Do you plan to sell your small business in the near future? If so, you'll want to get as much money as possible and need to make the organisation as attractive as possible to potential buyers. Yet you also have to know how to create a valuation, and there are many different factors to take into account as you proceed. What should you know as you prepare for this momentous occasion?
The Importance of Records
The most important thing to remember is that a prospective buyer can only make a decision based on the information that you provide. In other words, they've not been around to see how the business operates and to gauge levels of customer service, client loyalty and other factors. This means that you have to prepare your paperwork very carefully and bring in an experienced accountant knowledgeable about business management.
A good accountant will help you to prepare your accounts and valuation strategically. They'll ensure that your calculations are accurate, of course, and that you comply with all relevant accountancy standards and taxation practices. A prospective buyer (and their accountant) will want to see that the company has traded according to the law, and its performance can be measured against industry averages.
Generating the Paperwork
Typically, you need to provide three years of prior accounts, including a profit and loss account, balance sheet, asset ledger, and a list of any outstanding creditors and debtors. If you are selling during the middle of the trading year, then you can include the current figures up to the end of that year as an estimate. Some sellers will also include projections for the next couple of years, but you need to be able to back up any figures with some solid reasoning.
More often than not, a business can be valued based on a multiple of its net profit. A buyer may look at the last three years of trading and take an average of the net profit figure to work with. You will need to suggest an appropriate multiple and should talk with your accountant to see what is acceptable within your specific industry. Alternatively, you could market the business on an "offers invited" basis to see what comes along.
Adjusting the Net Profit
Finally, don't forget to make adjustments to your net profit figure if your overheads include any costs that are specific to you. This is sometimes known as "business owner benefits" and might, for example, include a vehicle that you put through the books but which is not absolutely necessary for everyday operation.
As you can see, this is quite a complicated process. Talk to a business management professional so you can properly prepare.Share
9 March 2022
Good day. I’m Linda and I run two family businesses — building contractor and aged care staff agency. It is quite a feat to juggle schedules and keep track of finances. I have become quite an expert with business management software. I have also learnt the vital importance of having good accountants to give advice and keep bookwork up-to-date. Prior to starting our family businesses, I honestly thought accountants existed to organise tax returns. I now understand that their jobs are much more complex and they can help your business prosper. I started this blog to highlight the numerous ways I’ve found that accountants can contribute to financial success. Please browse through the posts and I hope you find something useful within.