When selling a business, establishing the correct figures is one of the most critical aspects of the process.
Buyers will be incredibly diligent, and keen to effectively analyse the financials of the business.
Accountants will generally advise their business-owner clients of the best ways to legally minimise their tax obligations. As a result, many small businesses in Australia will produce accountant-prepared statements with a minimal net profit, and often a net loss for taxation purposes. It’s important to note, this does not necessarily reflect the actual cash results a business may produce.
What does a business broker do?
Enlisting the services of a business broker will ensure a proper sales valuation is conducted, and that a clear picture of what the business will look like financially to the new buyer and owner operator of the business is painted.
What is an add-back?
To achieve this, business brokers use ‘add backs’. Add-backs can be defined as expenses paid by the business for the personal use and benefit of the owner or are ‘one off’ and/or extraordinary expenses that are unlikely to occur again.
An add-back schedule
When conducting a sales valuation, the broker will list expenses incurred by the current owner, that will not be a cost to the new owner/operator working in the business for a normal 40-hour week, and add them back to the profits. This is called an add-back schedule.
An add-back schedule allows a prospective purchaser, their advisors and financiers the opportunity to evaluate the actual maintainable earnings available to the new owner of the business before personal and extraordinary expenses are deducted.
Why use an add-back schedule?
The reason for an add-back schedule is to separate these personal or one-off expenses so buyers can have a clear picture of the past without expenses that may not apply to them in the future. Add-backs can be items such as depreciation, finance costs and interest, the owner or manager’s salary and superannuation, motor vehicle for personal use, bookkeeping fees, one-off legal costs, telephone, internet, and personal insurances amongst others. This can also be determined to be an average wage for a 40-hour working week of $50,000 by the new owner, if the current owner is not working on a daily basis.
Once a net profit figure after add-backs is established, the broker can advise the owner of the appraisal for the selling price of the business. This net profit figure will then be used as the basis of the multiple appraisal system we use to set a recommended selling price. Different categories of businesses have a different multiple in determining its value. This can be based on the demand for this type of business, the location, the finances available, the trend of the business category whether going up or down. Other factors include whether the business is under management, or if the new owner operator will be required to work full time in the business. The quality of fit-outs, plant and equipment, building renovations or refurbishments all come into calculations
Franchises can vary in multiple depending on the demand for the franchise model, the franchisor management performance and support, the growth or decline of franchise numbers, marketing and advertising which creates sales and profits. Franchisor costs are also important consideration, where royalties and marketing funds can add a cost to the profit of the business.
It is always best to seek financial and due diligence information from your accountant to help determine what value you place on a business, and what your final offer may be for your required return on investment you are looking for. Rest assured, this is something that we can help you with!
Please talk to us if you have any questions, no matter how trivial you may feel they are. We need to answer all your questions, so you are confident in your purchase.