As a business valuation expert, I can reveal to you that there are Five Commandments when it comes time to sell your business. Any business valuation will assess how closely you’ve kept to them – and adjust the value of your business up or down accordingly.
An increase in the number of listings over the past 12 months has been met with some increase in purchaser activity, resulting in relatively stable prices for small businesses. Most brokers have reported a slight increase in their number of transactions (or at leas total value of transactions) over the last year.
Statistics Source: Jarot Business Assessments
The number of listings has shown a significant increase of around 27% from last year. However, in the last 3 months this increase has fallen over 11% due to a range of possible factors. At this time of year many business owners are waiting to get their 2015/16 accounts finalised by their accountant before taking a business to the market. The recent quarterly decline in listing numbers may also be seasonal and three months is not long enough to call it a ‘trend’ just yet but indications are at least positive.
Brokers are reporting that more businesses are now selling in less than six months compared to two years ago. Demand is strongest for businesses with profits between $250,000 – $400,000. Driving the demand appears to be an ongoing transition of retrenched employees from the mining services sector, together with merger and acquisitions from owners of other similar businesses. Given that there remains a good supply of businesses for sale, reasonable listing prices are essential to achieve a transaction.
Market trend: businesses generating < $100,000 hard to sell
Just as we keep hearing about the two-speed economy there’s currently a three-speed market for business sales. For owner-operated businesses making less than $100,000 p.a. the news is still not great. Most businesses of this size are extremely difficult to sell and are not achieving good prices.
The following business types are proving hard to sell:
- General retail
- News agencies
- Lotto Kiosks
- Travel Agencies
- Small Restaurant / Café (7 Days)
- Profits less than $100,000
Strong buyer demand for businesses with earnings above $2Mill
At the other end of the scale, SMEs with earnings above $2m are experiencing quite strong demand from buyers. Those businesses providing services to the resources sector have recently been changing hands at multiples of 4.0 – 5.5 times earnings before interest and tax (EBIT).
For those making less than $2m EBIT or not in the resource sector the multiple is likely to be in the 2.0 – 4.0 range with a number of factors contributing to where in the range you sit and they will be the focus of the rest of this article.
The most relevant factor is that if businesses in your industry sector typically sell on multiples of between say, 2.0 – 3.0 it is very unlikely that you will sell for significantly more than that. The applicable range reflects many variables and these could be described as the ‘best’ and ‘worst’ business in the sector.
So, to get the highest price for your business you should aim to be amongst the ‘best’. But what does this mean?
As a valuer of businesses I regularly see both extremes. If you don’t want to be in the ‘worst’ category here are 5 golden rules:
The Five Commandments (or Golden Rules) to achieve a good sale price for your business
1. Maintain good accounting records. Any interested party will want to know how the business is currently trading as well as recent history. Accountant-prepared financials are the gilt-edged standard here and it’s likely a minimum of 3 financial years will be required. Internal or management reports (e.g. from MYOB) are notorious for differing from the accountant prepared ones so they will be considered a much less reliable source of information about how the business is performing.
2. Don’t mix activities from different businesses into one entity. If you run multiple businesses, then keep multiple records and run them from separate entities.
3. Have security of tenure. If your business operates from leased premises it is important that there is a reasonable length of time left to run on the lease and that the lease is transferable to a buyer on terms are not too onerous. In times of rising property prices (such as pre GFC) a market rent review in the first year could result in enormous cost increases that affect the future profitability (& therefore likely sale price). If you own the premises and they are not to be included as part of the sale it is best practice to have a lease agreement in place so the prospective buyer knows the terms in advance.
4. Conduct real stock takes and cull obsolete stock. There is often a temptation to ‘estimate’ closing stock or work in progress for convenience or for tax planning purposes. The time to correct this is not as you prepare to sell! A buyer will not pay full price for obsolete stock and high levels of obsolete stock are often an indicator of poor stock management practices that reflect poorly on the remainder of the business.
5. Maintain a good spread of customers and suppliers – if any single customer is more than 20% of your sales this is a significant risk. Similarly, if there is not a range of suppliers for any of the raw material or inputs the inability to deal with that supplier also presents a risk.
What do the ‘best’ of breed businesses also have?
- Budgets and cash flow forecasts with evidence that they are reliable
- Business plans that explain what competitive advantage the business enjoys and how the strategy exploits it.
- Succession plans key roles have successors identified and in the process of being trained to take over.
- Well-developed HR systems. Human capital is probably the worst managed ‘asset’ in any business. The minimum you should have in place is job descriptions and an effective performance management system to ensure everyone knows what their job is, what’s expected of them and how to know when they’ve done it properly.
- Key performance metrics that provide lead indicators of business performance.
- Systems & processes that are documented so “the way things are done” is recorded in a way that is easily picked up by someone else.
Whilst the Five Commandments may seem like common sense, most business I consult to are breaking at least two of the Five Commandments, often without even knowing it! These breaches increase uncertainty about the profitability of the businesses in question, with the result being that the business valuer is be forced to apply a lower multiple…and the owner receives a lower price for their business.