How to get top price for your business
18 July 2010 1 Comment
With millions of baby boomers nearing retirement, thousands of businesses are about to be put up for sale in the next few years, which could result in an oversupply, forcing the price of businesses down. “This situation could see some owners closing up shop because they are unable to get a good price for their life’s work” according to Dennis Laundy, director of William Buck, as reported in The Boardroom Report published by the Australia Institute of Company Directors, Volume 8, Issue 11 on 16 June 2010.
Laundy believes owners should start planning at least three years before retirement to get the best possible price for a business. This is to ensure profitability is satisfactory, the risks that can be mitigated are, and the tax implications of a sale are properly considered and planned for.
He offers the following tips on how to get top price for your business:
- Understand how your business will be valued by the market. Business owners often have an inflated view of what their business is worth, but an operating business is typically valued by applying a multiple to the earnings achieved by that business where past results are a guide to future earnings, with the multiple representing the perceived risk in the business.
- Look at it from the buyer’s point of view. Prudent buyers are cautious and seek to assess the likely future levels of profitability and how much risk will be taken on to achieve that profitability. It is often beneficial to engage a third party, such as an accounting firm, to undertake such an assessment of your business, as if they are acting for a potential buyer. This process can help determine readiness for sale by identifying issues which, if rectified, can help increase the value of the business for sale.
- Identify risks to future profitability. Typical risks include dependence on a few key customers and suppliers, revenue streams not protected by contracts, intellectual property which has not been protected, insufficient diversification of products or services and dependence on key employees who are not locked in. If not rectified, these factors could have a significant impact on the value of the business.
- Operating without you. Many baby boomer owners are very hands-on in the business. They hold all the key relationships with customers and suppliers, hire and fire all the staff, control the finances and set strategy. Such
an owner-centric business will not be attractive to a buyer because the risk to future profitability of the owner’s departure is too great. While there is some risk in key employees holding some of the key relationships, if this is properly structured and the business protected, it will enhance the value of the business because those key employees can transfer to a new owner on the departure of the owner. A business will be more attractive to a buyer if it can operate independently of the owner. - Consider employees in your exit plan. Retention of key staff is very important for a new owner. This reduces the risk and flows on to an increase in the value of the business. It is important to communicate any plans with key staff early to gain their support and avoid any unexpected surprises. Ensuring that staff transferring to the new owner are looked after will assist in any transition and enhance the value of the business.
“People buying a business are looking for traps or hidden risks. The quality of the information you provide to a purchaser about your business must be truthful, supportable and transparent. You have to be able to provide a credible answer as to why you are selling, be prepared to be restrained from acting in competition to the purchaser, get some good advice and plan. But ultimately, a track record of good, solid financial performance is the main factor that will increase the value and attractiveness of your business,” says Laundy.
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I’m in touch with a number of reputable business brokers and related professionals if you are ready to sell; but it takes years of planning and preparation to obtain the best price for your business, and that I can help you with myself. Simply call me on 0412 921 292 or complete my contact form if we’ve not previously had contact.
About Paul Curtis
Most small business owners nearing retirement have no clear idea of who they intend to sell their business to. The best sale price generally results when the acquisition, from the purchaser’s perspective, has strategic significance. For example, two surf shops in Byron Bay were recently purchased in one line by Billbong for an undisclosed (but presumably high sum). These shops had the highest turnover of Billabong products in Australia the result being that Billabong had been trying to purchase them for years in order to make retail, rather than wholesale margins on their clothing lines. Did the owners of these businesses deliberately set out to make their local businesses attractive to Billabong as acquisition prospects? We don’t know, but it can be a highly lucrative strategy to study a large competitor’s (or supplier’s) business plan and strategy and work towards positioning your business as a strategically crucial takeover target. Why? Because the normal methods of valuation (multiple of net earnings) no longer apply to the “strategic sale”. A strategically crucial acquisition may sell at 8 or eve 10 times earnings when the normal multiple would be, say 2. In 2000 I was able to sell my company IntegraTec at 7 times earnings using this strategy.