Ready to embark on a new adventure or ease into retirement, but unsure what to do with the successful trades business you’ve poured your money, sweat and tears into? Selling a professional service business is filled with obstacles, from securing a fair price to finding a buyer who values your staff and reputation. These steps make the sale as smooth as possible and protect your business's legacy.
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- Keep clear records
- Decide when to sell
- Get a business appraisal and professional help
- Calculate your earning power and seller’s discretionary earnings
- Create an exit strategy
- Find buyers
1. Keep clear records
An organised approach to your financial management systems—covering invoicing, payroll, and accounting—can greatly simplify business operations and the future sale process. You’ll need to prepare 2-3 years of tax returns and financial statements before the sale. Using Tradify ensures that when the time comes to sell your business you can present exactly the flow of revenue, costs, the number of clients, jobs and all the other information a prospective business would be interested in.
Need help creating accurate business records? Try:
- Cash flow forecasting and profitability for trade businesses
- Small business break-even analysis for tradespeople
- Small business sales forecasting for tradespeople.
Make sure the following areas of your business are well organised and you’ll save time as you manage your business, and make it easier when it's time to sell!
Accounting software
Tradify integrates with your favourite accounting software, making it much easier to generate financial statements and track your ongoing costs.
Payroll
Tradify keeps accurate records of your staff's timesheets for your business's payroll. From your dashboard, you can generate reports from your schedule, see any staff changes and create accurate reports of any shifts and changes to your payroll.
Invoices
Using Tradify to generate invoices and to track incoming payments helps present a clear snapshot of your current finances to prospective buyers. It is also crucial for developing an accurate estimation of future earnings.
2. Decide when to sell
Selling your business may be the opportunity to start a new venture, move to a new country or begin the transition into retirement. However, deciding to sell isn’t an overnight choice, or a decision to take lightly. While you may be ready to sell your business, your business may not be ready to take to market.
Most experts say to give at least a year or two of preparation before putting your business on the market. Your goal will be to make your business as profitable as it’s ever been and prove consistent growth over a number of years. Selling your business when it’s at its most profitable is exactly when it will be most attractive to buyers – and when they will be prepared to pay a premium for it!
3. Get a business appraisal and professional help
Selling a business without professional help may be appealing as a way to cut out the middleman and keep the profits for yourself. However, it’s important to factor in both the potential legal and administration work that goes into selling a business, as well as the potential for professional brokers to drive a higher sell price. Professional brokers, valuation experts, accountants, and legal advisors each may play a role in selling your service business, including setting the best price, finding buyers and ensuring legal compliance.
Ultimately, regardless of your choice for professional help, the first official step towards selling your business is to get an accurate third-party business appraisal.
What is factored into your service business appraisal
An accurate third-party business appraisal is a critical first step in selling your business and your estimation of future revenue will be key. It will come from the average number of jobs, your profit margin and charge-out rate per job, the number of customers in the database with good contact information and revenue from repeat business. These factors are instrumental in determining your business's overall market value and are another reason why keeping accurate records of your business is crucial.
This appraisal considers also both physical assets; such as vehicles, tools, equipment, and real estate, as well as intangible assets, like a loyal customer base. Additional factors include:
Staff
Staff who have been part of your company for more than three years are particularly valuable. This is because a new buyer knows that he or she can rely on the employees. This minimises the risk that the staff will be unprepared for a change in ownership.
Licenses
Ensure that your business has the appropriate state or regional licenses to continue operations. Many business owners - particularly those with limited history within the trade or service industry themselves, prefer businesses with all the legal requirements pre-set to go.
Founder involvement
It may be counter-productive, but the less you are involved in your business, the more attractive it will seem to prospective buyers. This is because, in most cases, the new buyer will be stepping into your shoes. If your day-to-day operations require your oversight, this may become a complication for new owners who may not share your expertise. The more you do day-to-day, the harder it will be to successfully transition you out.
Specialisation
Is there something that sets you apart from the competition? If so, this will help your business carve out its niche and become more valuable. Perhaps you are the only business in the local area to offer after-hours call-out services, or who are available to service certain outdated models. This should be factored into your appraisal and business offering.
Branding and marketing
Factor in how self-sufficient your marketing plans and systems are. Do you have a dedicated marketing employee, or system in place to regularly appear in local advertising? The less upkeep and set-up involved, the more attractive your offer will be.
Remember, it is your company’s systems and processes that have value! As you prepare to sell your business, aim to create systems to are so straightforward and successful that you barely have to provide oversight! Part of the reason it takes two years for this transition is that this simplicity rarely happens without trial, error and effort. Ideally, you'll turn the keys over to a buyer with a system they can follow that makes you unique and better than your competition.
Documenting and showcasing these systems to potential buyers will significantly improve your business value.
4. Calculate your earning power and seller’s discretionary earnings
Calculating your Seller's Discretionary Earnings (SDE) is crucial for understanding the true profitability of your business, especially when preparing for a sale. SDE is part of your business appraisal, just adjusted for non-essential expenses. This offers a more accurate representation of a business's earning power.
Here’s how to calculate SDE:
Start with the net income as reported to the government on your business's tax return. This figure represents the profit after all operating expenses have been subtracted from total revenue.
The net income will include:
- Interest: Take note of payments on business loans or credit lines.
- Depreciation: Factor in the reduction in value of tangible assets like equipment.
- Amortisation: Spread the cost of intangible assets over its typical lifespan.
- Operational adjustments: Remove any unusual operational expenses to reflect what the real ongoing costs will be under new ownership.
To give the new owner a more accurate portrayal of what the business expenses and profits will be once you leave, make adjustments for expenses that won't continue after your departure, such as:
- Owner compensation: Account for your salary, healthcare, retirement benefits, and personal expenses which are run through the business.
- Discretionary expenses: Remove non-operational expenses, like non-active family members on the payroll and replace them with the real fair market cost of an employee doing their real hours.
- Property and rent: Factor in fair market rent if you own the property but haven’t been charging rent, or adjust for overcharged rent.
- Personal vehicle expenses: Exclude business-paid personal vehicle expenses, like interest and insurance.
- Taxes: Specify adjustments for taxes other than income tax, if necessary.
- Benefits: Adjust for owner or family benefits not necessary for operations.
The result will be an accurate representation of your business's future earning potential.
5. Create an exit strategy
When selling your service business, it’s unlikely you’ll simply sign the bottom line and hand over the keys. Most business owners provide a transitional period to ensure the new owners and staff are properly prepared for your departure. To ensure a smooth transition and maintain the business success and value, consider the following:
- Future purchases: Will the new owner need to hire additional staff, purchase new equipment, or train the existing workforce?
- Management: Can the remaining management staff manage the business during the transition and after your departure?
- Staff: Are your staff prepared for a change in ownership?
- Costing: Are your current charge-out rate and profit margin properly set up to ensure positive future profits?
- Plan: Do you have a clear business plan for the new owner to follow?
6. Find buyers
Using a business broker means you can leverage your industry knowledge and their networks to find the right buyer, negotiate the best deal, and facilitate a smooth, and legal, transaction. They will also help to determine which buyers are suitable for your business size and capacity, such as:
Individual buyers
Typically, professionals looking to start their own businesses look for service businesses with less than $1 million in earnings. Businesses typically attract individual buyers looking for a stable income source that aligns with their personal interests or lifestyle goals and are usually more interested in the business's ability to maintain a steady income than in its ability to scale.
Strategic buyers
Typically, other businesses within or adjacent to the service industry you belong to are interested in companies with earnings over $1 million. Their goal may be to expand their service offerings or grow their customer base and admin capacity. Successful businesses can offer a huge strategic benefit for these expanding businesses, which is often reflected in competitive pricing.
Private equity buyers
High-growth businesses may attract private equity buyers looking for scalable opportunities that can merge into their existing operations or portfolio and will usually target businesses with earnings over $1 million.
Get your admin sorted and start experiencing the benefits of an organised business. Sign up for a 14-day free trial with Tradify. No credit card required. No commitment. Or pop over to one of our live demo webinars to see Tradify in action.
Note: This article is not intended as financial advice. Please consult with your accountant or broker before making any financial or business decisions.
