Why you won’t be able to sell your business!
Wayne’s Words of Wisdom for the week….. is on Why you won’t be able to sell your business.
It is so common for small to medium business owners to see their business as part of their wealth creation or retirement strategy – that is, it will provide them with stable income while they operate it, but then also a lump some at the end when they sell, giving their wealth a boost. I want to focus on that sale today.
Unfortunately, in our experience many businesses don’t sell. Here are some of the reasons why:
- People consider it too late. They come to their adviser/broker looking to sell in the next 12mths to 2 years. This is too late. You need to be considering it 5 years out. This will help you focus on consistent figures, maintaining the appropriate documentation (to make a buyer less nervous about forking out the cash), and give you the ability to make small improvements to remove any hurdles to a potential purchase. For example, including cash sales or removing private expenditure that has always been claimed as business 1 to 2 years out, only makes potential buyers nervous – what other stuff isn’t real or has moved a lot?
- Your business has what all businesses looking to sell should be trying to avoid (where possible) – One of something.…. One Customer, One Supplier, One Product, One Key Employee, One Market so-on. Where your business has one of the above, there is a higher risk that should that item be removed, the business will fail. Often making it too risky for the buyer to complete the purchase…. or the sale will occur at a much much lower price than you were expecting.
- Lots of businesses similar to yours are for sale…..this tends to drag the price down and makes buyers nervous about that “market”. One of the major trends emerging is baby boomers getting out of their current businesses and moving to the next stage of their life. So a legitimate reason for multiple businesses for sale, but it will still potentially drag prices down or in some cases even make those business types unsaleable. How do you stand out from the crowd if there are lots of your business type for sale? What makes your business different/unique?
- Business “multiples” might be on the decline soon to account for the higher risk involved in owning a business these days…. Most business sell on a “multiple” of profits. Lets look at a quick example, the well published rule of thumb that you should be able to get 3 times profit for a business (though there is a lot more science to it than that and 3 might be too high) – this “3 times” profits is often referred to as the “multiple” or capitalisation rate and varies from business to business. So if you wish to sell your business for $900,000 and you had maintainable profits of about $300,000, then you would be hoping for a multiple of 3 (well run and stable business). The “multiple” works on the basis that the new owner will “make back” their investment in 3 years, then beyond that, be in front (& potentially get a sale of their own at the end). The more stable the business model and reliable the profits, the more likely you will achieve a higher multiple. So given that logic, how quickly do you think the world is changing and how confident are you that any business type will be unchanged/dependable for the next 3 years? Uber vs Taxi anyone? I think we will see a trend where multiples will drop in coming years, particularly where those industries are impacted by technology, excessive numbers of businesses for sale or world volatility in general continues. Are you banking on a reasonable “multiple” for your business sale?
- A particular skill – for example licensed builder. We don’t regularly see these businesses sell because of the need to have a license (smaller group of potential buyers and therefore less demand) and the continued obligation/risk with warranties often associated with these types of businesses. Most skilled people who would be the potential buyers are asking themselves, what if I just setup on my own? What if I invested that cost of purchase into advertising and expansion, could I achieve a similar or better result than buying the established business.
- Trend is for smaller businesses…. the goal used to be to setup large businesses with scale and run them extremely well, to get the best price. While this will still be true in a lot of cases, there seems to be a trend towards smaller more flexible businesses (can easily adapt to new world changes), with less upfront investment. So if your business is reasonable in size (asking for $1million and up) and involves a lot to run it, than maybe your only buy out option is likely to be those further up the food chain, like listed companies or bigger businesses of your type, rather than the smaller players. So are you preparing for that type of sale and appealing to that type of buyer?
There are of course many ways to mitigate the above, but planning early is the key. Using a good adviser who can help guide you through the process will also help. One more tip….put yourself in the shoes of the buyer and it will give you a new perspective…. Ask yourself, if I was asked to fork out $x (make it a big number) and wasn’t aware of the business like I am (assume the buyer is from outside the industry)…. what would make me nervous about departing with my cash? These are the potential hurdles you will need to try and mitigate to achieve the highest sale price on exit.