How to sell your small business in the times of COVID
You've worked hard to establish a successful venture and now you want to sell. But be patient: it takes time and careful planning to achieve the best result
If you're thinking about selling a business, don't leave things to the last minute. That's the advice from Simon Winter, principal of Raine & Horne Business Sales, who says savvy business owners typically start planning for a sale two or three years in advance.
Winter, a CPA (certified practising accountant), says it's amazing how many people decide to sell on a Sunday and ring him on Monday morning.
"It's a recipe for a disaster," he says. "The really good operators plan their exit before they even buy into a business, looking at how they'll improve it and what they'll get if they sell."
The upshot is that the earlier you start planning for the sale of your business, the better. "If you build that process into your business plan, it becomes a strategy rather than a chance outcome," says Winter.
Adam Smith, a chartered accountant and director of the professional services firm Aurecon, says whenever he's approached by a client to help them set up a business, he always asks that they start with the end game in mind. "What is the horizon you are working towards and what is the exit strategy?
"Too many business owners don't take the time to work out where they are going and what success looks like. Planning a sale is something that is generally years in the making. If you are planning to sell your business, I always advise owners to take the time to look inward and understand what their long-term personal objectives are."
When to sell
According to Winter, the time to sell is "when you've lost your drive to improve it - when you don't want to get out of bed and go to work in the morning, it's too late. You need to be still motivated".
Smith agrees that if the owner is burnt out or losing interest, it may be the right time to move on. But he adds: "It's also about knowing what the future looks like once the business has sold. Most owners struggle to answer this question as they have thought of nothing else except their business for years. When selling a business make sure it aligns with your personal goals, and will provide the revenue you need for the next chapter of your life."
That said, timing is the most important part of successfully selling a business, says Smith. "If it is planned correctly, the owner will be monitoring the financial and operational signs that would indicate it is the right time to sell, whether that be profitability, market growth, liquidity or lack of competition," he says.
"Most advisers will tell you the best time to sell a business is when you are in a growth phase, the market conditions are favourable for your product or service, and when you are ready to transition into something else."
Name your price
When it comes to valuing a business for sale, Winter cautions that it's all about risk and return. He points out that risk is actually very stable - it doesn't change much unless you change the nature of the business.
"The real variable that can impact the value of the business is how much money you make," says Winter. "As long as you're making more money this year than you did last year, the business is going to be more valuable. The secret is to make more money."
Improving the bottom line doesn't have to mean growing sales, a process that Winter says often takes time. The solution can be to trim expenses.
"The shortcut to maximising profit is to minimise operating expenses. And this is something you can deal with right now," he says. "Don't be frivolous in your spending. Skip running your golf club fee through the business. Minimise operating costs. Look at what you can do better, and how you can save money."
If you're in sale mode, it's important to understand what the business is worth in order to ask the right price. Smith says this may be done by:
• Comparing your business to other competitors that have recently sold.
• Calculating the net asset position and sustainable free cash flow.
• Determining the high-level buyers who may be interested in buying.
The impact of COVID
Despite the pandemic, Winter says there's no shortage of buyers at present.
"Buyers have come back to the market. And there's a whole lot of people wanting to sell, but the vendors' expectations are a problem. So, the buyers' offers are struggling to meet those expectations."
Part of the problem is that business owners are pricing their enterprises based on government support provided during Covid, such as JobKeeper. For some enterprises, that support delivered a bumper year. Strip out that money, though, and buyers can see a very different picture.
With government support now dialled down, financial institutions are casting a more critical eye over a business's financial records to determine its true value. This can be a wake-up call for an owner.
"Business owners are getting a set of financials from their accountant, and it says they've made a profit of, say, $180,000. Naturally, they think that's fantastic," says Winter. "What they don't understand is that government support payments will be taken out when determining the value of the enterprise for sale - and that can come as a bit of a shock."
With a vaccine on the way, market confidence and economic conditions are improving. Nevertheless, says Smith, "those businesses operating in industries that were badly hit by Covid will continue to struggle in turning around their circumstances for a profitable sale."
Optimise the value
Owners often take great pride in their venture. And that's fair enough. But when you're selling, it pays to set aside the rose-tinted glasses. As Smith points out, ego needs to be taken off the table.
"It's all about maximising value in the eye of the buyer," he says. "That means recognising the business's blind spots, which need to be addressed internally, and analysing what your competitors do better than your own business, then developing a plan to improve your market position.
"The key for any buyer is seeing the growth opportunity. Preparing a business for sale is not just about removing areas of weakness, it's also about recognising the best ways to harness and promote your strengths such as supply chain efficiency or long-term loyal customers."
Add an expert touch
According to Smith, owners who try to cut corners by selling a business themselves generally lose time and money, and become frustrated by the whole process.
"There are plenty of advisory firms who provide practical advice on how to maximise the sale price and manage the challenges ahead. Most will have their own preliminary requirements regarding business size, business type and profit before they take you on," he says.
Small businesses can be eligible for a tax concession when it is sold. As a guide, if you've owned it for 15 years and are aged 55 or over and plan to retire, you may not have an assessable capital gain. Or if you've owned the business for at least 12 months, any capital gain can be reduced by 50%.