Selling your business- Methods of sale

SELLING YOUR BUSINESS- METHEODS OF SALE

Internal sale/management buyout

The people who know your business best, are the people who work there. You might be surprised to learn that a capable and motivated buyer is already under your roof. With a little thought, however, you might be able to find a capable junior, or manager, interested in transitioning into the business, or buying it outright.

For sale by owner

Occasionally, an owner can find a buyer directly.

It is almost always someone else in the industry, or might be a capable manager working for a competitor. The trick is, letting it be known that you are interested, without giving the impression that there is some kind of urgency or problem. Obviously, picking your mark, and being consistent with the words that you use, are important.

Sale by broker

Much of the tim, unless you have a target buyer, you will need to consider appointing a broker to sell the business.

Depending upon the type of business, a specialist broker might be a major step forward.

Specialist brokers tend to have a good bank of contacts and, with their knowledge of your industry, are far more likely to get an accurate and robust price, due to their ability to educate buyers.

A specialist broker for your industry should be reasonably identifiable. If no specialist broker exists or can be found, then choose a broker who is active and enthusiastic.

Business brokers tend to have characteristics similar to real estate agents in that some are incisive, enthusiastic, systematic and get sales completed, whilst some will take your listing, post it on the internet, and hope that someone contacts them.

Choosing a broker

Effective, successful brokers tend to have the following characteristics:-

1. They are easy to find, that is, they are highly visible;

2. They have a well presented website that is easy to navigate.

3. They are easy to get hold of on the telephone, and enthusiastic to have a meeting;

4. They have a standardised presentation, and a formal listing process. At presentation, they exhibit a good  knowledge of the induction listing and sale process, and appear to have some knowledge of your industry.

5. They explain the listing process, and the process of contacting them, and a feedback and reporting process for you.

Questions to ask a broker

When appointing a broker, ask the following:-

1. How many listings do you have? (there can be too many and too few)

2. How many listings do you have in my industry?

3. How many sales have you made (this year and this month)?

4. How many sales have you made in my industry (this year and this month)?

5. What is the usual industry multiplier for my industry? (the main valuation tool for business goodwill).

6. How would you go about placing a value on my business?

7. What is the average time between listing and sale for your businesses?

Selling a franchise

Usually, when selling a franchise, it is slightly easier than selling a non-franchise business because:-

1. You get benefit from the brand;

2. The franchisor is constantly generating interest in franchise businessed for new territories, but those buyers will often ask about an existing territory;

3. There is usually a broker that sells the majority of businesses in that franchise, who is reasonably easy to identify.

So long as you take a professional approach to the process, there can be benefits in alerting yout franchisor to your interest in selling. It is important not to give the franchisor the impression that you are desperate or angry as a motivator for doing so.

Your franchisor manager should, in fact, be helping you analyse any problems in the business to identify any improper motivators for selling. It is likely that, in any due diligence period, or shortly thereafter, a buyer will find any major issue that has been hidden, and either terminate the contract, or raise a dispute regarding the particular issue.

These issues should be resolved, or at least a plan for resolution created, prior to the business being sold.

Duties of disclosure- what do i have to tell the buyer?

Unfortunately, there is long and tortured history of business sellers deliberately withholding pivotal information from buyers.

Sadly, the law is not as precise as it could be on this subject.

There is still a general belief in the principal of "buyer beware", that is, it is up to the buyer to ask sufficient questions, obtain sufficient answers, check objectively, and do a proper due diligence prior to committing to buy. The feeling is, that if the buyer does not "do the homework" then it is the buyer's problem.

As a starting point for the law, this is true.

Unfortunately, the matter is a little more complex than that.

Beyond this basic principle, the law imposes some duties to the seller. The duty not to engage in false and misleading conduct, or to makle false representations, is placed over the top of the general "buyer beware" principle.

A seller cannot deliberately provide false information to a buyer.

Often the question arises "What about staying silent?"

As a general principle, silence is not considered misrepresentation.

In rare situation, however, the Courts have found sellers liable in circumstances where a failure to point out a critical issue to a buyer, which the buyer could not possibly have found on an independent search, has been  held to be false and misleading conduct, or misrepresentation. This situation is quite rare and isolated.

It is often the case that sellers are aware of impending changes either to competition or to the industry in general, where the seller is unwilling to hold on and fight though that change.

This is not information you are required to volunteer. It is up to the buyer to negotiate a satisfactory price, and look at the information provided and be satisfied that it is safe to commit to buy.

It goes without saying that the information you provide must be accurate, and inaccurate information may leave you liable. Likewise, if you are asked a question during a negotiation, or due diligence, provision of that information must be accurate. It is open to you, of course, to refuse to provide the informationo (unless the purchase contract creates an obligation for you to do so). but the buyer may well draw conclusions from this refusal.

What type of person buys a franchise?

WHAT TYPE OF PERSON BUYS A FRANCHISE?

Having decided to take on business ownership, there are no set rules, and there is no definitive profile for those that opt for a franchise over ordinary business ownership.

A sound decision, however, should be based on:-

1.            Your personal goals (a firm decision that the business will support your lifestyle, not the other way around), a realistic idea of the size of the business (present and future), and an assessment of your skillset;

2.            A realistic assessment of the working capital (which will determine the size of the business you can purchase);

3.            An objective assessment of your skillset;

4.            A realistic decision about the type of work that you personally want to do within the business you are looking for;

5.            A realistic view of your technical ability with regard to producing a product or service.

Once this has been done, looking at the gaps and shortcomings, will tell you whether or not you have the skillset to take on all aspects of the business.

If you do not, you will either need to gain that skillset, or buy a business that is big enough to financially support the hiring of those skillsets.

A simpler option may be to look at a franchise system which will provide support, and “plug the gaps”, in your ability to provide a well rounded business operating system.

In effect, your franchise fee, a proportion of your gross turnover, is the price that you pay for receiving this supplementary support.

When considering a franchise, you should also think about whether territorial and other constraints (having to comply with systems, procedures and directions from the franchisor), are going to suit you.

Typical profile of a successful franchisee

People are different.  Although psychological profiling is being undertaken by some franchise groups, it is impossible to say, “This is the profile of a future successful franchisee”.

There are some common characteristics, however:-

1.                  They understand their role within the franchise group;

2.                  They understand and value the role of the franchisor;

3.                  They have a good grasp of the dynamics of how the business works, that is, they have an appreciation of the “levers” of the business (stock and staff systems, presentation, sales, advertising, processes), and how each relates to the other;

4.                  They are clear about their goals;

5.                  They are realistic about where the business fits into their lives and have a balance between the two.

Profile of an unsuccessful franchisee

Profile A

1.                  Treats the business as a personal __________ and resents intrusion and direction from the franchisor;

2.                  Refuses to follow processes;

3.                  “Knows better”, that is, refuses to accept that there are processes that work in every other franchise, and insists that his/her franchise is “different”;

4.                  Sees no value (rightly or wrongly) being given for the franchise fees;

5.                  Does not respect the rights of neighbouring franchisees;

6.                  Seeks to expand the franchise beyond its existing product range or territory without consultation with the franchisor, or regard for existing rights or responsibilities.

Profile B

1.                  Isn’t really interested in being part of a franchise in the first place;

2.                  Simply wants to “learn the system”, and then look for a way out;

3.                  Doesn’t value the input of the franchisor;

4.                  Sees no value being provided for the franchise fee paid;

5.                  Doesn’t respect systems and procedures as intellectual property;

6.                  Will breach a franchise agreement at any available opportunity.

Either of these profiles are unsuitable to a franchise business.

It is true that some franchisors do not offer value for the fee paid.  It is a common complaint that the franchisor “gives nothing and is only interested in fees”.  This is, in many cases, a reflection of the franchisee’s subjective assessment of the value received, as often as it is an objective reality.

This comes down to choosing a good franchisor system.

For more information on franchising, and the science and process behind buying a business, see my book “How To Buy A Business” on this website.

Reasons to buy a franchise

REASONS TO BUY A FRANCHISE

There are almost as many reasons to go into business as there are business owners.  Every decision is individual, and not all are “good” reasons.  For whatever reason, for centuries, people have felt the need to control their own destiny by buying or starting a business.

So what is so different about a franchise?

Running a business requires a large range of skills, which go well beyond the mere technical ability to produce the product or service which the business sells.  Finance, marketing, accounting, human resources, scheduling, managing growth, developing installing and maintaining systems; all these skills are necessary to successfully run a business.  An even larger skillset is required to grow a business from its existing size. 

That is where franchising can come in.

When you buy a franchise, you should receive the benefit, on an ongoing basis, of a system that is already developed and works. 

In exchange for parting with a percentage of a gross turnover, you should be joining a group which already has established systems and procedures to consistently turn out a high quality product which is valued and appreciated by the buying community.  You should also receive the benefit of all of the experience that went into making the system successful.

The idea of buying a franchise is that any gaps in your skillset are able to be filled by the collective experience of the franchisor, and the other franchisees.

And the concept works.

You need only look at successful and well run franchises, and speak to the franchisees in them, to see that a franchise structure can be very successful.

The question is – which one?

For more information on franchising, and the science and process behind buying a business, see my book “How To Buy A Business” on this website.