Faqs Archives

Q.

A potential buyer has told me his accountant has advised him ‘not to pay anything for goodwill.’ What does that mean?

A.

It probably means the buyer hasn’t understood their accountant’s advice, but it could also mean the accountant doesn’t understand buying and selling businesses. If the latter, be glad they are working for the buyer and not for you!

If a business is sold for more than $1M, the buyer and seller must agree how the sale total is apportioned. Included in the price might be inventory, tangible assets, and goodwill. As the vendor, you want the inventory and assets to be sold at book value to avoid additional tax, and therefore as much as possible should be goodwill. A buyer wants it the other way around because assets can be depreciated faster than intangibles can be amortised (written off). So, the accountant’s advice might be to apportion the purchase price entirely to tangible items (e.g., stock, physical assets).

But I also hear this type of comment from accountants meaning ‘goodwill has no value.’ It demonstrates a total lack of understanding of what goodwill is. Fundamentally, goodwill is the gap between the value of your firm’s tangible assets and the value of the overall firm. Even if there is an effective way of separating out the value of tangible assets (things you can touch) from the intangible assets (the things you can’t touch, like brands or intellectual property), there is still likely to be a gap. This gap is conveniently bundled up as ‘goodwill.’ It isn’t a great definition, but it is pretty much the best we have.

If someone says they won’t pay goodwill then they are saying there is no value beyond the tangible assets. Fine: sell them just the tangible assets, you keep the rest. And because they say there is no value in the intangibles, they can’t be upset that they don’t get them. You get to keep them, and even sell them separately. The brand, the social media footprint, the customer list, and even your restraint of trade. Those are all goodwill that they haven’t paid for. A somewhat facetious answer, but fundamentally, the argument you can counter with. The buyer either pays what the business is worth, or there is no deal.

Q.

What does it mean when a business is sold as ‘a going concern?’

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Basically, a going concern means the business is still trading and generating revenue, rather than being in the process of winding down or liquidating its main assets. This doesn’t mean the business is necessarily profitable, just that the doors are still open for trade and there is no current intention or reason to shut the business.

This is generally quite an obvious fact about a business, but not always. A firm that was shuttered during the COVID lockdowns could be described as being a going concern if there is a genuine intention from the owners to reopen when the lockdown is lifted. In most cases, I think we would consider a business a going concern if it is currently trading, but clearly there are some grey areas on the fringes.

Q.

I can’t find a buyer for my business. I keep being told that the ‘right’ buyers can’t afford it, and those that can afford it don’t have the right skills to run the business. What should I do?

A.

This problem isn’t as uncommon as you might think. I have seen this arise with trades businesses and ‘dirty’ jobs that require a license or qualification. Without knowing the specifics of your situation, here are some approaches you might like to consider:

Hire your replacement, get them adequately trained to do what you do, and then sell the firm as a ‘managed’ business. These types of businesses attract investors looking for high returns for minimal (direct) effort.
Help finance a buyer to buy your business. Vendor financing is not all that common in New Zealand, but can be a great way to make the firm more affordable.
Sell the business to your employees. Your staff has a major stake in your business continuing to run, so they can make the ideal buyers. This approach typically requires a level of vendor financing, and you can better set the schedule for the sales process.
Split the business into smaller parts, with each part being self-sustaining and designed to be owner-operators. These smaller firms can be easier to sell at a lower price point to someone buying a job. In most cases, splits are based on geography. This approach can also lend itself to creating a franchise system.

If your firm has more than ~$2M in earnings, it may be attractive to investment funds. This will depend on the industry you are in and the competitiveness of the market. Talk to a broker or M&A advisor about the viability of this approach.

Q.

What is an Ugly Baby?

A.

For every parent, their baby is gorgeous. It is preprogrammed into humans to love and cherish their children. That’s why you will never meet a parent who says their baby is ugly. Of course, this magic spell doesn’t work on others. You have probably been introduced to a new parent’s baby and immediately thought, “That baby is ugly.” No matter how ugly we consider the baby, however, we would never share that sentiment with the parent. Social norms and all that.

In a similar vein, business owners think their business is beautiful—it is their baby after all. And because it is beautiful, everyone and anyone will want to buy the business. What’s there not to like? But buyers rarely see what the vendor sees. To the buyer, the business has numerous faults—in other words, it is ugly. It may be so ugly, the buyer runs away. The owner is left confused as to why this happens.

The Ugly Baby concept was discussed in my Certified Exit Planning Advisor course. In Exit Planning, an advisor needs to be willing to have a difficult discussion with their client explaining that others will not view their business through the same lens as them, and to be prepared for that. I also highlight to my clients the aspects of their business that buyers will probably not like.

Q.

The broker has quoted us a fee of 9% commission to sell our business. Can we negotiate this fee down?

A.

Yes, the brokerage’s commission is negotiable prior to signing the listing form. Commission rates for business sales in New Zealand are between 6.5% and 9.5% for businesses with a sale price under about $2M. Above $2M, the commission rate will be lower. Depending on the value of your business, the brokerage may offer a stepped commission structure (e.g., 9% on the first $2M, then 7% thereafter).

Remember that the brokerage’s fee is success-based: you only pay a commission if they sell some or all of the business.

The commission rate shouldn’t be the biggest factor in selecting a broker, but it is certainly a significant consideration for many vendors. Ensure you shop around; get listing proposals from 3 to 5 different brokerages (depending on who services your area). You can counter (i.e., negotiate) on any of the listing terms, but there is a caution: if you make the deal less appealing for the broker to sell your business, they will likely put less effort into your listing. Non-standard listing terms and reduced commissions are key factors that make the sale of your business less appealing to a broker. In addition, keep in mind that any changes to the standard listing agreement need to be approved by the management of the brokerage, not just the broker.

Q.

I just signed a listing agreement for my business. The asking price is about $1.5M. The broker insisted on keeping their minimum fee in the listing agreement. Why?

A.

There are two reasons for this. The first is that brokers typically can’t alter the listing agreement without their brokerage’s approval, and the brokerage doesn’t like to vary their standard contract. This could be a reason, but is probably not the whole story.

It is not unusual for you to agree to carve off a part of your business and sell it to one buyer, and sell the rest to another buyer. The minimum fee – and the overall fee structure – applies to each transaction. Say you have two branches, one in Auckland, and one in Christchurch. You get a buyer really interested in the larger Auckland branch, but they have no interest in your small Christchurch office. You sell the Auckland branch to this buyer without the Christchurch branch. The broker then finds a buyer for Christchurch. This is a separate transaction, so another fee applies.

Even if you have no plans to split your business to sell, you need to keep the broker’s fee structure in mind when listing in the event that the sale involves more than one transaction. This could result in you paying far more commission than you envisaged. If the broker brings you an offer for only a part of your business, you can negotiate then around the commission on the sale of subsequent parts. Just ensure there is sufficient incentive for the broker to keep trying to sell the other part/s of the business.

Q.

The commission to sell my business will be $80k, half to the broker, half to his firm. Can I contract the broker directly and pay less commission?

A.

Basically, no, you can’t bypass the brokerage. Brokers fall under the Real Estate Act (2008), which requires them to be licensed salespeople, and to work under the supervision of a licensed real estate agent. The licensed agent is part of the brokerage (often an owner). A broker therefore cannot act independently.

The essential definition of a broker is someone who acts on behalf of a vendor, and is paid a success fee, this fee being linked by a formula to the sale price achieved (this is a bit of a simplification, but illustrates my point). Anyone acting in this capacity (other than a lawyer) must be licensed under the Real Estate Act (2008).

Other professionals can work with you on the sale of your business (in addition to or instead of a broker) as long as they do not charge a success-based percentage fee. Accountants, for example, may do this. Similarly M&A advisors can also assist you to sell. The fee structure of accountants and M&A specialists is quite different from brokers. And you always have the option of trying to sell your business yourself.

Don’t focus on the commission; focus on the outcome – getting your business sold. If you want to sell, using a broker is typically the best was to go.

Q.

I want to sell my business. Do I need to involve a lawyer?

A.

No, you do not have to use a lawyer when you sell your business, but I would strongly advise you do. There is a lot of potential risk with the sale (and purchase) of a business, and the lawyer’s role is to help you recognise and mitigate that risk.

Selling a business sits on a continuum between selling something like a car – where lawyers are generally not involved – and a house – where almost everyone would involve a lawyer. Sometimes, you are only really selling some assets when you sell your business. This is akin to selling a car. It is a simple exchange and ownership transfer, and no lawyer is needed. Most often, there are many, many other factors and potential risks and issues, and you would be foolish to try and do it all yourself.

Yes, you should use a lawyer.

Q.

I have spent nearly four years getting my business going, and it has cost me around $400,000 so far. It is just breaking even, but I need to sell. What is a fair price?

A.

This is a common situation that start-up owners face, and most don’t like the answer. To start, it probably isn’t worth anywhere near the $400,000 you have sunk into it.

Buyers only care about what the firm is going to do in the future. Most break-even businesses aren’t worth much. Two key exceptions to this are (a) revenues (and profits) are about to go through the roof – the ‘hockey stick,’ or (b) you have a lot of re-usable (and possibly re-deployable) assets.

If you genuinely believe a hockey stick is around the corner, why sell now? To enjoy the benefit of this uptick, you either hang on, or convince a buyer that riches are coming. This is a very difficult sale. If most of that $400k was spent on buying equipment that holds its value, or developing IP that has stand-alone value, you may be able to recover your investment. But in the same way a used car is worth less than a new car, used equipment generally doesn’t hold its value. Even inventory you have purchased or created is typically sold at a discount.

Build the business to a solid profit, or write off most of the last four years if you must exit immediately.

Q.

The person buying my business wants me to hand over my mobile phone as part of the deal. Is this fair (and normal)?

A.

When buying or selling a business, what is and isn’t included is up to the parties to negotiate. So, (almost) anything goes. It can also depend on what you are actually selling.

When you sell your business, you are essentially selling everything that contributes to the revenues and profits of the business. If your mobile phone number has been used in the operation of the business (and therefore contributing to the revenue and profits), then this would generally be transferred in the sale. A good test is whether the number is on any business cards, your website, or other contact material. The buyer wants all points of contact to go to them.

In most cases, what the buyer is after is your mobile phone number. They probably don’t want the phone. I suggest you agree to hand over the number and erase the phone. It gives you a good reason to contact people with your new number – and let them know you have sold the business.

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