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Selling a small business

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When we start a small business, we all dream of how much money we will make and at some point, we hope to sell it and enjoy the high life. The selling process can be overwhelming and time-consuming; this guide will explain the basics and help you decide how to move forward.

Selling your business is the process of putting your business up for sale by an owner or owners. Just as you needed a plan to get into business, you’ll need a plan to get out of it.

WHY are you selling your business?

Selling your business is a very emotional decision, and you must have thought this through. Remember that the first question a prospective buyer is going to ask is, why are you selling?

If you are selling because of financial stress, an alternative may be to speak with your accountant or business advisor first.

When selling, you must also decide exactly what are you selling?

  • Do you want to sell everything?
    • Do you want to walk away?
    • Are you prepared to stay on for a period to help with the handover?
  • Are there any assets you do not want to sell? for example, a car
  • Does the sale include your registered business name?
    • Will you agree not to compete?
  • Do you have some business’ intellectual property (IP) that you want to sell?
  • If you own property associated with the business will you keep that?

WHAT is the value of your business?

Like selling a house, you probably don’t know its true value. If selling, you will need to value it, which cannot include your emotional attachment. Otherwise, you could easily price yourself out of the market. T value and sell a business you can attempt to do it yourself, or you can get professional advice from the likes of your accountant, business advisor, or a business broker.

Beyond understanding the financials, you will need to consider goodwill, including the intellectual property of the business, any plant and equipment, including digital assets of the business, and any stock or inventory that the business owns.

There is no single business valuation method, instead of a number that can be used singularly or combined. S e of the more popular include:

  • Book value – Subtract liabilities from the assets. For example, if you have $100,000 in assets and $30,000 in liabilities, the value of your business is $70,000.
  • Return on Investment (ROI) – uses the formula ROI = (net annual profit/selling price) x 100.  If the selling price was $100,000 and your annual net profit was $10,000 your ROI would be 10%.  Thus a buyer could expect to get 10% back on their money based on an investment of $100,000.
  • Market value – This is how much someone is prepared to pay for your business. It is market and industry-specific so it is worth researching your industry.
  • Goodwill – A business may only be worth the reputation of one employee and if that is you, and you leave, goodwill is what the business is now worth.  Customer loyalty and brand reputation are usually factors that affect this.
  • Cost of creating from scratch – current cost if you had to start the business today.
  • Future profits – If you can predict what future profits may look like this can significantly increase the price of business if on an upward trajectory.

Note if you have not paid attention and not kept accurate records of your business, this will impact the perceived value of your business.

HOW do I sell my small business?

There are several ways to sell businesses, but the most common is through a broker. A broker will help with the whole process, including valuations, marketing, negotiations, and final sales. Some internet solutions charge a set fee, and others charge a 7-10% commission on the sale price. Mar ting costs are normally in addition. A directory of business brokers can be found here.

To sell your business, you will need to provide the following information:

  1. Financials: Tax returns (3 years), bank statements (3 years), balance sheets (3 years), accounts receivable/payable lists, salary information, financial forecasts, stock inventory and cost price, valuation of equipment and fixtures.
  2. Legal: Business registration (ABN), contracts/agreements, insurance policies, building leases, licenses, patents/trademarks, employee agreements, and records of employment, franchise agreements current loans/agreements. If it is a freehold sale, the land title, and any agreements.
  3. Operational: Marketing plans, vendor and customer database, equipment servicing receipts, website details and statistics, business procedures, training manuals, and employee manuals.

Without a broker, you would need to do the following:

  1. Value your business
  2. Prepare a marketing document on your business including history, what you sell, competition,  growth prospects, why you are selling, and contact details.
  3. Advertise the business is for sale. Word of mouth and your existing networks may also help.
  4. Deal with interested parties
  5. Be prepared to make relevant financial, legal, and operational information available as per above so the prospective buyer can do their due diligence.
  6. Prepare a contract of sale. It is highly recommended you use the services of an accountant and lawyer at this point to help prepare the documents and transfers.
  7. Determine how and when settlement will occur.

HINTS

Keep your employees up to date when appropriate.

Selling your business may result in additional obligations that need to be paid, such as employee entitlements or tax amounts from asset sales.

Normally the sale of a business is GST free.

Remember to account for asset depreciation when valuing an asset.

The Australian Tax Office offers small business owners the following Capital Gains Tax (CGT) concessions.

  • 15-year exemption – may exempt a capital gain from a business asset you have owned for at least 15 years
  • 50% active asset reduction –allows you to reduce the capital gain arising from the sale of a business asset
  • retirement exemption – allows you to receive relief from CGT if you sell active assets used in your business. Active assets include those used in the course of operating a business and intangible assets like goodwill.
  • rollover – allows you to defer a capital gain from the disposal of a business asset for two years.

SUMMARY – Consider using a business broker

Make sure you are selling for the right reasons. Work out if you want to sell everything or just parts. Decide if you will get help from a business broker to sell your business or do it yourself. Be prepared to provide all your confidential information and try hard to keep emotion out of the process.

Advertising for better sales

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Maybe you are starting a small business or maybe you have been in business for a while.  How do you reach new customers or let more people know you exist?  Ideally, when someone is in the market to buy your offering, they come to you.  Advertising is a way to let people know what you have to offer and we will cover your options in this guide.

Advertising is a marketing tactic involving paying for space to promote a product or service. The actual promotional messages are called advertisements, or ads for short. The goal of advertising is to reach people most likely to be willing to pay for a company’s products or services and entice them to buy.

f you have not already done so we highly encourage you to read our guide on marketing before you read this guide.

WHY should I advertise?

How do potential customers know that you are running a special this month that makes your offering very attractive to purchase?  Unless you or one of your staff tell them they probably don’t know. It is not possible for you to personally look for and speak to every new customer in most circumstances so you have a few options:

  1. Word of mouth – a happy customer tells a friend
  2. Having the right location – people walk by your shop
  3. Be on a directory – You are found on Google or Yellow page
  4. Advertising – you spend money to be found or promote a message

Advertising has a cost to it and the key is to spend the amount of money that you can afford to drive the greatest number of people to your business. Successful advertising would mean that you generate more profit from any additional sales (sales you would not have had if you did not advertise) than the cost of the advertising.

Beyond increasing sales, advertising can help establish your brand and increase the likelihood of someone recognising your brand. It can help you reach customers much further away than your place of business and position your offering as better than your competition.

WHAT do I need to know about advertising?

There are two types of adverting:
  1. Traditional – TV, radio and newspaper, mailbox flyer, cold telephone calling and door to door selling
  2. Digital – Internet-based including social media and digital ads (see our guide on digital marketing)

All forms of advertising have advantages and disadvantages, but in most cases, trial and error will help you decide which is best.  Digital advertising can be targeted to just the right people but will those people just scroll past your ad?  What sort of ads do you notice?  An important lesson here is to ensure your advertisements are relevant to your audience and they see some sort of benefit.  Thus, the messaging and the creative of the ad can be just as important as the type of advertising you pick.

As a small business, it is unlikely that you will go out and buy TV advertising, at least not before you are already a success or have deep pockets. 

Some ideas as to what might be most effective include:
  • Letterbox flyers – design and print a flyer that can be distributed to letterboxes in targeted areas.
  • Local newspaper – delivered free, targets people in the area your business operates and is relatively inexpensive.
  • Product Review – Look for a journalist or blogger who is prepared to write about your product or service.  This may require you to provide something for free or pay a fee.
  • Google AdWords – investing in keywords can drive more traffic to your website.
  • Google Maps – ensure you have your business listed at Google My Business so it will appear on searches (no cost).
  • Social Media – Facebook ads can be very targeted and also allows you to create a following for your brand.  Note, most followers will not see your post unless you pay Facebook for them to be seen.

HOW do I create an Ad and get it in front of people?

Simple 10 step process to advertise:
  1. Research who your audience is – who is most likely to buy.
  2. Decide who you want to reach – location, demographics, interests etc.
  3. Set a budget and a targeted outcome – if I spend this much, I hope to get this result.
  4. Choose an advertising type – you may wish to get some advice from a marketing agency.
  5. Develop a message to suit your target audience – resonate with the customer and show a benefit.
  6. Design creative assets with a call to action – you want to catch people’s eye in a sea of advertisers and give them a clear next step to purchase from you.
  7. Work out how you will measure success – yales will be your goal but consider what else you can measure.
  8. Launch your Advertising – directly with the medium like Facebook or through a media buyer.
  9. Track and analyse the performance – consider changing your advertising mid-way through if it is not working.
  10. Decide if you will do it again and how you could improve your advertisement.

To learn more about design see your guide on getting graphics done.

Picking the right type of advertising will be dependant on many factors. Watch what your competitors are doing as well as what you see working for other industries.  You will find that more than one type of advertising is better than just doing one thing.  For example, a newspaper advertisement is well complimented by doing some Google Ad words.

As a small business, buying advertising is best done directly with the vendor. If you wanted to advertise in a local newspaper go directly to the local newspaper. In the advertising world almost everything is negotiable so don’t just accept the first price they give you.  Note when buying digital advertising like Facebook or Google assets the price is based on an auction system so you will pay depending on what others are prepared to bid on the same assets.

Beyond sales, measuring results can be the number of clicks on an ad or to your website, calls received, the number of opens of an electronic direct mail, or website traffic.  However, remember only sales will mean an improvement in the bottom line.

HINTS

Any advertising of your products or services should be accurate, true, and able to be substantiated. Advertising practices are governed by law and there are fines for businesses that mislead consumers, whether intentionally or not. Ensure you read our guide on Australian Competition and Consumer Law.

Be ready to respond to your advertisement.  Make sure you have the product or service available.  Ensure your call to action is clear and respond to enquiries quickly, for example, make sure someone can answer the phone or respond to emails. Does your website duplicate the offer and what is your plan if the advertisement goes better than expected?

Unfortunately not all advertising works.  Learn from your failures and don’t make the same mistakes next time.

SUMMARY – advertising for more sales

Advertising is great when it increases your sales but finding who to advertise with and where to advertise is a trial and error approach. Newer forms of advertising like social media competes with older forms like a letterbox drop each with their advantages. Pay special attention to your creativity as it not only represents your business but also enables your advertisement to stand out from your competitors.  Always measure your advertising results and adjust any future advertising based on what you have learned.