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

3 ways to better explain the true value of your business to buyers.

Michael Kerr - Saturday, September 28, 2019

Small business owners often underestimate the effort involved in preparing and selling their 'small' business. 

They think that because it's only small it won't be that hard for a buyer to understand the financials and how the business makes it money.

In most small businesses I analyse there is more than one type of business operating out of the one company or legal entity.

There can be many simple reasons why a business ends up with a number of different parts;

1. The business owner seeing a good commercial opportunity develops new revenue streams. For example a retailer of whitegoods goes into;

  • Repairs, and also
  • Sales of second hand whitegoods
2. The business owner runs sideline businesses through the one set of business financials. For example an importer of electronic equipment (main business) imports toys (sideline business) from the same supplier,  
3. A husband & wife or family team run separate businesses from the one location and under the one lease e.g. she sets up a café and he a cooking school,
4. To save on accounting, tax and compliance costs 

The existing owners, who are busy running the business 'day to day', can't see it as anything other than their one 'small' business. Buyers don't see it that way. They want to understand the different 'parts' of the business and exactly what drives financial performance. They know the different businesses require different skills and resources.

When a business has different 'parts' it does take extra effort to value the business for sale. But there is upside if you make the effort;

  • You might uncover extra value,
  • The business is easier to explain to a buyer, 
  • You know which potential buyers to target and/or where to advertise,
  • You can more quickly which potential buyers are worth spending time with. 
In the case of the whitegoods retailers, used as an example above, it might translate as follows. A potential buyer (who is say a specialist retailer) only being interested in the retail business unit and seeing the profitable repairs business unit as both a management distraction and a barrier to more sales of new units.
 
Unless you have a business is truly a simple, one unit business then you need should undertake the following activities to help you and potential buyers better understand your business. 

1. Recasting your business financials to show the profitability of the business overall.

Recasting is essentially taking the raw financial information (usually what goes in your tax return) and then adjusting for items such as;

  1. Personal expenses run through the business, and 
  2. Normalising business expenses such as depreciation (for rapid write-offs of capital items) and owners wages (which are normally not paid at market rates) etc. 
The adjusted profit you calculate after recasting should be a reasonable proxy for the profits a buyer could expect to generate by running your business on a stand-alone basis.

2. Recasting your business financials to show the profitability of the separate business units.

When you own the business and are using only one set of books to cover two or more different business units there is no need to allocate common expenses such as rent, overheads and the cost of staff that do work for the different business units (e.g. a receptionist that answers calls for the different businesses). 
 
However, when contemplating the sale of your business and what the separate business units might be worth you will need to pay particular attention to how you allocate expenses between the business units. 

It might seem a bit painful and challenging but you will be able to find a reasonable basis for splitting expenses. Don’t get hung up on getting it perfectly right, you just need to be able to explain to a buyer how you made the estimate. 

3. Crafting a story that positions the business (and its business units) in the best way.

How the business is presented and then perceived by a potential buyer after your first discussion or their initial review of any information will strongly determine your chances of a successful sale. 

So first impressions count in a business sale as well!

If they can’t quickly and easily see how the business looks both as a whole and in its parts (the business units) then you will struggle to hold their attention. 

Again to use an earlier example. If a buyer interested in retail businesses sees a business with new sales, second hand sales and repairs they might just dismiss it out of hand as too complex. So you need to craft the story and hit them between the eyes very early. The story might be something like:
 
  • Integrated business focussing on complementary market segments
  • The business has been through different economic cycles but the history of steady business profits has been achieved by having a diverse revenue & customer base (e.g. in the GFC new sales were down but second hand sales were up)
  • All repairs are outsourced to a local specialist so you don’t need to “get your hands dirty”
  • A database of second hand customers has been a highly effective cross sell / upsell to new products with a tailored finance program 
  • Presenting your business this way takes time and effort and some expert guidance but it will significantly enhance your chances of a sale.

4. Understanding the separate values of the different business units and being able to easily split them and sell them separately.   

While your preferred outcome might be to sell the business ‘as a whole’ it just might not be possible.
 
Even with your best efforts to present the business as a cohesive and complementary whole you may be faced with questions such as;
 
  • Should I sell the main business unit now, to lock in a major part of the sale value, and risk not selling the other units later?
  • Do I discount the overall price to incent the buyer to buy the whole lot?
  • Should I set up separate companies or business structures and split out the different businesses?
  • Are the other business units separately saleable?
  • How will the sale value of the smaller business units be affected by a separate sale of the main business unit?
  • Is it possible to split or assign key common assets such as the lease without affecting the value of other business units? 
By undertaking this work early not only do you increase the chances of a sale on your terms and in your timeframe but you also learn much more about what really makes your business tick. 

You’ll gain great insights on; 
 
  • What business units and what products are actually profitable
  • What your options are to increase the overall sale proceeds on sale of your business
  • How interdependent the business units are
  • How to best market the combined business to prospective buyers 
  • The practical options you have to split up the business if you can’t sell ‘as a whole’
Genuine buyers will want to drill down on what products and what customers make you money. 
 
The effort you go to 'slice & dice' your business will help you get properly prepared for these inevitable questions. 
 
The alternative of presenting your multi-part business as one business is a bad sale strategy that will cost you money and time.
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