You've worked hard and been in business for over 15 years. You go in and see your accountant and announce that it's time to sell the business.
"How much are you looking for?" they ask. "Oh, $1,200,000 plus stock.'' you reply.
''But it's only worth $300,000 at best and don't forget you may have to pay capital gains tax. I'm not even sure it's saleable in its current state?''
All of sudden after the shock at such a suggestion, you realise that retirement will need to be postponed for years. You wonder why it is that you are only finding this out now? Is there anything you can do about it and if so, over what timeframe?
So, here are some things that business valuers Sydney and brokers look for when not only determining your business valuation but also whether it is saleable.
Figure 1: Get in front early to reach your target sales price and win the game.
1. would you invest in your business?
The first thing you should do is have a look at your business from an outsider's perspective. Your accountant or business advisor could be a good sounding board or perhaps if you really want to know ask a business broker or business valuer and get a solid, well-informed opinion.
Would you really pay what you are asking for? Would you be confident that the business would make a return in excess of 30% given the risk involved?
Is it a business on the way up or on the way down? Evidence of small business growth is usually key. Businesses that keep growing tend to fetch higher prices. Businesses that showing decreasing revenues and profitability usually reveal much higher risk and therefore lower sales prices.
List down all the positive things your business has.
These could be:
- Strong history of solid profits;
- Loyal customers;
- Longevity of staff;
- Niche market or competitive advantage;
- Good technology and up-to-date equipment.
2. reduce investor risk
Those who are willing to pay the monies you are after will be more likely to pay higher profit multiples if their risk is reduced.
They will look for in addition to Point 1:
- Little owner reliance (can the business run by itself and will customers stay?);
- Willingness by you the vendor to stay on for a period of 6 months to say 2 years (usually with a market salary);
- Employment contracts (these can have reasonable restraint of trade clauses but you need your solicitor to review these);
- Restraint of trade clause in the sale contract for the vendor;
- Strong cash flow as evidenced by budget versus actual and a business plan that contains a cash flow forecast;
- Robust management accounting software systems with meaningful monthly reporting.
3. what future does the business really have?
What is your industry currently experiencing? Does it have a positive outlook or is it threatened by technology or by some behemoth that could come in and crush your small business?
Most small business accountants will subscribe to industry research reports such as IbisWorld. Ask them for help in determining whether your business would be attractive given the current environment.
Devise a plan to address any concerns that a would be purchaser might raise with the current business and industry outlook.
''All of a sudden after the shock at such a suggestion, you realise that retirement will need to be postponed for years."
Figure 2: How well do you present your business? A lick of paint should not just occur when you plan to list.
4. how much work is needed to business renovate?
Just like buying a house is your business run down? Whilst it always good to dress up your business just prior to sale, the reality is you should have been doing this and maintaining it all the way along or at least a few years before listing it.
If the business looks tired from the outside then it's likely it's tired on the inside. Everyday somebody sees your premises or deals with you and your tea. If the business needs work then your brand is diminished and it is likely you will find it harder to sell when the time comes down the track.
This makes sense because you will not only have a better business which is more profitable, but it should then also have a higher selling price.
Do not wait to fix up your business - do it now!
5. reduce obstacles at sales time
Just as when you are in business and not having it for sale, the easier you make it for the purchaser to buy the better.
- If the premises are leased (or if you own the property), offer an attractive lease term with options in place that allows the lease to be easily renewed. This is particularly so for any business that has location goodwill.
- Have customer and supplier contracts (where possible) tied up for long periods just prior to sale.
- Ensure your financial figures stack up and agree to tax returns and business activity statements.
- Show cash flow forecasts that reveal solid evidence of adequate working capital.
Figure 3: What is the view of your business from an outside perspective?
Like anything, being forewarned is to be forearmed. It's much more preferable to work out what you need to do in advance rather than finding out just before you wish to sell your business. If you don't know what your business valuation might be, find out now.
If your business needs work, it's imperative you get it done immediately. By not acting now, the damage you are causing yourself and the ability to sell in later years is not only wasteful but makes absolutely no sense whatsoever.