Small businesses, like ours, are being sold for profit multiples not thought of in the old days. Yes, I said, “profit multiples”. Yes, that means you will get the right price for your business if certain factors, including profit, are present.
Don’t be fooled into believing that you only need to worry about this when you come to sell! The point is, advance preparation for sale can be a business owner's best weapon and obtaining a periodic valuation of the business can be an excellent tool to gain an understanding of the market's view of your business.
I couldn’t tell you the number of times we have received phone calls from clients along the lines of … “I have a quick question for you… how much is my business worth?”
Unfortunately, the answer is not as quick as the question! The answer is always – depends!
It depends on a lot of factors:
• Who is buying?
• Why are you selling?
• Do you have a business? Or unfortunately do you just have a job?
• Is your business profitable?
• Will your customers stay when you sell?
• Will your team stay?
Remember the definition of a business – “something that makes a profit when you’re not there”. Imagine going away for a year and then coming back. If there is anything left…you have a business.
Let’s start with some basics. What do buyers look for when they buy your business? Or conversely, what should you have in place to achieve the best sale price?
The key elements are:
• Team & Culture;
• Systems;
• Customers;
• Suppliers; and
• Profit
The important thing to note is that with any method used for the valuation of an ongoing business, primacy in determining value goes to the business’ EARNINGS.
We understand that if you’re like most small businesses you will have made use of tactics such as giving yourself and family members as many perks and benefits as possible, kept your children on the payroll, made large contributions into your superannuation etc – so as to minimise your profit and minimise your tax liability.
That means your profits won’t be showing as high as they really could be. So, the first step is to normalise your financial statements and restate the profit so that, for example, salaries more accurately reflect a typical salary for that position rather than any inflated amount that may be being paid.
While it is important to restate financial statements, it is critical not to produce misleading figures through misstatements or omissions, which might make you liable for fraud. Expert accounting advice is essential here.
If you are thinking of selling or passing on the business, also consider your business structure. If the business depends on your own expertise, what is it worth without you? You can increase the value of the business by bringing in people who can do your job and bring management depth.
Start delegating and step back to let the business run with less intervention from you. Otherwise, if the business obviously relies on just one individual and there is no succession plan you are likely to be faced with a request for a ‘key man discount’. You can also train up employees so that they have more expertise in the business.
If you are preparing sufficiently far in advance, one of the most important things you can do is to take steps to maximise the profitability of the business. Just let us know if you are interested in how to do this.
So what are you waiting on? It’s time to start knocking your business into shape for that eventual day when you will sell. If you are not selling your business then by default you are buying it.
Need help? Give Terry Dewing or one of the Sullivan Dewing Business Building Team a call on 9526 1211 and they will point you in the right direction.
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