One of the great mysteries for small business owners is what their business is worth and how to sell it. 

According to professional services firm William Buck's 2024 Exit Smart Report[i], 76% of business owners plan to exit within the next decade. Of those, 48% cite retirement as the primary reason for their exit. However, 50% of business owners have no clear plan for exiting their business.

The team at Raine & Horne Business Sales, led by Simon and Melanie Winter—who recently took over Raine & Horne Commercial SA from long-serving principal David Ente, who remains with the business—highlighted that another major mistake business owners often make is relying on “trusted advisors” who speak with authority and confidence, and only telling them what they want to hear. 

“However, these advisors cannot generally explain how the market would respond to the business,” said Melanie Winter. 

“You wouldn’t ask a builder to sell your house because he knows about houses. He knows what it costs to build but has no idea what it would sell for. Cost and value are very different things.” 

Simon Winter adds, “Vendors should always follow a series of rules if they want to develop a successful exit and move on from their business without regret.” He outlines these seven simple rules here.

Seven simple rules for successfully exiting a business

Rule #1 – Seek expert advice

You don’t go to a dentist if you need knee surgery because he is a doctor. Likewise, it is critical that a vendor takes advice from a business agent who knows and understands the market. Selling a business is generally much more challenging and complicated than selling a house because what you see is not necessarily what you get when you buy a business. House values are a product of demand and supply, while the value of a business is driven by risk and return. The approach to valuing a business is fundamentally different from assessing the value of a house.

Rule #2 - Understand market risk and its impact on value

Market risk is not about the issues surrounding the products or services the business trades on a day-to-day basis. It is about how the market perceives the risk of the business not achieving its projected returns. It is common for professional advisors to believe that market risk is all about interest rates, cost of living issues and government policy. Those are operating characteristics that affect return and not market risk. If people believe they are about to lose their jobs or can’t afford the rent, they stop spending money.

Many factors affect market risk, and they are all specific to the vendor's business. If all the businesses in the street are affected by the same variable, it is almost certainly not a market risk, but it is almost certainly a variable that affects return. 

Simon Winter says, “In my experience, the two most important factors affecting market risk are: firstly, how strong is the level of income repetition, that is, how often customers must return to the business. 

“Secondly, how loyal is the customer base, and do they always return to the same business?”

The two issues sound the same but are very different; for example, most people rarely need a plumber, but they will always return to the one who gave them good service when needed.

Rule #3 – Calculating return is a reasonably straightforward process. 

The “future maintainable income” is identified by making a series of adjustments to the net profit so that the results are normalised and reflect what a purchaser might expect to receive in the future. Return is best understood if it is considered through the eyes of a purchaser.

Rule #4 - Avoid using formulas to value your business

Never value a business by using a formula. Formulas fix risk and allow return to be variable (for example, the most common formula is Maintainable Income x 3). Risk and return are equally variable, and fixing risk at a multiple of 3 almost guarantees high inaccuracy.   

Using a formula is common because it removes all the complexities of understanding market risk.

Rule #5 - Request a formal appraisal based on risk and return

Request a formal appraisal from the agent that assigns a value to risk and return. The logic can then be analysed, reviewed, and presented to the vendor's accountant for comment. 

Never be persuaded by people who tell you what you want to hear, and never be persuaded that the business has added value because of its potential. 

Remember, potential is what you didn’t bother to do. Remember, you sell what your business is; you don’t sell what it once was or might be again. The critical point is getting your asking price right to connect with what the market is prepared to pay.

Rule #6 - Choose a business broker with a strong marketing strategy

Select a business broker with a professional marketing strategy so that their online and social media presentation gives your business the maximum market exposure. The secret to digital marketing is translating a complex business into a simple presentation that is easy for a buyer to understand. Creating simplicity from complexity is essential

Also, select a broker who is available, keeps you informed, and is prepared to attend every business inspection.

Rule #7 - Select a broker with a genuine database of past sales

Use a broker with a genuine database of past sales. This database is critical to understanding risk and identifying how the market responds to risk characteristics within the subject business.

Remember, calculating return is easy; understanding market risk is everything. The key focus should always be on how the market will perceive the risk of not achieving the business's projected income. Everything else is a distraction.

If you are considering exiting your business in 2025, be sure to contact Raine & Horne Commercial & Business Sales on 08 8361 3074. 

Also, if you have business premises that will be included in the sale, speak with your local Raine & Horne commercial property experts.

 
[i] https://williambuck.com/tools/exit-smart-2024/