Practical articles to help small business owners when selling and buying small businesses.

The 5 key things owners need to get right when undertaking a DIY sale.

Michael Kerr - Monday, September 23, 2019

Focus on these 5 key areas to get your DIY business sale planning process off to a flying start.

I want to share with you 5 high level tasks that are essential building blocks in any business sale planning process. 

As an advisor to a business owner planning to sell I would always start with zero knowledge of the business. Once I had completed these 5 tasks I would always have a very good understanding of what made the business tick, how valuable it was, how sellable it was and what the key barriers to a sale were. 

The challenge for a business owner undertaking a DIY business sale is to be able to view your own business (the one that you know so well and that you put your blood, sweat & tears into) through the eyes of potential buyers. 

This is never easy though. There will be aspects of the business that will be "self-evident" to you (because you've been doing them for 10 or 20 or 25 years) but you will need to be able to patiently explain how they work. There will inevitably be areas of weakness, where the business could be improved. Potential buyers will be critical and will find faults.

As a business owner you can't take these personally and you need to go about fixing the problems If you work hard on these 5 key areas it will allow you to have a highly valuable and external perspective of your business and it really builds momentum into the business sale planning process.  

When contemplating a DIY business sale process you need to very clearly understand that it as a major project that will add to your already business schedule. Of course you need to very organised but a big part of your success will come from having a sense of momentum - comfort that you have done all the preparation and that there will be a pay off for all the hard work. There will be times, many outside of your direct control, where the process goes into a lull, where the buyers go silent, where the project is delayed. If you have strong momentum you will be able to see through the silence and the delays and keep yourself and the project on track. I'll continue to revisit this theme of building and maintaining momentum. 

So now here is an overview of the 5 key areas to get you started. In coming blogs I'll expand on each topic. 

1. Financial recasting i.e. making your business look as attractive as you can.

I've very rarely ever seen a set of small business financials that in their raw form reflect the true underlying financial performance of the business. So you need to recast the raw financials and adjust for items such as:
owners personal expenses run through the business 
commercial level salaries for working owners
commercial rents for business premises owned
capital items that have been written off well in advance of their productive life
This is all perfectly normal. It is usually part art / part science. The trick is to do it thoroughly.

2. Creating a good story about your business.

You need to be able to tell a well constructed about how the business will be sustainable and profitable for a buyer. This story should span how the business came about and where it can go. The story will be written in formal business sale documents like Information Memoranda (and an executive summary version) and spoken about by you in conversation with potential buyers.  It's also about understanding what information is released, when and to who. Getting the story right is essential to getting the DIY business sale process off on the right track.

3. Setting a realistic budget for advertising and other selling costs.

You need to invest money to ensure you sell your business. Money needs to be spent on preparation, specialist advisors (tax & legal) and advertising & marketing. If you think about the investment as a percentage of the eventual sale value it makes it easier to  rationalise. If you successfully sell your own business you can save on what is usually the biggest cost in a traditional business sale i.e. success fees for a business broker or other business sale advisor. In Australia at least this can be anywhere between 2% (for larger small businesses) and 10% (for the very small businesses). As a guide for typical small businesses, and excluding any success fees, somewhere in the region of 4% - 8% of the expected sale value is reasonable start point. Marketing & advertising can easily be around 2% - 3%. Likewise for expert tax and legal advice. So if your expected value is $200K then think about between $8K and $16K to do it well. 

4. Thinking hard about who are the more obvious potential buyers of your business.

Start with thinking about your industry body or professional association, existing customers and suppliers and yes even competitors. This way you will focus in on buyers that already know your business, your industry, your local market. When you have eyes & ears open there will be clues everywhere.  Finding and then targeting buyers this way is a lot more productive because your pitching your business to a buyer that you've researched and qualified   It's a whole lot more effective in the long run than taking enquiries from general business buyers  who want to be educated about your business and industry and who are often looking at a diverse range of different business opportunities.  

5. Avoid 'tyre-kickers' at all costs. 

Before you deal with any 'potential' buyer make sure you know who they are and why they are interested in your business.
Establishing a process for filtering prospective buyers One of the really key success factors in a successful DIY business sale process is to effectively filter your prospects. If you are effective in filtering you will save a lot of time and you will minimise the release of your sensitive commercial information. Filtering is about releasing the right information at the right time. Early in the process you will release high level information to interested parties - just enough for you and them to determine that it is worth you both spending more time on exploring the sale. More detailed information is released later but only to those parties you consider genuine. Filtering is also about an exchange, a quid pro quo, When you share information you want something in return.  You want something in return because you need to be able to assess the value of spending more time with them. You need to be convinced that they are actually in a position to buy your business. The business sale process is traditionally very one way, where the potential buyer requests or demands more and more information.  

As a DIY business seller, and in order to get the result you are after, you need to;

  1. Tightly control what information is released to who,
  2. Agree when it is released, and
  3. Understand why it is released. 

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