What to do if your business wont sell

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There have been a lot of stories in the trade press recently about the extraordinary prices that are being achieved for estate agency and letting businesses.  One letting business has just sold for twenty-six times its profit!  Another single office letting business sold for over £5 million!  These prices truly are extraordinary but unfortunately there is not such strong demand for every type of business.  Generally speaking, good quality letting businesses are selling very well.  The buyers are looking for businesses with good compliance, businesses where most of the properties are fully managed and businesses in large towns where there is opportunity to combine them with another existing operation.  If your business doesn’t fall into this category, it can be much more difficult to find a buyer.  So, what can you do if your business won’t sell?

If the problem is poor compliance, you should consider bringing a specialist in to conduct a thorough audit of your procedures.  There are half a dozen consultants who specialise in this field and the typical cost of around £2,000 for a single office business can be recouped many times over when the time comes to sell.  Even if you are keeping your business, it is a sensible precaution to have a compliance audit at least once every couple of years.

If the problem is that your properties are let on a let-only basis, then you should consider trying to convert as many landlords as possible to fully managed or rent collection contracts.  This type of income is seen as far more secure and will command a much higher multiple when the time comes to sell.  However, if you are converting one-off fees into recurring income, then it will take thirteen months for this to wash through the cashflow so you need to take steps to do this at least two years before you plan to sell.

If your business is located in a small village miles from anywhere, then its value will be determined by its level of profit rather than its turnover.  If you are planning to sell a business like this, you need to focus on improving the profit level in the year or two before you offer the business for sale.  This means maximising income and conducting a very thorough review of your costs.  Every pound of additional profit will be worth several pounds on the sale price.

If your business is predominantly a residential sales business, then it may be much more difficult to sell.  Landlords tend to be very loyal to their agents and most will stick with them even if the business is sold.  The success of a residential sales business, however, is almost entirely dependent upon the skill, ability and energy of the business owner.  Buyers worry that if John Smith leaves John Smith & Company estate agents and is replaced by a salaried manager, then the business will very quickly fall away.  This is why residential sales businesses have always sold for significantly less than residential letting businesses.

Residential sales businesses are usually sold on profit rather than on turnover so you will need to do everything possible to increase the profit during the year or two prior to the sale.  A second thing that you can do particularly if you are trading under your own name is to bring a good number two on board to prove to potential buyers that the business is transferable.  However, even if you do these things, you may still find that the offers that you get for your business are worth little more than its pipeline value.  This can be terribly disappointing after a lifetime of hard work.  So what’s the alternative to an outright sale?

One alternative is to put a manager in to run the business for you.  The problem, however, is that managers tend to become resentful if they are doing the work and you are taking most of the profit.  For this reason, this relationship seldom lasts for more than a few years.  A good alternative therefore may be to sell the business to your manager or to someone who you bring in from outside with payment phased over a typically three to five year period.  The mechanism is that you pay them a basic salary for the work that they are doing and allow them to buy one third of the business each year for three years with the sale price paid for out of the profit.  This might achieve a far better price for you than a sale to a third party.  The contract will have to be drawn up properly by a solicitor and you must have absolute confidence in the manager’s ability to run the business competently and pay you the instalments as they fall due.

Another alternative might be to approach one of the franchise organisations.  They may have somebody who is prepared to take your business over and pay for it over a period of time.  The same precautions need to be taken to ensure that you receive the money when it is due.

There are, however, some businesses that are wholly unsaleable.  If you find yourself in this position, the only alternative is to wait for the next break in the lease and wind the business down so that it can be closed on this date with minimal exposure.  It is of course sad to see a business close after many years but you should remind yourself that the business has provided you with a good income for this period and recognise that not all businesses have a capital value.  Professional sportsmen realise that their career has a finite end and that after that, they will need to earn their living in a different way.  The same is true for some estate agency businesses.

 

Adam Walker is a management consultant, business sales agent and trainer who has specialised in the property sector for more than twenty-five years.

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