FAQs: Real Life Questions (And Answers) On Selling Businesses
Practical Questions From Small Business Owners (and the answers) - FAQs On Selling Businesses
FAQ 1: Are there good online communities to discuss the topic of business buying / selling?
Are there any good online communities to discuss or learn about business selling / buying and about business brokers?
The best place is Reddit. If you haven't heard about Reddit, it's one of the largest and most visited sites in the world. In fact, it gets more traffic than Facebook!
It's free to open an account and there are communities in Reddit on all kinds of subject. These communities or forums are call 'subs' or 'subreddits'. Each has its own short rules which will be in the right column but anybody can take part in the conversations.
There's the Sell My Business, Business Broker and Buying A Business communities there, for example. We have a more detailed look on other good online locations here.
FAQ 2: Who's the best business broker to sell a media business?
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 an "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.
FAQ 3: How do I sell my Chinese takeaway?
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. You need to start with the accounts and how much of 'real profit' the business is making (after deducting a proper 'salary' for yourself).
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. They start by looking at the accounts.
FAQ 4: Who is the best broker for my business?
Can you advise me on the best broker for my business? My turnover is £400K and my profit is circa £50K.
This is a great question for our FAQs page. 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 and I would recommend you sell the business yourself.
This does take a fair bit of knowledge and time though. You can read articles like this one on how to sell your business by yourself. That would be a good start.
FAQ 5: I've met with a business broker. How can I tell if he's any good?
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 as selling of larger businesses happens very differently. 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.
FAQ 6: How can I find someone to negotiate my business sale?
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.
FAQ 7: Isn't it the case that most >£1m deals involve some form of seller financing or external finance?
Why do you say that you lose all respect for a buyer when you realise he doesn't have enough money?
Yes, most deals in the £1m - £10m space (small businesses rather than micro businesses) tend to involve some form of seller financing or external finance. The larger the business, the more the chance there's some 'deal structure' in place and it's not all cash.
But the less the cash the buyer has to put down, the less the respect I have for him/her!
Buyers who are looking to raise money elsewhere to complete the deal, sometimes 100%, are a pain. There are several good reasons:
1. Their "external funders" are not risk takers. They are interested in capital preservation, not capital appreciation. (If they wanted to take risk they'd buy equity!) They are highly cautious and conservative and are difficult to please.
2. Having a "shadow" investor always increases the risk of deal collapse or, at best, a late stage renegotiation when the buyer comes back to say, "It's not me, guv, the external funder is demanding a lower price".
3. People who are trying to buy a business without investing their own money are generally chancers, Delboys, sharp operators.
Which is why I demand proof of liquid funds when dealing with these buyers..
FAQ 8: What are the main things a DIY seller needs to know?
I'm looking to sell my own business. What are the things you find most that DIY sellers do not know about the selling process? Andrea
Ah, this is a difficult one, but it's a great question for our FAQs page. I'll list the 10 most common things that often come as a surprise to DIY sellers:
- Stock: Buyers don't value your stock at market price / retail price. In fact, they won't even value it at cost price. They'll want the dead stock taken out of the equation, for starters. They'll pay you for the rest but at fire sale or other negotiated value.
- There's something called a disposal letter you'll have to write the buyer at some point (with, possibly, a disclosure bundle). You have to disclose all negatives here. If there's some negative about the business about which you were aware or should have been aware, you need to disclose it. If you don't disclose it in the disclosure bundle, the buyer can sue you later when he finds out.
- Buyers don't come in with a big pile of money and pay you on day one. They'll invariably want to pay you only part of the sum on day one. They'll duck and dive and try to borrow money, or ask you to lend them money, or try to defer payments into the future. You need an expert negotiator on your side to deal with this.
- Buyers don't pay you the valuation figure. No matter who did your valuation, buyers don't give a damn for the number. They'll come to their own valuation (and it'll be nowhere near yours).
- Even an "average" valuation, from speaking with different business brokers, may sound more "reasonable" but not to a buyer. He will still ignore that number completely.
- VAT. Don't disclose your sales figures inclusive of VAT. Turnover etc., are always quoted ex-VAT.
- Buyers are looking into a lot, lot more than most vendors think. For example, they'll ask for staff leave records and work out how much of unused leave is sitting on the books. That's a liability as far as they're concerned. They'll want money deducted for that.
- Also, if you're getting the profit from the business till the day of sale, they won't pay the corporation tax calculated up to the day of sale. There's something called completion accounts which you'll have to do and which will adjust the price (unless you've pre-agreed a locked-box mechanism).
- As you'll see from the above, there's extensive accountancy work involved. There's working capital to be calculated, equity to EV bridge to be worked out and much more. Vendors would be well placed to have a good accountant to hand to assist with all this.
- The cash in the limited company's bank account is not yours. It belongs to the company and needs to be handed over to the buyer. It's part and parcel of the assets in the company (which are balanced by liabilities - loans to the bank, creditors like HMRC etc etc).
In summary, there's a lot a DIY seller needs to know so my advice would be to spend some time to do some research and try to learn the ropes.
FAQ 9: I'm a business broker and I get, on average, less than 6 serious enquiries for each client. Why do you say brokers get dozens, even 100+ enquiries. What am I doing wrong?
Reason 1. Size
Larger businesses attract more serious buyers. Run a small experiment: Post a micro business with £20K profit on all the main channels. Simultaneously, post an ad for a business with £1m in EBITDA. You'll get a lot more enquiries for the latter.
Reason 2. Size
Smaller businesses often want to do the sale on the cheap. Even with the marketing of the opportunity, they are reluctant to spend large sums. Larger businesses don't and, to be fair, they don't feel the pain as much as the cost of marketing this kind of opportunity is the same whether the profit is £20K or £2m.
Also, larger businesses have advisory firms / M&A firms who can afford to post the opportunity in M&A databases like DealSuite, SourceScrub etc. Subscriptions to those database cost in the thousands, so business brokers handling smaller businesses aren't generally subscribers and therefore can't reach those more professional buyers (who don't go searching in the usual marketplaces).
Reason 3: Size
For larger businesses, it's worth the advisory firm putting a lot of time and effort into hunting for firms that might be good matches but not currently actively looking for an acquisition. They'll buy in data of companies who're likely to be a good match and then approach them individually. They persuade these firms to take a look. That effort is enormously expensive when done properly - it costs tens of thousands. M&A firms will often put in that effort for their clients, most brokers won't as any commission they get on a successful sale is unlikely to cover those costs.
FAQ 10: How do I estimate value of a dog walking business?
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 dependent 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 business-for-sale marketplaces 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.
FAQ 11: Why do you find businesses a broker instead of taking on the sale mandate yourself?
People often ask me, "Why don't you sell businesses yourself?" ie Why is my job finding mid-market firms the right business broker / M&A firm to sell their business? There's a ton more commission in doing the sale myself & there's no doubt I'd do a great job! So why don't I?
I have on occasion taken on the sale of a sub £5m business. But if we're talking +£10m businesses, if we can get them the spot-on best-placed advisory firm to do the sale, they'd fare much better.
So, here are some good reasons why you shouldn't rely on a one-man band operation (like me) to sell your mid-market business (even +£5m in value) no matter how competent they are and how trusted.
1. A proper advisory firm will have highly qualified ICAEW accountants, qualified corporate finance experts, qualified valuers, tax experts & various other in-house talents. Sure, I'm a smart guy and know everything, but they're better placed to provide higher level advice and there's a TON of that advice through the average sale!
2. The name / reputation makes a difference. Having a Goldman Sachs, or even a Grant Thornton handling the sale is in itself a loud message to buyers. It says, "This is not some crap business". If a highly respected M&A firm has taken this on they would have done extensive vetting of the business, advised on realistic valuations, know that the owners are reasonable people with realistic price expectations etc etc. They'll know that the advisory can provide the kind of data they'd need - projections, budgets, financial ratios etc
3. If done properly, there's a huge back office operation in selling a mid-market business. Here's what a competent & clued up firm would do: they'd buy in data of other business in the sector (and related sector), do filtering on the data, make a list of a few hundred prospective acquirers & start approaching them. These are non-obvious buyers but exploring this option is enormously time intensive & beyond the ability of a one-man band.
4. Especially when dealing with financial buyers, like private equity firms, there are numerous, complicated spreadsheets that go back & forth. And these financially sophisticated buyers try all kinds of tricks. You need the authority of a large and well reputed firm behind you to push back on some of their calculations & positions. When I say, "No, that's no way to calculate working capital" it doesn't have as much punch as when PwC or Deloitte say it!
5. Large advisory firms tend to have subscriptions to all kinds of expensive M&A services - from Zephr / S&P to DealSuite/ SourceScrub etc. Collectively these cost advisory firms tens of thousands of pounds p.a. but it gives them access to industry data on pricing, for example, but also access to buyers & other facilities.
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