As I’ve been having conversations with clients, a surprising number have raised the prospect of selling their businesses over the next few years.
They may be considering retirement or wanting to get out of their existing business into something new.
The good thing is most of them were considering this over the next three to five years, which gave us the perfect opportunity to map out a plan to maximise the sale price they could get for their business.
What will maximise the sale price for business owners wishing to sell? Firstly, it’s about profits.
Buyers are looking for consistently growing profits over the previous three years.
A focus on growing the revenue and reducing costs is the most important way to increase the sale price.
However, the sale price is based on more than just profits.
The sale price of a business is determined by the profit times a multiple.
For small- to medium-sized businesses, that multiple is somewhere between two to five times the profit.
As you can imagine, there’s a big difference between double the profits and five times the profits. So how is the multiple calculated, and what can business owners do to increase it?
Each industry has a different multiple, which is largely based around how much demand there is for that type of business. But here are six factors that could determine what that final number might be.
- Higher profits will increase the multiple. A business with $300,000 profit will demand a higher multiple than one with $100,000 profit.
- How much the business depends on its owner has the biggest bearing on the multiple. If the business can run well without the owners, then a change of ownership shouldn’t affect the future profits. This type of business also gives a new owner more freedom.
- A recurring income stream will increase the profit multiple. Income that relies on always making a new sale makes future income more uncertain. But a business with customers that pay regularly is much more valuable. (This is why real estate companies are valued on their rent roll, and not their property sales.)
- The business’ competitive advantage affects both the profit and the multiple. If the business model is designed to make it difficult for other businesses to compete, this advantage will improve the multiple.
- How much the business drains cash also has a bearing on the value. A business that carries large stock and debtors will have a lower multiple than one that gets up-front payments and has found ways to minimise stock and debtors.
- A widespread customer base reduces the risk. A business that has a customer responsible for more than 15% of the revenue faces a risk if that particular customer’s sales drop.
If you just decide to just sell your business, the price you’ll get for it will be substantially less than if you make a planned sale.
So give yourself time to get your business in good shape for a sale. In fact, to maximise your profits you should aim to keep your business in a sale-ready state.
After all, who knows when life will throw something at you and you’ll need to sell?
Peter Ambrosiussen is the managing partner of Ambrosiussen Accountants and Advisors. www.ambrosiussen.com.au