These are 5 of the most common myths business owners believe when selling their business.
“My business will sell quickly”
While some businesses do sell quite fast, it can take a period of months to attract the right buyer and close the sale at a good price. A common rule of thumb is that it can take somewhere between 4 to 8 months to sell a business. This may seem like a long time, but it takes time to find the right buyer who will pay you an appropriate market price and to whom you will be comfortable handing over the reins of your business.
“Foreign buyers will overpay just to get residency.”
Some business owners seem to think that rich foreign buyers looking to reside here, or wanting a visa will overpay to buy their business because they have tons of foreign cash. The facts are probably a bit different. In order to become rich in any country, (and New Zealand is no different) you need to have some degree of intelligence. It stands to reason therefore, that most rich foreign buyers are relatively intelligent so they won’t suddenly get irrational just to buy residency, a visa and an overpriced business. There are stories of buyers buying a business to get residency and then closing it down in a few years, but they don’t spend large and usually don’t overpay for any business.
“The buyers financing is not my problem”
The reality is that most buyers will require some form of finance to purchase your business. Even for the most experienced business owners and purchasers, they will look to leverage the use of funding from elsewhere as this makes the process of purchasing more efficient for them. It is in your best interest to help them through this process as this may be the difference between them completing the purchase or not. Accounts showing little profit are great from a tax point of view but not good when it comes to determining the value of the business you’ve built.
Have your accountant re-cast your financials to reflect adjustments for what you take out of the business in terms of salary, health, vehicle expenses, travel etc. You will want to show the purchasers bank your business in the most favourable light possible so as to give your purchaser every chance of successfully funding the purchase.
“Same industry buyers pay more because they want my customers/skills/product”
Any buyer will only overpay when they fear losing the purchase to another buyer: competition in the market, and good marketing by the selling broker. If a competitor is smart enough to be successful and build a business big enough to acquire yours, then they are not likely to suddenly get irrational enough to over-pay.
“I can sell my business without help”
Many business owners believe they know how to sell their business because they have been the main salesperson in their business for many years. However, selling your business is not like selling a product or service. It can be particularly hard for business owners to put aside their emotional attachment and this can adversely affect buyer negotiations. Selling a business can be a full-time job and the demands can add stress to an owner trying to juggle both the sale and the running of the business. Throughout the selling process, clever business owners keep their businesses fully operational and add touches that would bolster the potential for a top of the market price.
Furthermore, confidentiality is lost, which means you risk losing clients and employees – the very goodwill you are trying to sell. It’s difficult to vet potential buyers without revealing your identity. Acting as an intermediary between you and the buyer, brokers will ensure that crucial information is not leaked out to competitors, suppliers, employees, or customers prior to concluding the sale as this can possibly impact the company’s competitive advantage, management structure, profitability and so much more.
This is where the services of a professional business broker can offer you valuable strategic advice and increase your chances of selling your business for a higher price.
Bonus Myth: “It’s worth more because of the cash I take”
If you are lying to IRD and stealing money from the business, why will a buyer believe that you are not trying to do the same to them? Undeclared earnings doesn’t add value to the price of the business. You can only steal it once. But why do it anyway?
Take this simple example: If your business is valued by a multiple of profit (as most are) and that multiple is 2, then the only person losing money is you. By stealing $1 of earnings, you save 30 cents in tax. Left in the company that $1 of earnings turns into $2 on the sale price, tax free. So it’s costing you $2 to save 30 cents!
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