Tuesday, 9 September 2014

CONFIDENCE TRICK? - The role of confidence in business sales

Guilty!!... Until Proven Innocent ...

... That's the reality for a business owner looking to sell their business.

Business buyers (and their accountants, financiers, advisers) view the information they receive from business owners, and their brokers, with a healthy dose of skepticism.

There have been many horror stories of naive buyers being duped by unscrupulous business sellers, and as such buyers these days are very cautious and fearful about committing to buy a business.

"If this business is so good, why are they selling?"

That's probably the #1 question I receive as a business broker from buyers.  Therefore, It's important for a business seller to have a credible and logical answer for this question. The seller needs to be completely honest, because at some point in the sale process the buyer will confirm the true reason they are selling and this has to match with the original reason told by the seller.

Most sellers have legitimate reasons for selling a business. E.g. ill-health, relocating to the eastern states, or simply just being sick and tired of the business after 10 years of doing the same thing day in day out.

The trick for the business seller, the confidence trick as it were, is to clearly explain and convince the buyer that their reasons for selling are genuine and that the information provided about the business is true and correct.

If you're a business owner who is currently selling your business, or if you're advising a client in respect to the sale of their business, below are some simple steps you can take to help re-enforce and build confidence in a potential buyer and their advisers.

Step 1. Act Quickly! 
I consider this to be probably the most important step in the process and hence its first in the list.

Any request for information made to you from a business buyer or their accountant needs to be acted upon immediately and quickly.

Any delay in responding gets the buyer thinking "what are they trying to hide by delaying giving me this information?" These 'communication delays' sap confidence, and cause buyers to think there is something wrong with the business, if the information isn't immediately at hand.

If you need time to prepare the information they have requested, be in regular contact with the buyer (preferably every two days) to reassure them that you're working on getting the information they have requested as quickly as you possibly can.

If you are too busy to organise the information, I would strongly advise you engage the services of a business broker to undertake this on your behalf. Part of the role of a good business broker is to communicate regularly with all parties concerned. Acting quickly re-enforces confidence.

Step 2. Consider getting an Independent Valuation (blatant conflict of interest warning!!)
As a licensed business valuer, I have a conflict of interest in recommending this step, however the truth is that having an valuation/assessment conducted by an independent Business Valuer or an independent Business Coach is a valuable resource in providing assurance and confidence to the buyer.

Sure, there will be a cost to undertake this, however it will help reinforce your selling price and will act as a shield against buyers making ridiculously low offers. So long as the valuation or analysis is truly independent, this is a surefire tool for reinforcing confidence in a buyer.  

Step 3. Prepare a detailed and extensive Business Prospectus which outlines all the details of the business (without disclosing commercially sensitive information) so that buyer and their accountant have all of the information they need at their fingertips to make an informed decision on whether they wish to proceed further with the purchase of your business.

A good business broker should prepare a thorough Business Prospectus (not all do though).
I encourage potential business sellers who are planning to use a business broker to sell, to 'shop around' the different brokers to assess the quality of the Business Prospectuses they produce.  Take the time to find a Broker that understands your business, and has the systems and process in place to sell it.

Step 4. Direct Contact between Accountants
Give a buyer's accountant direct contact with your own accountant. A buyers accountants will feel a lot more comfortable advising their client if they have the opportunity to source information directly from your accountant.

There will be fees/costs to you associated with this so make sure that you only allow this the serious buyers.

It's important however that the sellers accountants react quickly to any request for information (see step 1 above).

Step 5. Enforce a "Due Diligence" Clause
In the event that a buyer makes a written offer on your business, be sure to enforce a Due Diligence clause in the contract.

A Due Diligence Clause states that you won't let a buyer purchase your business until their accountant has thoroughly checked your figures to ensure they are correctly prepared and genuine, and has given the all clear to the buyer.

By enforcing a due diligence clause in the contract, it demonstrates to the buyer that you are genuine in not wanting to hide any issues or incorrect financial figures in the business sale. 
This is a big confidence builder for a buyer since they know that if they make an offer on your business they will get an opportunity to thoroughly audit your books.

Also, don't agree to a Due Diligence until after a written offer is made! Why? A buyer can do a full due diligence and then offer you are ridiculously low price which you wouldn't accept anyway, which wastes a considerable amount of time and also potentially exposes you to the loss of commercially sensitive information.

A Due Diligence ultimately protects the business seller, since if there is any legal ramifications after the sale of the business you can point to the fact that the buyers' accountants independently checked the figures and they found no hidden issues with the business at the date of settlement.

These are a small selection of the ways a business seller can reinforce confidence in the business that they are selling.

Confidence is the key, and in my opinion it's the number one contributing factor of why businesses don't sell.

Contact Me:
Blair R Macdonald
0433 149 144

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