When valuing a business or offering it for sale, the terms and conditions of the sale can significantly influence its value. Factors such as payment structure, vendor assistance, restraint of trade, and other specific terms often change how appealing the business is to potential buyers, thus directly affecting its value. A comprehensive understanding of these elements can help ensure the valuation accurately reflects the true worth of the business.

Case Study: Two Accountants Selling Similar Practices

Consider two chartered accountants, each offering their practices for sale under different conditions:

Accountant A

• Full Payment: Due on settlement date.
• Vendor Assistance: Minimum 20 hours per week at $90/hour, for up to 6 months.
• Restraint of Trade: One-year restriction.
• No Adjustment: No compensation for lost clients.

Accountant B

• Payment Plan: Spread over three years at a 4.5% interest rate.
• Vendor Assistance: As-needed basis at $45/hour, available for up to 3 years.
• Restraint of Trade: Three-year restriction.
• Client Adjustment: 50% of annual fees for any lost clients deducted from final payment.

Though both practices have the same turnover and profit, Accountant B’s practice is more attractive to potential buyers due to its favorable terms. The extended payment period, lower interest rate, client protection clauses, and flexible vendor support all contribute to a higher value compared to Accountant A’s practice.

Key Sale Terms that Influence Business Valuation

1. Vendor Financing

In a climate of tight lending conditions, vendor financing has become an increasingly important term in business sales. By offering favorable financing terms, a vendor can make a business more attractive and potentially increase its value. Valuers need to clarify whether vendor financing is included in the valuation process.

2. Lease Conditions

Lease terms play a critical role in determining a business’s value. Factors such as whether the lease is assignable, demolition clauses, remaining lease duration, and upcoming rent reviews can all impact the valuation. A business with a favorable lease agreement is inherently more valuable due to its stability.

3. Restraint of Trade

Restraint of trade clauses are crucial for protecting the goodwill of a business. Buyers are reassured when a vendor is restricted from immediately setting up a competing business, which helps preserve customer relationships. The extent of the restraint, in terms of time and geographic scope, is often negotiated and directly impacts the valuation.

4. Vendor Assistance

The availability and duration of vendor assistance can significantly affect a buyer’s confidence in transitioning the business smoothly. For example, a vendor providing ongoing support, even on an as-needed basis, may make the acquisition more attractive, thereby increasing the perceived value.

5. Warranties and Other Conditions

Business sales contracts often include a set of warranties and conditions that protect the buyer, and these are typically documented in standard forms like the ADLS contract. The presence or absence of these conditions, along with any variations, can impact the value of the business.

Conclusion

The terms and conditions associated with the sale of an SME have a profound impact on its value. Payment flexibility, vendor support, lease conditions, and restraint of trade are all key factors that determine how attractive a business is to potential buyers. Valuers need to use their judgment in quantifying the impact that any one term or condition may have on the overall value.

For further insights and defensible valuations, consider leveraging the Bizstats database, which includes comprehensive sales statistics for New Zealand SMEs.