potential sale value. You’ll lose some if you sell quickly for a low price by rushing the sale process. You’ll lose all of the potential sale value if you incorrectly assume the business has no value and don’t bother to properly prepare and then sell the business.

    During this process we identify obvious barriers to selling the business and provide recommendations on what can help to overcome them.

  • What can you expect and what is typical for others like you in the same situation?

    We unpick your business numbers to establish the level of profitability over 4 to 5 years. Typically the ‘raw’ numbers from your financials or tax returns do not reflect the true underlying profit of the business, as a buyer would see it. We go through the financials line by line and identify the ‘adjustments’ required to estimate the ‘adjusted’ net profit.

    Most buyers and their advisors understand this process of adjustment and need it for their assessment of the value of your business to them.

    Typical adjustments include:

    • Increasing underlying adjusted net profit by adding back personal expenses paid for by the business, or
    • Decreasing underlying adjusted net profit by adding in a salary for the working owner who might have legitimately taken money out of the business as dividends.

    Up until actively thinking about selling many owners, and their advisers, don’t tend to do regular or meaningful analysis of the true underlying financial performance and potential sale value. So for most owners this stage is incredibly insightful in helping to see your business as a buyer might.

  • What are the benefits / outcomes of this stage and how does it relate to the next stage?

    By establishing a realistic range of potential values you avoid the common and costly mistakes related to overvaluing and undervaluing.

    While getting the value range right is only one part of making the best decision on when and how to sell your business it is vitally important first step in the overall process.

    If you are tempted to try and sell your business at an overvalued price to ‘test the market’ you will end up very disappointed. Smart buyers and their advisers quickly move on from businesses with an inflated price tag. They don’t want to waste their time. But you will if you get tempted into ‘testing the market’ for that once-in-a-generation buyer and a ‘tattslotto price’.

    At the other end of the spectrum you need to understand there are buyers for businesses, even if they aren’t making profits. Buyers can see value for reasons other than the bottom line in things like established customer bases, quality staff, long standing or exclusive supplier relationships. So before you give up on the idea of selling your ‘unprofitable’ business we can help you to evaluate how it might be attractive to some buyers.

    At the end of this stage you will have a very good understanding of the potential value range and overall saleability of your business.

    These are the foundation stones for making important personal decisions in the next stage.

    How Small Businesses Are Valued

  • What is the Owner stage about?

    The purpose of Stage 1 was to assess the underlying financial performance and therefore potential value (aka The Number) of the business, if you decided to sell.

    This is important information but there is much more to it. This stage is about you the owner.

    Most of you will own and run one business. There is a lot involved in planning a sale and only one chance to get it right.

    We understand that when you start to think about "getting out" there are mixed emotions and a lot of anxiety and uncertainty.

    Many questions will surface.

    • Is 'the Number' sufficient?
    • Do I actually want to sell, even if the number is ok?
    • Do I want to sell even though the number is not ok?
    • Can I put my head down and improve the number?
    • Do I just want to keep running my business and forget about ever selling?
    • What would I do if I didn’t have the business to keep me occupied?
    • Are there buyers I wouldn’t want to sell to?
    • How will this affect my customer and staff? Does it actually matter how they feel?
    • Are there other options to selling?

    In this frame of mind it’s easy to make bad, knee-jerk decisions.

    The better way forward is to identify, analyse and compare all the possible options before making a major decision. You won’t get that from a lot of business sale advisers simply because they aren’t incented to. They get paid when the business sells and their typical approach is to get the business onto the market quickly to see if there are any buyers.

  • What can you expect and what is typical for others like you in the same situation?

    B.O.D. helps you to understand and think through all viable options, and how they will impact you and the business.

    This stage includes a comprehensive questionnaire to help you explore and better understand what you want to do.

    We conclude with a confidential 45 minute personal phone call to discuss your answers, to address other questions or uncertainties and to review the Stage 1 report.

    It’s all about owners getting clarity from asking questions that often they thought were too ‘personal’ and therefore not relevant to ‘the business’.

    And remember we aren’t trying to lock you in to us selling the business. We are giving you expert and independent advice to help you make the best decision on if and when you sell.

  • What are the benefits / outcomes of this stage and how does it relate to the next stage?

    Armed with the greater understanding gained through Stages 1 & 2, the options presented in Stage 3 will make a lot more sense.

    You’ll be clearer in what you want to do and more confident when making your decision.

    The Business Sale Emotional Rollercoaster

  • What is the Options stage about?

    In this stage and based on what we uncovered during Stages 1 & 2 we outline the options available for you, which can range from:

    1. Not selling at all, to
    2. Selling later, after you have made some improvements, to
    3. Selling now, but at a realistic price, to
    4. Deferring a decision, for a set period of time and while you further evaluate options.

    Together we’ll look at the pro’s and con’s of each option. We’ll explain typical timings, likely costs, what activities you need to undertake and what other resources or advice you’ll need to make it happen.

    We draw on our vast experience in the sale and purchase of small businesses to cut through all the uncertainty and help you make your best decision.

  • What can you expect and what is typical for others like you in the same situation?

    This stage concludes with our second personal 45 minute phone call by which time you can expect to have a comprehensive understanding of your options and the practical implications.

    The objective of B.O.D. is not to lock you into a sale process with Kerr Capital. It’s an independent and expert process to ensure you understand the impact of the different options on:

    • you personally, and
    • the business, and
    • on 'the Number', and
    • on those important to you, and
    • on those important to the business.

    By the end you won’t have too many unanswered questions about what’s involved.

    In any cases we will end up directing you to other advisors for specific, specialist advice. We do this because we want you to have all the answers.

    Our approach and advice will starkly contrast with the ’advice’ some of you will have already received , or are about to get. In a lot of cases that ‘advice’ will be designed to get you to agree to ‘testing the market for buyers by rushing to sell the business’.

  • What are the benefits / outcomes of this stage and how does it relate to the next stage?

    While you may own the business there are always other stakeholders to consider.

    Any decision you make has a direct and sometimes significant impact on these stakeholders e.g. family, staff, customers. The end result for you as the owner will be negatively or positively impacted depending on how well you manage them.

    Far too many times we’ve seen the fallout on owners and their businesses from poor or badly timed communication about a potential sale process with important stakeholders. There is no ‘perfect time’ to talk about an issue as complex as a potential business sale and it will differ from business to business based on culture, history and other unique characteristics. But there is a ‘better way’ that involves planning and utilising our expert advice based on having had hundreds of discussions with owners about this issue.

    As an owner contemplating selling for the first, and only time, you need to know it’s normal not to have all the answers.

    This stage is designed to provide you with a clear and practical overview of the different options. From there and with a clear head you can far more easily work with the different stakeholders to minimise the impact on them, and most importantly, maximise the positive impact on you and the business.

    At the completion of this stage we are ready to prepare our final report and recommendations to best help you.

  • What is the Plan stage about?

    Having assessed the business, your own personal requirements and discussed the different options we now provide you with our Final Report, a well thought out action plan including:

    1. A summary of the options ranging from selling to not selling,
    2. Indicative timings for each option,
    3. Indicative costs for each option,
    4. An action list, and
    5. Recommendations and referrals for other advice and services, as required.

    With this plan you are now informed and in control.

  • What can you expect and what is typical for others like you in the same situation?

    With this information you can now reflect on and decide the best next steps, regardless of whether it’s to hold, to sell now, to sell later or to defer a decision for a period of time.

  • What are the benefits / outcomes of this stage?

    Having completed both this Stage and B.O.D owners typically feel two things.

    Firstly, having been surprised at how much they didn’t know and what incorrect assumptions they made, owners are comforted that they have now "covered all their bases".

    Secondly, they feel stronger and more certain in making their final decision, based on better information, more thorough analysis and unbiased advice.

    Provided you provide all the right information and answer all the questions in the agreed timeframe B.O.D. can be completed over 4 weeks, no time really against the backdrop of having owned a business for 10, 20, 30 or more years.

    We are also confident that if and when you do decide to sell, regardless of who does that for you, that you’ll achieve a better outcome (in terms of final sale value and timeframe) and that it will far less stressful and uncertain.

PROGRAM TIMELINE

Business Onwer's Diagnostic Program Timeline

CASE STUDY #1

Off to a Flying Start,
but Is My Business on Track to Make Me Money
if I Decided to Sell?

Michael Kent

Executive Summary

After a very successful professional career Michael Kent just couldn’t resist any longer. He had to get into his own small business. He considered buying one but in the end he started his own. He sent his first invoice in 2012. By late 2016 he topped the $1m turnover mark – from the outside it would have looked like he was flying. But the personal stresses were mounting. Now that he had successfully started Michael wondered about what next? Was it time to sell? Should I keep going as I am or take it to another level? Michael engaged Kerr Capital and after completing the Business Owner Diagnostic (B.O.D.) decided to defer selling. He realised he could make the business more valuable and instead refocused on the most profitable areas of the business and started to plan for a sale in 3 - 5 years.

"You pick up on snippets of information on how to value and assess your business – but it’s all anecdotal – I thought it was about time to get some expert external advice."

About the Client

Michael Kent founded Slate Accountsin 2012.

Slate seriously loves business and provides bookkeeping and related services that deliver clarity and efficiencies for its diverse small business client base. Their approach is modern, informed and fresh.

The Challenges

Michael was working overtime to drive the topline revenue growth, which is vital in the early days of a new business. But like a lot owners there came a point when Michael hit a lull in his energy and passion. Taking its place were questions like “Am I focussing on the right areas of the business and are they adding to the potential sale value?” and "How long before I start to see some more money in my pocket?"

While Michael remained committed to the business he needed answers. His family wanted to be sure that all the effort and sacrifice was worth it.

While he picked up bits of advice from business colleagues along the way it felt disjointed. What troubled him most was that he was using this ad-hoc advice to make important decisions. While well-intentioned it was confusing and counterproductive, and lacked a thorough understanding of Michael’s personal and business aspirations.

"It’s crazy that a business wouldn’t think at this level at least every 5 years."

The Solution

We undertook the B.O.D. and a few things quickly became apparent.

The analysis started with an evaluation of the historical business performance at a ‘whole of business’ level. From there and based on further internal work by Michael we were able to identify 4 different business units, each with different products serving different market segments.

Michael had always seen potential in each of the segments and thought that by having a diversified business it would be more valuable. But when the numbers came in however he could see that a couple of the business units were really draining the overall business. He now had the analysis to back up the decision to streamline his day to day focus. While growing topline revenue had been vital in the start-up years now it had to be about focussing on profit.

"When looking for advice I figured a broker would be just after a sale so the advice would be skewed..."

It was time to ‘mothball’ two of the units and focus on the other 2 for at least the next few years. So he had really been ‘flying blind’ and now realised that there was a big gap between what the business would probably sell for and what he thought it should be worth.

With the financial analysis completed we then were able to have a much more intensive discussion about the different options and what Michael really wanted to do. This stage involved a lot of soul searching and family discussions. Together we discussed all the options e.g. selling, growing faster by buying another business or selling a share to an investor or bigger company.

"I thought you understanding what was going on with both the business and me personally – because they are so connected – was really helpful."

But anyway we looked at these different options Michael knew they would only be short term fixes and that he would feel like he hadn’t finished the job he started. He had built a really great team, a quality client base and a considerable amount of potentially valuable infrastructure in the form of systems and processes. In the end it became clear that Michael had to stick with his original objective - to organically build a business that he owned, where he had control and that would produce a significant financial upside when the time was right to sell.

Armed with an objective and independent assessment of all the options for the business and a structured plan it made it far easier for the family to ‘buy-in’ to his vision for the business. This significantly reduced the personal stresses and gave him a clear head and the confidence to keep investing in the business.

Michael summed it up his thoughts on Kerr Capital’s B.O.D.

"The breakthrough in clarity released the shackles and I could exactly where to invest my time, money and energy. That was a great relief but really in the longer term the payback will be far higher and will come in the form of a more profitable business and a higher sale value, if I ever decided to sell."

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CASE STUDY #2

Not Letting a Once in a Lifetime Opportunity Slip

James Murphy

Executive Summary

James Murphy was a successful café entrepreneur. Out of the blue and while running 2 successful café sites he (and his wife) were offered the once-in-a-lifetime opportunity to live and work in the USA. It ticked a lot of boxes personally. Acting on instinct he quickly got the businesses listed for sale. But this hasty attempt failed, wasting precious time and putting their US plans in serious doubt. James contacted Kerr Capital and asked us to help him work through an analysis of his options and create a plan that would work in the remaining time.

"At the core of the diagnostic is an honest open chat with no expectation of anything down the track. It’s about what you as the owner want..."

About the Client

James kicked off his hospitality career with a coffee cart at The University of Melbourne. This business was developed successfully incorporating an innovative cause based marketing approach to differentiate the business and underpin its financial viability. Later sold it marked the beginnings of a more diverse, community focussed hospitality group which encompasses retail café sites, community building consulting and business mentoring.

The Challenges

Having reacted, rather than thinking through his options, James rushed to market to sell one of his 2 businesses, figuring he could keep the other and let existing management run it while he was away. Not long into the hastily planned sale process he realised that it wasn’t going to work and that it would be a race to the bottom. After the business broker handling the sale got little interest James knew the next conversation was going to be along the lines of "the market is tough, how about we reduce the price". Faced with the prospect of leaving Australia without selling the business or losing out financially he started to wonder about different options and how they would help or hinder his plans to relocate to the USA.

All the while James had to continue to run the businesses. The day to day operational commitment absorbed a lot of his time leaving him short when it came to thinking about a major decision like this. While there was a temptation to just keep making decisions to avoid uncertainty, after all that was what he did day to day, he also knew that he had to get the next one right. The potential consequences of another bad decision were very high - personally and financially. He needed some expert external advice and turned to Kerr Capital.

The Solution

We took James through our Business Owner Diagnostic (B.O.D.) and undertook financial analysis of the combined business and looked at profitability and potential at an individual site level. We looked at ways to make it easier for buyers to understand and buy the business he wanted to sell. This included putting together a cohesive story that emphasised what a great business opportunity it was. We also developed strategies to help James overcome the potential downsides and inevitable questions about why this was such a quick sale process.

Once completed we were able to provide James with an assessment of potential sale value, of the individual sites as well as the combined business, and recommendations on the best way to get the sale away in the short timeframe available.

With this independent analysis we discussed the full range of options which by then ranged from keeping both and running them under management to selling the entire business. Through this process, supported by the findings of the B.O.D., James’s could more easily discuss the options with his wife.

"But there is some much value in having someone that you can talk to. It can be really hard trying to do that with a life partner and your family or whatever, because you don’t have all the answers and it’s hard for them to really understand the daily up’s and down’s."

In the end James decided to sell 1 of the 2 sites at the value we had agreed made it worthwhile. He was confident enough in the end to undertook the sale process himself. The sale was achieved within the very tight timeframe (dictated by his impending move to the US) and without buyers in the sale process feeling like there was a bargain to be had, just because the seller was relocating.

James best summarised the result of the work we did together.

"I reckon once I felt set about what I was going to do, I was off and away. The commitment to the plan was there and it was a game of patience to see it through."

With his track record of building successful businesses the decision he ended up making was much harder. He felt a weight of well-meaning expectations from others close to him to capitalise on future opportunities by “scaling up and getting bigger”. The discussions held as part of the B.O.D. enabled James to comfortable in giving himself the permission to chase another dream - a once in a lifetime opportunity to live in the US.

The payback for James was two-fold. At a personal level B.O.D. delivered James clarity about what he needed to do.

At a financial level getting the sale completed was a big windfall. It also ensured that he could take up the opportunity to live in the US. If the sale hadn’t gone ahead it would really have made this difficult.

James acknowledged that "While you can put it down to superior planning the guts of it was much more fundamental. The excellent sale result was achieved by shifting my thinking towards what a great opportunity my business was for buyer. Up to then all I could think about were my issues e.g. how my imminent move to the USA was going to get in the way of a sale. Kerr Capital really skilfully re-focused my thinking".

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YOUR INVESTMENT

How Much Does It Cost?

The B.O.D. costs $2,500 + GST. For that you get the following:

  1. Interim Report - an independent and unbiased assessment of:
    • Potential sale value range,
    • Opportunities to improve business value, and
    • Overall saleability.
  2. Final Report - an independent and unbiased action plan with:
    • A summary of your options (including holding & staying, holding & growing, merging, selling all the business (trade sale, to staff), selling part of the business or winding down), estimated timing and costs,
    • A comprehensive overview of what a business sale process involves and how it will affect you and the business,
    • Referrals to other professional advisors.
  3. Two personal calls with Kerr Capital to go over the reports and recommendations and to discuss any of your personal concerns and questions.

We have designed B.O.D. with a single purpose in mind – to help owners make best decision before they rush in and commit to selling.

The sale of any business – micro, small or big – is always more complex, time consuming and emotionally draining than owners, and those close to them, could ever imagine. If you want proof find some other owners who have been through a sale process and ask them!

B.O.D. is about answering your questions and arming you with all the information you need to make the best decision you can.

As we have been doing this for over 15 years our advice will be expert, up to date, practical and easy to understand.

If a sale is the best thing for you in most cases we are going to refer you to other quality business brokers who are experienced in your industry. Sometimes we will recommend that you undertake the sale yourself. So the advice we provide will be independent.

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Why Is This Independence so Important?

Because the ‘free’ advice you get from some business brokers or other business sale professionals isn’t independent and will have a catch or be much more costly in the long run.

To understand why you need to know that business brokers only earn their money when your business sells.

You need to know that the more businesses business brokers have for sale the more chances they have of making a sale – and any sale will do.

Often their ‘free’ advice on selling your business is only designed to get you to list your business with them and to get it on the market as soon as possible.

So while initially it might sound attractive i.e. to only pay them money when (and if?) the business sells there are real downsides for you.

Two of the major downsides to think about are:

  1. Rushing the business onto the market just means that you and the business are underprepared. If you do happen to get an interested buyer you will be backpedaling the whole time. They will have the upperhand in any negotiations because you won’t answers to simple questions or all the information they need. If, as is more likely, your business doesn’t generate much interest from buyers, the broker’s interest in your business will reduce and it will shift to the next business most likely to generate a commission. You will go into a state of limbo and either just keep waiting and hoping or think about starting again with another broker and more advertising.
  2. When your underprepared business receives little interest from buyers the typical ‘advice’, and most of the time you need to chase them for this, is usually to reduce the price to get the business sold. This is understandable when you know that the broker is paid only on success and hasn’t invested the necessary amount of time in getting to know your business. So while a quicker and easier result works for them it’s very much at your expense in the form of a much lower sale price.

To avoid these downsides you have the option to pay for some expert, independent advice before committing to selling or taking any other critical decision like deciding to sell half your business.

This is what B.O.D. is about.

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Why Is B.O.D. Such a Smart Investment

When you’ve started to think about selling we understand that it's new territory for most owners. When you start to look or to ask around you’ll find there’s a lot of advice out there. But how do you know what’s good and what’s bad? Who can you trust? It can be confusing. There can be a temptation to jump at anything from someone who sounds half reasonable and knows a little more than you about selling and valuing businesses than you do.

We’ve already talked about the downside of ‘free’ advice.

So how else might you easily spend a few thousand dollars and how does it stack up against investing in B.O.D.?

  • Advertising to ‘test the market’ instead of properly preparing the business. It’s easy to spend anywhere from a few thousand to $10K on some nice looking ads. However it will be a complete waste of money if you haven’t properly prepared.
  • Getting advice from your long standing or other professional advisers. This might seem like a natural place to start. But you need to ensure that the advice they give and the money you pay for the advice (often in the thousands) is up to date. Market conditions and the way businesses are bought and sold continue to change rapidly. So seek out and rely on their expert tax and legal advice but don’t just assume their business sale or acquisition advice will be what you need.
  • Get a valuation to determine ‘market value’. The cost of a valuation will range anywhere from approximately $1K to $10K. But what do you get? Does it guarantee anything? Do you know it’s just an opinion? There are so many assumptions and disclaimers with any valuation that can make them worthless. If you are thinking of selling then a valuation or appraisal from an adviser who sells businesses can be really helpful. Otherwise they might just be an expensive and useless opinion.
  • Investing in an expensive Business Exit Planning Program when you you are still not sure you want to sell. These can be a great investment but if done prematurely a waste of thousands of dollars (anywhere from $5K - $30K).

Most of you will only ever sell one business. The financial (dollars) and personal cost (time and health) of making a bad decision will be very hard to recover from.

B.O.D. is an investment that will ensure you make the best decision, at a stressful and emotional time, when considering the sale of your business. It will help you ensure that when you do invest in advertising or business exit planning that you make the most of that significant investment.

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