One day, hopefully the day when your business has made you rich and you’re looking to retire, you put it up for sale.

Some business owners (and unfortunately brokers who should know better) take the approach of making it very obvious, well TOO obvious that the business is on the market. This could be:

• putting the exact name and address of the business on public listings, or
• disclosing too much information upfront without qualifying the potential buyer.

Unfortunately, rather than selling your business, this can have the opposite effect of killing your business (OK, I might be exaggerating a little). Why? It affects three groups of people:

1. Staff
2. Customers
3. Competitors

Let’s go into detail.

Staff

If staff know your business is for sale, there will most likely be uncertainty in their minds. They’ll ask questions like:

• “Will the new owner keep me?”,
• “Will the new owner let me go on lunch breaks whenever I like?”,
• “Will the new owner treat me well?”
• “Will the new owner pay me on time?”, or
• “Will the new owner do x?” (x being anything they might lose once the old owner leaves)

I hope you get the point. Some people are real worry warts, or at worst panic merchants. That is, they get scared because they can’t afford to lose their job and they run away to their competitor. If that person is perceived as a leader, other staff may follow him/her. Then you have to spend time and money training new staff. This compounded with the extra work involved in selling your business will take any enjoyment you had out of the selling process.

Customers

Not only staff, the same uncertainty applies to customers. They’ll ask questions like:

• “Will the new owner provide the same quality of product or service?”
• “Will the new owner tighten up on payment terms?”
• “Will the new owner stop giving me mate’s rates?” (i.e. a discount)
• “If the owner is selling the business, then there’s something wrong with it. I better change to someone else more stable.”

Competitors

If it wasn’t enough, competitors may take advantage of this uncertainty to spread more rumours, or if they know any of your customers or key staff, begin the process of poaching them. And remember, not everyone is as honest as you, right?

In Concluding…

So moral of the story is… be discreet when selling your business. It may make the difference between your largest payday (i.e. selling your business) or being stuck with a business that no one wants.

If you’ve started to look at business listings online (or offline), you’ll see a common term WIWO, which is shown with the price.

What does it mean? It stands for walk in walk out. It means that on the day of settlement, the old owner walks out, and the new owner walks in to run the business.  It differs from $price + SAV in that a stocktake does not occur.

Essentially, the new owner buys everything “as is”.

For example, you might be looking at a hairdresser for sale and it could say something like $180,000 WIWO. When it comes to settlement, aside from a few transaction fees, the buyer will pay the seller $180,000 for the business.

But why does it matter?

Many businesses are sold $price + SAV. The figure that is paid on settlement can differ depending on how much stock that business is holding at settlement. This is checked by both buyer and seller through a stocktake.

So with this in mind, you’ll see listings shown as $price + SAV, or $price WIWO. If you see both, then it’s wrong (which I’m sad to say I’ve seen a few times).

Is WIWO useful?

It’s generally used for businesses with very little or no stock.

Also in some businesses, it’s very hard to value the stock at settlement (e.g. manufacturing), so buyers and sellers may prefer to avoid doing the stocktake altogether and sell as WIWO.

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Today, I was having a nice sit down coffee with an acquaintance in the city, and as he knew I was a business broker, he quipped “Why do people want to buy a business? I mean, don’t most people sell because it’s going downhill?”

I shake my head in disbelief, yet at the same time reminding myself that this question is seemingly as common as the pox. And it mainly comes from people that’ve never been in business.

By rote, I begin to explain, “Well, believe it or not, there’s plenty of other reasons why people sell their businesses.

• There’s health – someone could have cancer and needs to sell the business,
• There’s retirement – they’re 60 or 70 and just want to get out of the game,
• The husband and wife want to get out and take a break, or
• They could just be bored of it – like people with jobs get bored and want to switch jobs.”

Those are probably the main ones I hear, but there’s plenty of other reasons that have nothing to do with the profitability of the business.

So the next time you’re looking at business listings, don’t always assume they’re in bad condition and need huge amounts of money and elbow grease to turn it around.  Be proactive, search around and you’ll definitely find the opportunities out there. Otherwise, you’ll just end up being a fence sitter like most.

Chris Khoo
Decisive Business Broker

Have you been looking at business listings on the Internet and wondered what SAV meant?

It stands for Stock At Value, and it’s the value of the stock in a business at cost price. If you see a business listing saying “$price + SAV”, then you know the price of the business excludes stock.

It’s generally used for cafes, restaurants and retail businesses, where the business requires stock on hand to trade with. It’s not easy to estimate how much stock a business will have, but you can safely assume it shouldn’t be too much for a food business. With retail businesses, it’ll generally be alot.

But some of you may be asking, why do I need a separate figure for stock? Can’t we just lump it all together when buying a business?

Good question! Let me explain.

When a buyer goes out to buy a business, it’s not just a matter of writing a cheque out to the seller, and the seller handing you the keys and walking away forever. There is generally a lengthy process for the buyer to do their due diligence, finance and training before the business is handed over (i.e. settled).

During this time, the business would’ve bought and sold stock, which will vary the amount of stock to trade with. So on the day before settlement, the buyer and seller will get together to do a stocktake. Whatever the final amount they agree on should be close to the SAV, and is paid by the buyer on settlement.

Note: There is another common variation to this arrangement called WIWO.

If you’re interested in buying a business, sign up to my weekly newsletter on the right.  I promise you’ll get value out of it!

At times when I use the term “multiplier” or “multiple” as a business broker, many business owners screw up their faces and go “What?”. So I thought I might explain it here for your benefit.

The multiplier is the number of years it takes to recoup an investment in a business, based on the value of money today. For example, if I bought a business at $350,000 and EBIT (earnings before interest & tax) is $100,000 a year, then the multiplier for that business is the purchase price of the business divided by EBIT, which is 350K / 100K = 3.5x.

If we raise the profit to $150,000 a year, then the multiplier lowers to about 2.3x.

So a rule of thumb is – the smaller the multiplier, the more money it makes (and vice versa). But always keep in mind… if a business makes more money in a shorter amount of time, there’s probably a higher level of risk involved as well.

How About ROI or P/E?

You can also convert the earnings multiplier into a ROI (return on investment) figure by calculating 1 divided by the multiplier. So if you have an earnings multiplier of 2, 1 divided by 2 equals 50% ROI.

And also for all you share investors out there, the earnings multiplier is exactly the same as the P/E ratio (price earnings ratio).

If you have any questions about buying or selling a business, you can ask me a question anytime.

Chris Khoo
Business Broker

Hi, my name is Chris Khoo and I’m a professional business broker with Action Business Brokers. In my day to day work, I talk to many business owners and observe them at work in all different industries. I help them list their businesses for sale and link them up with buyers so we can achieve a mutually beneficial outcome for everyone.

With this in mind, I believe I’m in a very good position to see what works and what doesn’t. From buying a business, running it and selling it, I’m hoping that I can give you some good advice that you can benefit from. Not only that, I hope you can help me understand your needs by contributing your opinions in the comments.

From a publishing point of view, I’ll be posting a new article every Wednesday. And to start off, I’ll be talking about the basics, such as terminology and the basics of buying, running and selling a business.  Later on, I’ll be delving into some advanced topics and talking about the current market as I see it.

If you have any topics you’d like discussed, ask a question.

Chris Khoo
Business Broker