Preparing for Sale

I am often asked by management rights and motel operators, ” when is the best time to start preparing for the sale of the business?” The age old answer surprises some but has proven to be true over many years. Start preparing the day you buy. In fact, start preparing before you buy. There is not much point buying a business that you love but is unlikely to have any appeal to a future purchaser. Perhaps because of your financial position you can afford to buy a unique motel with quirky charm but not much income. Maybe you want to live in a $2M manager’s apartment as part of a management rights. That’s fine but please remember that when you go to sell you will need to find a buyer in a similar position and that’s not always easy.

The manner in which you operate your business from the get go will ultimately impact its future value and market appeal. Being mindful of this dynamic can help inform business and operational decisions and establish a trading and performance pattern that will appeal to future buyers. It’s all about differentiating your property from the broader market and commanding a premium when you sell. A great example is the establishment of an operations manual for your business. Building such a process and procedure document over time is no big task and will have the double positive benefit of assisting you to manage your business and providing a point of difference when potential purchasers are making a decision to buy your property or another.

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The same applies to marketing plans and a documented data base of repeat guests, demand trends, occupancy and tariff history and booking channel performance.

Once you decide to list your property it’s vitally important to get your asking price right. Listing way above market will simply turn off potential buyers and your property listing will get stale in a big hurry. If your agent suggests a list price, ask for market sales evidence to support the proposal. Of course, if the market is trending up, there may be merit in listing at a price point ahead of the trend and testing demand. Just don’t get too far in front of the curve. Needless to say always use industry expert sales professionals and beware of any proposed sale price that cannot be substantiated via market evidence.

In support of your listing ask your accountant to prepare a Profit and Loss Statement adjusted for sale purposes. The report should cover the past 12 months trading period and be as up to date as possible. The report should exclude all discretionary expenses not critical to the operation of the business and all expenses unique to you as operator. These include depreciation, interest costs and discretionary staff costs. Don’t be tempted to pull staff costs back to ridiculous levels that are clearly unsustainable. Savvy buyers will either walk away or make an offer discounted to reflect your creative accounting. Conversely buyers are happy to pay a bit more for a business with a believable and sustainable P and L Statement prepared by a qualified accountant. They are less likely to believe your vendor prepared spreadsheet or MYOB extracts.

So, how can an industry expert finance broker help when you decide to sell?

We have significant market data and finance high volumes of transactions. As such we can certainly assist with recent market benchmarks for yields and multiples. If we currently finance your business we are best placed to assist your buyer in being pre-qualified and in negotiating funding by presenting your business in the best possible light to the banks. Whether you are an existing client or not, we are happy to provide vendors and their agents with funding scenarios based on your list price and we are happy for these to be presented to potential purchasers. Most buyers are keenly interested in how the return and debt servicing will work and having a document that demonstrates the viability of the transaction can be very powerful.

Just as many agents recommend us because we get the job done, vendors should also get on the front foot and ensure buyers are working with industry experts and are pre -qualified. There is nothing more disappointing than having an unqualified dreamer inspect your property and make an offer only to have finance declined. If you are not comfortable giving this message to a vendor ask your agent to do so. In all likelihood they already have.

We recently had a vendor insist that before a buyer conducted an inspection that the buyer be pre-qualified by ourselves and capacity to purchase be confirmed. We subsequently met with the buyer and sought an approval to confirm capacity to purchase with the vendor and agent. The buyer instructed us to do so and as a result the subsequent offer was taken seriously. We have since presented the buyer with a number of formal finance proposals from a range of banks including the bank that currently funds the property. It has been a source of great comfort to the purchaser that the current banker clearly wishes to continue to fund the property. Needless to say the agent is also happy with the process.

Finally, a word for buyers. Competition between the banks has never been stronger and frankly borrowers would have to have rocks in their heads to simply go to one bank and accept a finance offer. By engaging an industry expert and independent finance broker to manage a formal finance tender process you are assured of having a range of finance options to choose from and a highly competitive interest rate and fee structure. It is not unusual for banks to reissue finance quotes to us at lower rates than quoted direct with their client. This is as it should be given that we assist the bank to manage the transaction and also given the business volumes introduced to the banks. The old business maxim applies. Volume = Discount.

Mike Phipps
Director | Mike Phipps Finance.