What your business is worth

IN last week's article we discussed preparing your business for sale as a going concern and maximising its value to potential buyers.

Remember, it's all about preparation and ultimately it's a "beauty parade".

To make your business more attractive you should have:

  • A good track record of profit growth
  • A strong, broad customer base
  • Unique intellectual property or selling proposition
  • Good strategic relationships
  • A business plan
  • Independence from the owner (and any others who will be leaving when it is sold)
  • Strong systems and documentation
  • Secure premises
  • A good financial adviser to maximise the value of the business and minimise any tax payable upon the sale.

Some common traps and pitfalls to avoid:

  • Cash businesses
  • Business relationships that are built on a handshake
  • Lack of documented systems and processes

Once we have primed the business for sale, we then need to consider valuation methodologies, how to market the business to potential purchasers and the tax consequences of the sale.

There are various methods used to value a business. The most common is a "multiple of EBITDA".

EBITDA is "accounting speak" for your Earnings Before Interest, Tax, Depreciation and Amortisation. The "multiple" can be from one up to five times EBITDA. You should seek professional advice to assist you with calculating EBITDA for your business and determining an appropriate multiple to use.

Usually, a set of 'Special Purpose Financial Statements' commonly referred to as 'Abridged Accounts' are prepared for your business to use when marketing the business for sale along with a document called an 'Information Memorandum' (IM). This document includes information on your business, its history, position in the market, track record, key clients, the economy in which it operates, etc. Again, this document is usually prepared by a professional.

Finally, calculating any tax payable on the sale of your business requires the skills of a professional accountant and tax agent. Capital Gains Tax can be a complex topic and your circumstances must be closely considered when applying this legislation to the business sale transaction.

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