VENTURES: How to Sell Your Business
Recent Western Cape Business News
ADVICE for starting a business is easy to find, but what happens when the business owner decides to sell that company? Perhaps because the time has come to retire, emigrate or diversify capital? That sale could be the most important financial deal that the entrepreneur ever makes. So it is very important to get it just right, says Cris Dillon, COO of Cape Town-based Coast2Coast (C2C).
C2C is a private equity company which acquires established entrepreneurial businesses with potential. He offers the following advice to help business owners get their companies ready to sell.
Separate business and personal expenses: For at least a year before the planned sale, the owner should take great care to keep all personal affairs completely separate from those of the company. Forget paying for overseas trips or doing dry cleaning on the company account, the owner should only pay themselves a salary (the size is up to them) and keep all non-business expenses separate. Doing this will ensure that the company books reflect exactly what has been happening in the business – and only that.
Understand the price: The value of a business is calculated in three main ways, price earnings multiple, net asset value and discounted cash flow. All three are important and the final price offered by a prospective buyer will generally be based on a combination of the three.
The price earnings (PE) multiple, calculated before interest and after tax (EBIAT) looks at the profits of a business over the past year and multiples them by a certain figure. So if a company has profits EBIAT of R10 million, using a PE multiple of four, the enterprise value of the business would be R40 million. PE multiples vary depending on the earnings growth rate of the business.
Net asset value (NAV) calculates the market value of the business taking all debts and assets into account. To work this out, all the company’s debt is totalled and all the companies assets are added up and the difference is NAV.
The third way to value a business is using discounted cash flow (DCF) which is the value calculated by discounting all future cash flows at an applicable discount rate.
Don’t become fixated on a round number: Many business owners make the mistake of getting fixated on a single round number which they believe their business is worth and they refuse to budge from that number. So, if they have decided that the company is worth R20 million, they won’t sell it for any less. Even if they are being offered a very good price of, say, R19.5 million. This is often an emotional response rather than a practical one and owners should try to consciously keep an open mind during the selling process.
Also, they should try to be pragmatic about the value of their business. If they are heavily in debt and their profits are down, they may just need to lower the expected selling price.
They should remember that selling a business is really no different from selling a property. If a home owner owes R500 000 on a R1 million house, they would only ever expect to get R500 000 in their pocket. The same is true for a business. Prospective buyers will review a company’s books and know what is owed to the bank and they will definitely take this into account when working out their offer. The value of the business excluding debt and cash is known as the enterprise value and the equity value is calculated by subtracting debt and adding cash.
Use professional advisors: While this may cost slightly more in the short term, in the long term it will be more than worth the investment. The owner should consult good lawyers and accountants for advice at every level of the sale – from preparing the books to making sure that they get the best possible deal. Also, it is a good idea to be cautious of business brokers because they are often not as highly skilled as a lawyer or accountant, Dillon says.
Convert into a Pty Ltd: If a business is registered as a CC the owner can only sell it to an individual or individuals. However, if the buyer is another company the business will need to be converted into a Pty Ltd. This process takes about four weeks so it is advisable to get this bit of admin out of the way while in the process of preparing for sale.
Understand earning warranties: These will very often form part of a sale agreement. What this means is that certain earning targets have been put in place which, if they aren’t reached, mean a portion of the sale price will not be paid. Owners should, therefore, make sure they truly understand these warranties and they feel confident about their ability to meet them.
Sell to people you can do business with: This is particularly important if the owner is going to stay on in the company, working under the new owners. The chemistry should be right between the two parties, they should trust each other and trust in each other’s ability to do a good job. This will make a huge difference to the quality of life at work and impact on staff morale and possibly also the performance of the business.
Dress up smartly: Every bit of the business – from the owner and staff to the offices and factory – should look organised, clean and a bit spruced up during the selling process.
While this is purely a cosmetic factor, first impressions do count and they do more to guide perceptions of how well a company is run than we often realise.
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