Getting the best price for a medium-sized business

A demonstrable good profit history is a great asset, but far more valuable is the promise of future viability. By ANDREW KENT

By Andrew Kent

A medium-sized business with a strong profit history is not as easy to sell as it should be. It is often too big for the first-time buyer and too small for an initial public offering or leveraged buyout.

But medium-sized businesses can provide buyers with good rewards for little risk, and the key to getting the best price for one is demonstrating this to potential purchasers.

The way to do this is to get the sales process right. It is a three-step process to optimise the selling price for a business, involving careful planning, preparation and implementation.

Planning

Consider who are the most likely buyers, the best timing and whether you are prepared to stay on and help with the handover.

Most likely buyers could be:

• Industry participants, competitors, customers or suppliers.
• Management, with or without third-party involvement, (such as venture capital or private equity funds).
• Venture capital/private equity funds alone.
• Retired wealthy executives looking to run a business of their own.

Larger medium-sized businesses can also consider sale by way of public float on a stock exchange.

Timing is important. It is always better to sell when your company’s industry is in a positive rather than a negative phase. And it is better to try to sell according to your timetable rather than have the timing dictated by others or external circumstances.

Buyers with limited financial resources may require a purchase under terms, and buyers from outside the industry may seek a handover period to maximise the price from them.

Industry participants may be more aware of some of the pitfalls or negatives of your business, but on the other hand they may see significant vertical integration or consolidation benefits.

Preparation

Many businesses have been structured to suit their current owners. (They may own more real estate than is necessary for running the business, for example). This can be separated from the business sale and retained or sold separately.

Ensure that you can provide up-to-date, accurate and easily understood financial records of the business. Poor records will create doubt and uncertainty in a buyer’s mind, which will result in the buyer applying a discount factor to the price.

Implementation

When presenting a business for sale, the positives should be highlighted. Positives would include a history of sustainable profitability, competitive advantages, barriers to entry and identifying areas for improvement that have not been dealt with.

Be mindful that when you are selling a business, you are selling the future. The past is only relevant to give comfort with respect to what has been achieved. Businesses with a turnover of $5 million or more can generally provide a base for dramatic growth for new owners.

Because sales of businesses are singular events for most business owners, it is advisable for them to engage experienced advisers to assist with the business sale. It is wise to canvass the widest possible audience to attract potential business buyers – especially those from outside the relevant industry.