How do outgoings influence the purchase price in the sale of a business?

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Preparation is everything

 When selling a car, you have it detailed for maximum impact. With a house, you make sure all is in order, and stage it for the best presentation. Likewise, when you are contemplating the sale of a business, you should prepare your business, and prepare yourself.

 Your business should be able to show clear and accurate accounting. Equipment should be in top order. Outstanding items should be attended to, with any staff issues resolved.

 Prepare yourself. Why am I selling? What is my explanation? Ill health may be a reason, but is perhaps not conducive to a good price. Get the timing right.


What price success?

There are a number of ways to value a business.

One way has been to apply a multiple to EBIT (Earnings Before Interest and Tax). A company with an EBIT figure of $300,000, when say, a multiple of 5 is applied, gives a value of M$1.5. But what multiple to apply? Many factors come into play:

  • Are economic times good, bad or mediocre?
  • Is the business in a niche market with little competition and high start-up prices for any competitor?
  • Is the sale being hurried because of ill-health, or similar reason?
  • Does this business have high market acceptance, or is it little known?

Valuation methods used in other businesses may be based on numbers:

  • of outlets
  • of customers
  • of regular contracts

 In bricks-and-mortar businesses, assets can be valued via NPV, the Nett Present Value of listed assets, less any associated debt. This is often referred to as the tangibles, but takes no account of the greater picture, the intangibles. That is, areas of value that you can’t really see: the goodwill of loyal customers built up over years, the number of clients, whether they are long term or high turnover, the loyalty or otherwise of staff, the uniqueness of the product or service.

In any company there will be business outgoings, such as wages, rent, insurance, licence fees and such. When a business is sold, that day of final settlement, completion day, will specify the headline purchase price of the business but this may well need adjustment. For example, on the one hand, rent, insurance premiums, payment for materials not yet received—all of which the current owner has paid for, but will reap no benefit from—will need to be paid for by the new owner, who will receive reward from them.

 On the other hand, the current owner may have received prepayment for goods or services not yet delivered. The current owner has the reward, but the new owner must complete the task, and therefore needs to be remunerated by way of adjustment to the purchase price.


Due diligence … only for buyers?

When looking to purchase a business, potential buyers will astutely perform due diligence. This will be wide-ranging, and will go far beyond the mere financials of the company.

It is vitally important that anyone contemplating selling a business do likewise, to ensure the seller is as completely prepared for the negotiations as the buyers. It will be a valuable strategic investment in the sale of your business.

Your accountant can provide a detailed financial picture—your trusted commercial lawyers can complete the package.

At the end of the day, a business is only worth what a buyer is prepared to pay. This process will be easier with sound legal advice from the experts. Owen Hodge Lawyers. We are here to help. Contact us today with any questions about the issues raised in this article, or if you need assistance in valuing or selling your business. 

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