FAQ: Real Life Questions (And Answers) On Selling Businesses
Questions & Answers
The below are questions received from business owners in relation to selling businesses, and the answers we provided. Note that no confidential information is disclosed below and numbers and names have been modified to anonymise the sender.
I'm looking to sell a part time dog walking business which has great Google rankings, has been established for 3 years and makes £25K+ a year. The annual income is dependant on how the new owner runs the business. For example, if he does dog boarding as well he would make a lot more profit. It will also play with factors such as advertising - I am very active on Facebook and that attracts a lot of business....My questions to you are these: what is the process for selling a business of this kind? How would we make an estimation for the value of the business? And is there a market for people who are looking for this type of business?
I'm afraid I don't have great news. My opinion on the sellability of this business is very different to yours. I think the chances of finding a buyer are extremely slim. Please read this article of mine about selling really small, owner-run businesses.
Great Google rankings are, unfortunately, a negative and not a positive (see example 2 at this location). The fact that a lot of business comes via your activity on Facebook suggests to a buyer that once you are not around new sales will dry up as he won't have your reach in Facebook nor your "voice" in social media. The fact that the buyer can add other services, like boarding, is irrelevant. He's not going to pay you for the "potential" of the business!
You could try listing the business yourself at places like these, but rather than thinking about what your business is worth I would suggest you just accept whatever any interested party is willing to pay.
I'm sorry I don't have better news.
Can you advise me on the best broker to use to sell my media company? Turnover for the last financial year was £300,000 and net profit for our last financial year stands at £20k. The business has been structured for growth up to this point.
That's a tricky situation you have. There are hundreds of new businesses for sale every single day competing for buyers' interest. Buyers take a 50,000 foot view and filter, initially, based on the numbers. They don't have the time to read the narrative in each case (explaining why the profit isn't higher).
Your first challenge is passing this barrier and getting buyers to come down to 10,000 feet for a closer look.
The next problem is that they see "structured for growth up to this point" and read it as "we've been struggling to make a profit". What can I say, buyers are a highly cynical lot! They'll also see a <7% net profit margin as so wafer thin as to risk a net loss in the first year or two of new management. Besides, founders who are "structuring for growth" tend to hold on to their businesses to take advantage of that growth and reap the benefits, they don't put the business up for sale.
But if you really were structured for growth and can prove that conclusively with a recasted* version of your accounts, there might be some mileage in going to market and trying to sell the business. Otherwise my advice to you would be to grow the business some more first as it's not ready for sale at this time. How do you prove reinvestment as the basis for lack of profit? It isn't easy. If you invested in patents and other IP, that'll work in your favour. If you invested in growth by charging lower prices (to build a client base), paying more expensive staff, doing SEO, expanding existing operations etc., that'll count against you!
*I've written about recasting here. The article is a bit technical but I would recommend you plough through it.
This is not suitable for a broker sale, it's too small as I've described here. It may be suitable for my Assisted DIY service, but I won't be able to say until I know a bit more about the financials and form an idea as to what the real profit would have been.
I'd like to sell my Chinese takeaway. The turnover is around £4500 a week. The profit is around 35% gross.
Many broker created listings of businesses for sale that you will find online quote gross profit. However, buyers are not concerned with gross profit. They want to know the net profit. And not some theoretical figure as in "net profits could be in the range of xxx". They want to see actual numbers. Can you please send me a copy of your accounts?
I just took over the business recently and I do not have the accounts yet.
The first thing you need when selling a business is proper accounts and proof of profit.
You need complete accounts for the previous year and you need current accounts being regularly maintained and updated on a daily basis. If you don't have clean records then buyers won't be interested in your business. The don't listen to any long stories you have, they start by looking at the accounts. Please let me know when you have the figures.
Can you advise me on the best broker for my business? My turnover is £400K and my profit is circa £50K.
Thank you for your interest in finding the right broker for your business. Typically, sellers who take time and trouble to find the right partner when going to market see a much higher probability of sale and a significantly higher price. They also avoid ending up in news articles like this one.
However, it has been my advice over the years that brokers are better suited to the larger businesses - businesses that can afford to pay for a professional level of service (which can cost in the tens of thousands). Unfortunately, at the lower end of the market (under £2 million) businesses tend to end up with brokers such as KBS, Turner Butler, Intelligent Business Transfer and the like. I have never "recommended" any of these brokers. Prior to signing up with any broker that will accept a smaller business I urge the business owners to devote as much time as they can to researching the broker (some of my reviews are here). This applies whether or not you're paying an advance fee! I suggest they also read my articles (example 1 and example 2) about the dangers with brokers operating in the sub £2m market.
Please see the attached "Valuation" PDF for more on Broker Matching. Pages 22 onwards describe our service of matching you with the right broker and how that can save you significant sums of money, get you the right partner and improve your chances of a successful sale on your terms.
There are some cases studies on our website involving previous clients and how they benefited from this broker matching service. However, I must admit, I do not think this service would be right for you given the size of your business.
I occasionally take on a few select businesses and provide the owner with an Assisted DIY service i.e. I help them sell their business themselves and without the risk of lower end brokers. I do not know enough about your business to make an offer to get involved, but I would be happy to spend a few minutes on the phone to have an exploratory chat if you wish to book a call. You could use that opportunity to raise any questions related to valuing or selling businesses.
I had an introductory visit from a broker yesterday and they have provided a valuation for my business. How can I tell if the broker is any good? Alan
Great question, Alan.
If the broker contacted you out of the blue, that's the first warning sign! The best brokers in the UK are so inundated with work that they don't cold call, don't send out marketing emails and don't give any spiel about having lots of buyers looking for businesses just like yours. You have to persuade them to take on your business rather than the other way around.
Second, out of the people who come to me saying they've already spoken to a broker over 75% of them quote just 4-5 names out of the nearly 1000 firms in the UK that handle the sale of businesses. And the names they tend to quote are, in order, KBS (or Knightsbridge Corporate), Intelligent Business Transfer, Turner Butler, Blacks and RTA.
Some of the above brokers come across as very professional, they seem to have impressive credentials, they put together a very slick looking brochure etc. But for many brokers their talent lies in signing you up, not in actually selling your business.
Third, it pays to do a great deal of research before signing up with a broker. Do some Google searches for the broker's name together with terms such as "feedback", "reviews", "scam" etc. Then to see how dismal some of them are, go further and actually pose as a buyer and ask for details of businesses they currently have on their books. How responsive are they? How quick? If you raise questions about an individual business how convincing are their answers?
I have some reviews here of the best known brokers, a page here on how to choose a business broker and a list of hundreds of brokers in the UK if you wish to research a few more. With respect how to find the right broker for your business - my material has been published at this page on the Jonathan Lea Legal Network, this page on the BBP business magazine website and elsewhere. If you have over £5 million in turnover, or £100K in net profit, get in touch with me and ask about my broker matching service. I own and maintain the UK's largest database and knowledge base of business brokers - their sector specialisation, their fees, their client feedback, their geographical coverage and much more.
A competitor is interested in my business and would like to put in an offer. Do you know anyone who can negotiate this deal for me? Tony
Thanks for the question, Tony. You are right to seek an expert to do the negotiations on your behalf as these negotiations can be quite tricky. It's not just a matter of agreeing a number, there's a long list of points which need to be negotiated!
There are people you could hire to do the negotiation for you, but they don't come cheap. You'll be looking at between £1,000 - £3,000 per day plus travel expenses. The average negotiation for a business worth £1m - £5m takes about 5 hours. And you'll need a fair bit of time prior to that to brief the negotiator about your business & discuss what your priorities are and what you'd like to get out of the sale.
On occasion I, too, have taken on an instruction to negotiate a deal.
However, my advice would be to never engage directly with a competitor and never admit to a competitor that you might consider selling the business. This is what you need to do if you've had an offer for your business.
Even if the offer is from a firm that is not a competitor, having just a single buyer is a very, very bad idea.
What typically happens is that the buyer will get you to sign an exclusivity agreement ie. an agreement to not discuss the sale with any other buyers. He needs this as protection because he's going to be spending a fair few thousand on accounting and legal services to run a due diligence on your business and he doesn't want you pulling out halfway through because you've got a better offer.
And you shouldn't ever sign an exclusivity agreement unless the buyer knows you've got other options and other interested parties. Otherwise he'll find "faults" with the business during the due diligence and keep chipping away and chipping away at the already agreed terms!
The best approach is to engage someone who can generate multiple buyers for you before you engage with the out-of-the-blue offer. Unsolicited offers are, in over 90% of cases, not genuine offers but attempts to fish for information, gain competitive advantage or probe for vulnerabilities.