When considering the sale of their business, a vendor will typically seek guidance on the likely price range that the business will sell for. Whilst we are not licensed valuers, Lloyds Corporate Brokers uses comparable sales information, industry knowledge and the business' past three years' financial statements to prepare a business appraisal prior to listing a business for sale.
This is Step One of our marketing activities prior to the launch of a marketing campaign.
Why is this important? There are several reasons as to why an appraisal is important as a pre-marketing tool:
1. The vendor will often have a price range in mind, and an appraisal will result in an Enterprise Value (EV) range which either meets these expectations or doesn't. In the latter scenario, Lloyds Corporate Brokers can discuss with the vendor the next steps in preparing the business for sale, including assisting with strategies to improve performance in the short to medium term.
2. When preparing an appraisal, Lloyds considers not only the potential valuation of the business but also the typical payment terms and completion risks. If the initial appraisal does not meet the client's expectations—whether due to value, terms, risk, or a combination of these factors—Lloyds will classify the business into one of two pathways:
a. The Accelerated Pathway (approximately 6 months or less):
Best suited for businesses that require a light clean-up, improved
documentation, accounting policy adjustment or minor adjustments to resourcing
and market positioning to prepare for sale.
b. The Long Runway to Exit: Designed for businesses that need significant strategic step changes to achieve a successful exit at a valuation acceptable to the owners.
3. Normalising the earnings of a business to adjust for one-off costs or related party costs (private expenses) which a buyer / new owner will not incur may result in a large gap between the net profit of the business in any one year and the EBITDA result (Earnings Before Interest, Tax and Depreciation) which is the figure typically used by buyers to inform their view of the EV. In undertaking the appraisal, Lloyds identifies any Interest expenses which also are added back to the net profit result, as a new owner may not have the same financing costs as the current owner. Depreciation expense is also adjusted out of OPEX to produce the EBITDA result.
However, the vendor can gain a false sense of security around the achievable sale price based on the EBITDA, when this is much higher than the net profit. This is because:
a. Material depreciation expenses incurred annually or even biannually are suggestive of a high capital expenditure business, which impacts monthly cash flows. So, a buyer is likely to want to rely on the EBIT result, rather than the EBITDA result, in this circumstance;
b. The published financial statements may provide no comfort about the legitimacy of the addbacks /adjustments. The vendors, focused every year on tax payable, are motivated to achieve a low net profit result, but when selling the business, their focus shifts to a high earnings result, albeit prospectively rather than retrospectively. The challenge here is that the buyer is basing their view on EV on historical earnings results.
c. A buyer looking to source bank debt to part finance the acquisition will meet resistance from many lenders (including the Big 4 banks) on the level of "related party costs" added back to the net profit, as this inflates the adjusted earnings result. In Lloyds' experience, lenders are accepting only a percentage (no more than 60%) of the stated add backs. And private buyers not relying on debt will often comment to us that they are not prepared to put the time in to unpacking all the addback assumptions, necessary to give themselves comfort that the adjusted EBITDA result represents the future maintainable earnings for the business.
d. Material differences between normalised earnings and reported net profit significantly increase the chances of non-completion, especially in instances where external funding is applicable. 80-90% of all SME acquisitions in Australia carry a level of bank funding, as purchasers will generally look to be as efficient as possible by using leveraged capital.
e. Ideally, business owners and their accountants should implement strategies to ensure the business's financials are clean and transparent. The most effective approach is to conduct any tax planning at the ownership level—such as through a holding company, trust, or individual owners—rather than within the entity being sold. Leveraging the small business rollover and restructure provisions can provide an opportunity to reorganise ownership structures appropriately, provided the process is undertaken well in advance of a potential sale.
How the vendors' accountant can help in the sale process
Lloyds has found that working with the vendors' accountant assists in the sale process by preparing a true picture of the adjusted earnings result (with full explanatory commentary) linked to the financial statements, so that adjustments can be more easily identified, justified, and proven. The vendors' accountant can also play an invaluable role throughout the marketing campaign, by answering the questions that interested parties pose about revenue and margin by product and customer, drivers of profitability, cash flow and much more. Moreover, vendors are usually too busy running their business to have the time to address these questions and often don't have the information to hand.
The vendor's accountant plays an important role ensuring financial records are accurate, transparent, and clearly presented, listing add-backs or unusual one-off costs (with explanatory notes) to determine the year on year adjusted EBITDA, preparing cash flow statements and budgets or forecasts.
In summary, they can add value to the sale process by:
By taking on these responsibilities, the vendor's accountant reduces the burden on the vendor while presenting buyers with clear, reliable insights that support their decision-making. This strengthens buyer confidence that the results accurately reflect the historical performance of the business, and reduces delays during due diligence, increasing the likelihood of achieving a smooth, successful sale at an optimal purchase price.
Conclusion
Lloyds Corporate Brokers assists vendors seeking to sell their business by:
1. Managing the vendor's expectations by determining the likely enterprise value range that the business will sell for, noting that we run an Expression of Interest process so letting the market inform the vendor about its view on the purchase price;
2. Addressing any vendor' expectation gap by engaging with Lloyds Corporate Advisory service which helps the business position for sale in the short to medium term;
3. Working closely with the vendor's accountant to prepare an accurate earnings result, including a realistic assessment of adjustments, cashflow, budget and/or forecastto the satisfaction of the vendors, the buyers and lenders.
Special thanks to contributors Lisa Maletta, Bacchus Advisory and Geoffrey Tulett, Lloyds Corporate Advisory
https://www.lloydscorporate.com.au/
If you own a business in the Wholesale, Manufacturing sector, talk with Lloyds Corporate Brokers on 1300 366 943 for advice on how to buy or sell your business. We have teams of brokers in Melbourne, Brisbane Brokers, Adelaide Brokers and Sydney Brokers.
