What do you need to know if you are considering selling your sales or lettings business?
Here’s ten top tips to think about…
1. Prepare in good time
The actions you take in the 12 to 18 months prior to your sale can have a huge impact on the price you eventually achieve.
Improving the profitability, cutting unnecessary costs, converting one-off income into recurring income, and improving your compliance systems are all things that take time to achieve and it is never too soon to start preparing your business for sale.
2. Use a broker
Selling a business is much more difficult that people think. Most members of the public are not very good at selling or letting their own houses and most estate agents are not very good at selling their own businesses.
A good broker can help to prepare a business for sale and this process often starts one or two years before the sale takes place. A good broker will also have access to buyers that you would not know about yourself. A good broker will run an effective competition to play one buyer off against another.
Finally, a good broker will help to get the sale through to a successful completion first time around. A very high proportion of private sales fall apart, usually for reasons that could have been predicted at the outset.
3. Choose your timing
There is always a good market for lettings businesses. Prices go up and down according to what is happening in the economy but even in 2008 at the bottom of the last recession, lettings businesses were still being sold.
The market for residential sales businesses is much more patchy. Generally speaking, there are two or three years in every cycle where all the stars come into alignment and residential sales businesses command good prices.
The current cycle ended on the day after Brexit. The previous cycle ended the day after the Northern Rock nearly went bankrupt. If you miss the boat, it may be several years before an opportunity to sell a residential sales business for a good price next presents itself.
4. Prepare your documentation carefully
I have lost count of how many times I am sent a shoebox full of bits of paper and asked to value a business.
I find it astonishing how many business owners do not know what their turnover is, how much of their turnover is generated from management income rather than one-off fees and how much their profit is.
Unless you can give accurate figures broken down into all the different categories of income, then many potential buyers will be deterred. It is also absolutely crucial to double check the accuracy of this information. If the buyer finds that the figures don’t add up, your credibility will be shot and the buyer could be put off for ever.
5. Set a realistic guide price
Lettings businesses are valued on a multiple of turnover. Different multipliers apply to different types of income. Management income is the most secure type of income and attracts the higher multiplier of all. Landlord admin fees will only be invoiced next time there is a change of tenancy and a lower multiplier is therefore paid for these. Let-only fees are seen as very vulnerable because they will only be paid when there is a change of tenant and if the tenant stays a second year, it is becoming increasingly difficult to charge renewal fees in most areas of the country.
For this reason, a lot of buyers will no longer look at let-only businesses. Tenant fees attract the lowest multiplier of all because of the likelihood that they will be banned at some point next year.
Residential sales businesses are usually sold on a multiple of profit. The profit will be the sustainable profit, i.e. the total profit minus a commercial salary for the proprietor if they are still working in the business full-time.
In order to achieve a good price, you will need to show a stable profit history over a period of at least three years.
The formulae for valuing estate agency and letting businesses are well understood and if a business goes onto the market at too high a price, prospective buyers will be deterred.
There is a finite pool of buyers and if it is necessary to approach them at a lower price, they will know that they have the upper hand and negotiate the price down further. In my experience, it is always best to start with a conservative guide price and bid up rather than set an over-optimistic guide price and fail to achieve it.
6. Answer questions promptly and fully
Before they commit to a meeting, most buyers will ask detailed questions about the accounts and how the turnover of the business is made up.
They will want to follow through the information given on the marketing information pack and double check that this tallies with the accounts and with the property records shown in the property management system. Any inconsistencies will need to be explained.
Buyers will be put off if they do not get answers to their questions promptly or if the answers are inaccurate or incomplete.
7. Insist that all offers are made in writing
The only way to be able to compare the offers properly is to insist that they are set out in detail and in writing.
The headline price is not the only factor to consider and many other factors will determine which offer turns out to be the best one.
8. Choose your offer carefully
An offer of a million pounds for a business often turns out to be worth less than an offer of £900,000. There are lots of other factors that you need to consider apart from the price.
For example, how much of the price will be paid upfront and how much will be deferred?
You also need to consider the terms of the deferment. Is it just an interest-free loan which is paid, unconditionally or would it be linked to hitting certain profit or turnover targets?
Finally, you need to consider the reputation of the buyer. Some buyers are notorious for trying to reduce the price after it has been agreed. One regular buyer acquired a terrible reputation for reducing the price literally on the day of completion.
Other buyers have an impeccable track record of behaving honourably once a deal has been agreed.
9. Don’t forget the disposal costs
You need to know whether all the staff will transfer with the business or whether you will end up with redundancy costs to pay.
You need to know whether all the premises will transfer with the business or whether you will end up being responsible for disposing of shops that the buyer does not want.
You need to know whether the offer is for the limited company or for the assets. This will make an enormous difference to the amount of tax that you pay.
You also need to know how the cash in the business will be treated. The clause in the sales and purchase agreement that determines this can add many thousands of pounds to the eventual sale price that you receive.
10. Choose your solicitor carefully
Finally, you need to think about how to get the sale through to a successful completion first time.
Just like house sales, a high proportion of business sales go wrong.
I estimate that about 75% of private sales fail to complete often because of problems that could have been identified at the very outset.
A good solicitor will be worth their weight in gold here. You must choose someone who specialises in commercial law, you must choose someone who has sold a sales or lettings business before and you must deal with someone who will agree to a fixed fee.
The three firms of solicitors that we use regularly have together handled more than a thousand lettings business sales over the last ten years.
*Adam Walker is a business transfer agent who specialises in the sale of lettings and estate agency businesses.