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Let's be Frank

Published : 11 December 2018

One of my Mergers and Acquisition colleagues pointed out some statistics to me that are based on US small business experience which is very likely to be replicated in Australia.

Firstly, only about 20% of all businesses for sale will ever sell.

Secondly, 90% of all of people who search to buy a business never complete a transaction.

The good news is that if you are reading this article and you own a business the probability of getting a sale for your business has just gone up a bit. That’s because I’m a business broker.

More good news is that if you are reading this article and you own a business the probability of getting a sale for your business has gone up by a lot. That’s because I’m a Registered Business Valuer (RBV).

An interesting conversation with another colleague giving a presentation to a room of business owners at a chamber of commerce breakfast revealed that when asked how many of those who were present had there business for sale, only 3 put their hand up. When asked how many wanted to find out how much their business was worth about 90 put their hand up.

It stands to reason because the decision to put a business up for sale has a much higher chance of being a sensible one if the seller has an idea of the market value of the business. Without this knowledge the decision is more like wishful thinking.

This creates an interesting conundrum for business owners. There are of course many factors that an RBV will use to help furnish his or her opinion of the market value of a business. A list of these factors would include:

-         The level of profit

-         The sustainability of profit

-         Potential to grow profit

-         Level of tangible assets

-         Personal goodwill of the owner

-         Management, business systems and processes

-         Quality and availability of financial records

-         Client profile

-         Supplier profile and product range

-         Competitive profile/barriers to entry

-         Premises location/presentation/lease terms

-         Working capital requirements

-         Trading hours

-         Potential for inspection

-         Finance availability including vendor finance

-         Others

Note that the first three of these factors are related to profit. It stands to reason because that is the raison d’etre for a business’ existence.

The conundrum is that when a business is doing well and profits and turnover are improving year on year the last thing on a business owners mind is the sale of the business. Sadly, this usually appears as possible course of action when the financial position of a business starts to deteriorate.

One of the benefits of using an RBV as part of a process of placing your business on the market is that not only can you establish a realistic market price for the business but you will receive valuable insights into what is impacting upon the value of your business and can implement a plan to either nurture or safeguard against these various factors.

As part of the conundrum facing a seller when considering putting their business on the market is the vicious cycle that permeates the mindset of a business owner when things start to turn sour in the direction of growth of a business.

Enthusiasm is the equivalent of morale for a business owner. When things are not going as desired the well of enthusiasm can start to run dry. What follows is stress and one of the main symptoms of stress is immobility through the inability to make good quality decisions. One crisis leads to the next.

If you are among the group of business owners who would put up their hand in search of a business valuation then grab that enthusiasm and run with it. The decision to sell should be made subsequent to assessing the market value of the business.

Placing a business for sale is a big decision and approached on its own can be quite a daunting one. If you break it up into a process where the first part is finding a value for it then you have started to put the task into bite size pieces. In the process the person you eventually choose to sell it will have start to have assembled some of the information necessary for them to market it properly.

The first port of call that a business owner will visit when seeking assistance with the valuation task is their accountant. An RBV will also sensibly seek assistance from the accountant when undertaking the task of assessing the market value of the business. An important factor in assessing a business value is the level of profit with which the accountant will be intimately involved. While being important profitability does not dominate the many other factors involved in valuing the business which are listed above. After assessing the taxable profit accountants are quite often far too busy to undertake a proper assessment of the many other factors involved in assessing the market value of a business.

The best outcome in a valuation and sale process quite often involves a collaboration between the seller, the accountant and an RBV who then goes on to place the business on the market.

The RBV has access to a critical network of business brokers and valuers who supply the market based intelligence to provide the most realistic market value for a business.

An important role of the custodian of a business is to have the end in mind. This will help you in making the decisions necessary to run an efficient business that avoids the twin traps of being over or under capitalised. You start to move into the 20% of business owners who successfully turn their business into cash.

Now there’s an exit strategy.