The Main Goal

The main goal of every business owner trying to sell their business is to increase EBITDA.  Every pound increase will increase the value of the business by two to five pounds.
 

What about the value of the Business Assets?

Assets of a business such as land, buildings, equipment, furniture, fixtures and inventory all support the value of the purchase price and may slightly increase the multiple offered on EBITDA. However, buyers are buying Cash Flow!  If the assets are not producing sufficient cash flow, then they only represent value in liquidation or in a near liquidation scenario.

The main goal for the assets of the business

 

For every business owner planning to sell their business, the main goal pertaining to the assets should be to sell unproductive assets such as:

 

- Machinery
- Land, Buildings
- "Dead" Inventory / Excess Inventory
- "Dead" Raw Materials / Excess Raw Materials
- Fleet Vehicles
- Company Cars (All)
 

These assets add no value to the business, so any money received from their sale are of direct benefit to the business owner.

What else can a business owner do to increase the value of their business ?

Shut down or sell off poor performing, zero or negative cash flowing units, locations and product lines, etc. unless they are crucial to the operation of the business.

Any money received here will be a direct benefit to the business owner as a buyer will view them as having little value.

·         Personnel

Eliminate any personnel that a new owner would terminate. Many business owners have strong personal relationships (or obligations) to long term employees.  The new owners could care less.  They will be looking for increased productivity / profitability.  If these employees are to be terminated, the current business owner will likely treat these employees with more compassion and in a more financially equitable manner than the new owner who has no loyalty to them.  At this point, you should also seriously look at other personnel reductions.

·         Bad debts

Consider selling off all bad debts, in particular debts which are about to be written off.  In most cases, these debts stay with the current owner.  Selling the bad debts will also make the balance sheet and income statements look much better.

·         Legal Action

Settle all outstanding legal actions where possible.  This includes both plaintiff and defendant suits.  Outstanding cases project poor management at best and a lot of problems for the new owner at worst.

·         Raise Prices

Where competitive conditions allow, raise prices 5% to 20% across the board or selectively.  Many business owners become passive or conservative over time with their pricing.  With a solid product and/or customer base, most modest price increases can be implemented with negligible impact.  Virtually all of this revenue increase goes directly to the bottom line as net income.

·         Unproductive Marketing

Eliminate any unproductive marketing expenditure such as charitable giving and charitable advertising placements. As a business grows and prospers, businessmen give back to the community through charitable giving and charitable advertising placements for church, school functions, etc.  Large national companies buying a local business will immediately end these types of expenditures as will most new individual business owners - so you might as well do it.  Drive up net income and the sales price for the business. 

·         Clean Up / Clean Out

Physically clean up the appearance of the business. Things that sparkle and shine sell faster and for a higher price than things that do not - it's just human nature.  You don't get a second chance to make a good first impression.  Start with a thorough cleanup and "throw it out" campaign.  If it is not going to be used, sell it or throw it away.  Then give the physical location a thorough scrubbing:  walls, windows, floors, cabinets, etc.  Where practical paint, clean or replace carpet and upgrade landscaping.  In particular, upgrade the office of the owner.  Remember this will be the "home" away from home for the new owner or his executive.

·         Fringe Benefits

Reduce employee fringe benefits that are out of the "norm" with your industry.  You can bet that a new owner will.  If it is a corporate buyer, the existing and retained employees will be added to the corporate buyers existing fringe benefit plan.  So make the cuts and reap the benefits.

·         Sales Trends

Take definitive action to reverse any stagnant or declining sales trends.  Nothing will negatively impact the value of a business or kill a potential sale more than declining sales trends.  Buyers are making a financial investment in a future stream of income. A declining income stream is viewed very negatively. 

·         Overtime

Eliminate or reduce as much as possible, overtime pay. Buyers view overtime (paying a premium for labour) as very poor management.  Workers get used to the extra income that overtime produces.  A tendency can develop for workers to create situations to continue that income.  If this tendency to create overtime becomes entrenched, new owners quite often feel it will be very difficult if not impossible to correct.  Damaged labour relations may result if new management has to implement corrective action.

·         Long Term Contracts

Lengthen and firm up all long term contracts with customers, critical suppliers and labour unions.  The last thing you want to happen in the middle of delicate negotiations on the sale of the business is a labour union strike, loss of a major customer or critical supplier.

·         Long Term Commitments

Avoid entering into any long term commitments not critical to the business operation.  For example, building leases, purchase of expensive computer systems, fleet leases, purchasing high tech/high cost equipment. It is likely that a new buyer will want to do his own purchasing and negotiating when upgrading computers or creating new leases.

·         Processing Receivables / Payables

You should make a concentrated effort to speed up the processing of receivables and slow down the payment of payables while not incurring late charges or losing prompt payment discounts.  This will definitely improve your income statement if you are on a "cash" accounting basis versus "accrual".

·         Key Man

Protect the new buyer against the loss of a "Key Man" during the sales negotiations or after the sale where the Key Man will be instrumental in the transition to the new owner.  Often, the existing business owner is required in the sales transaction agreement to perform certain duties for a specified period of time after the sale.  This can be training the new owners, introductions to key business relationships, advice and guidance on running the business.

The best strategy is to develop a second Key Employee so that the owner is not critical to the survival of the business.  A second, highly regarded strategy is the acquisition of an assignable "Key Man" life insurance policy.  This policy could be payable to the buyer after the sale, used to payoff debt and improve liquidity prior to sale, or to payoff heirs so they will not hinder the sale.

·         Tax Returns

During the due diligence process, the prospective buyer and/or his agents (Accountant, Business Advisors, Solicitors) are going to request the three most current Tax Returns.  Usually they will want to see monthly or quarterly profit and loss statements (P&L's) from the last filed tax return to the present date. Nothing will send up a "Red Flag" more than not having current tax returns.  A substantial number of businesses consistently incurring penalties for the late payment of tax and filing of accounts - usually for very good business reasons.  In preparing a business for sale, it is imperative that all tax returns and accounts submitted promptly. P&L statements must also be prepared promptly, no later than 30 days after the close of the period to which they relate.

·         Licensing

Registrations, licenses, permits, trademarks, franchise agreements, distributorship agreements, etc. are items that a buyer will have a keen interest in. These items can be critical to the viability of a business. Some in particular, such as banking, insurance, gaming licenses can have very significant value.  Be sure to check on a regular basis to see that all of these items are current with all associated fees paid.  It can be quite embarrassing or even disastrous if a potential buyer finds that one of these items has lapsed - particularly if someone forgot to renew or pay the associated fees.  A particular positive for a buyer would be that the seller has made inquiries and obtained all the necessary information, including costs on what it would take to transfer these items to the buyer.

·         Insurance

Having insurance coverage in place or having coverage at particularly good rates can be a distinct competitive advantage that will be highly valued by buyers.  This is particularly true for some types of insurance cover which maybe hard to obtain (or obtain at a reasonable cost). Check to make sure that all insurance cover is current and that the policy limits are appropriate to current exposures.  It is a big plus for the buyer when the seller has met with his insurance agent or company and has all the information on the transfer of insurance cover: costs, limitations/exclusions, etc.  

·         Business Plan Marketing Plan / Sales Forecast

As mentioned previously, buyers of businesses are dominantly buying a future stream of net income.  A vitally important factor to the buyer is the current owner and his management team's perception of the future of the company.  This is best presented in the format of a business plan.  The business plan should have as an integral part a marketing plan with a sales forecast showing sales predictions for at least the next three years, preferably the next five years. Free business plan software, which is surprisingly easy to complete, may be obtained at any HSBC bank.

This document is particularly important because it will show a buyer, in particular a corporate buyer, the current owner and his management team's grasp of the future outlook for the company and the industry.  In addition, it will help the potential buyer accurately.

·         Summary

In summary, the existing business owner planning to sell his business should be very aggressive in cutting costs to maximise net cash flow, while simultaneously improving  revenue streams that will also maximise net cash flow and in general, improving the overall physical appearance of the business.

·         Selling the Business

Once you have prepared the business for sale, the best way to get the best price for the business is to confidentially present the business to the largest audience of potential qualified buyers.  This is where our company, The Sunbelt Group can be of assistance. For our clients, we discreetly yet aggressively market the business worldwide using a sophisticated portfolio of techniques.

The Major ones are:

We start by developing a profile sheet on the business.  This profile sheet describes the essential elements of the business that are most likely to be of interest to a potential buyer. The profile is generic and DOES NOT identify the specific business.

The profile sheet is then transmitted to all 400 Sunbelt offices worldwide and distributed to over 1,500 brokers associated with those offices. These brokers then distribute the profile sheet to prospective buyers that are their clients.

Utilising our existing database compiled over the years, the profile is sent to over 3,000 venture capital groups and over 3,000 accountancy and legal firms which specialise in handling business acquisitions. The profile is sent using email, fax or post depending on the preference of the recipient.

Using another one of our proprietary databases, the profile is sent to industry specific "consolidators" and others within the industry seeking to expand and grow through acquisitions and/or mergers.

An electronic profile is posted on our corporate website www.sunbeltnetwork.com/uk . It is the largest and most heavily accessed website of businesses for sale in the world. In the UK we also use www.businessesforsale.com and www.daltonsbusiness.com which are linked to The Financial Times, Daily Telegraph, Times, Daily Mail, Evening Standard and Loot, as well as other related sites.

Generic advertisements will be placed in national and local newspapers, as well as industry specific publications.

A few days after the profiles are distributed our staff embarks on an extensive telemarketing effort where we call those receiving the profiles to determine any interest generated and to get feedback.  This feedback is especially important in that it allows us to hone, refine and precisely focus our marketing effort.

We then qualify potential buyers to ensure they have the financial and personal wherewithal to buy the business; have them sign a confidentiality and non-disclosure agreement before showing them the exact business details. From our marketing efforts, we develop qualified, serious buyers that we present to the business owner. After meetings between the seller and the buyers, with mutual agreement, the buyers are then allowed due diligence.  A specific cut off date is established and the buyers must have completed their due diligence and submit an offer to purchase.

·         Financing

Once a prospective buyer is in place with a signed purchase agreement, we can turn the vast resources of the Sunbelt Network to securing financing if needed.  Because we are the largest Business Brokerage Organisation in the world handling thousands of business sales, Lenders from across the world come to us.  Lenders usually have a profile of the particular types of loans in which they specialise.  We have an array of lenders that will finance any financially sound business sale transaction. These lenders can be commercial loan companies, private venture groups, banks, etc.  In many cases, they have the capacity and will lend when the local banking community will not.