01 Dec 2019
Are we headed for a price crash for businesses looking to sell?
Business Review Weekly (BRW) published a controversial article on 25 Feb 2015 that claimed, 'Why Some Baby Boomer Business Owners May Retire With Nothing!'
And the Sydney Morning Herald (SMH) also wrote years earlier (2011) in 'Sell sell sell: baby boomers approach retirement':
'Twenty two per cent of business owners are aged 60 and over, which means hundreds of thousands of businesses are going to be sold or shut down in the next three to five years.'
In the next three to five years? How about the next 10-20 years. Baby boomers are delaying retirement and staying in their businesses much, much longer because they can't afford to retire, or they simply cannot find a buyer.
So is all the gloom and doom really that bad for business owners?
Business owners are finding it harder and hard to exit on their own terms. PHOTO: Pixabay.com
Is this really a buyer's market and a crash of prices?
Well, there are 5.5 million baby boomers born between 1956 and 1965 in Australia, and we are witnessing a wave of approximately 800,000 baby boomer business owners retiring and selling their businesses.
A plethora of supply will inevitably push prices down.
In the same article, SMH also explained, 'Business owners who understand how to ready their business for sale may achieve a strong sale price, but those who do little to prepare can expect an average sale price of a 1.5 multiple of their profits, most probably through a careless business broker.' (2011)
Fast forward 9 years. If a supposedly 'careless' business broker in 2019 is able to sell your business at 1.5x multiple of profits (or EBITPDA, Earnings Before Interest, Tax, Proprietor's Salarty, Depreciation and Amortisation), you would rise about the average.
For many micro, small or medium businesses, the payback multiple could be less than 1x of annual profits in some industries.
How about businesses with problems? Well, they simply get given away, forced to shut down, or get sold for next to nothing.
This problem isn't helped by valuations from other 'professionals' that don't meet the market. For example, accountants or solicitors may price a business incorrectly that could keep a business unsold for a long time.
The only 'valuation' that really counts is the price that meets the market and a price that buyers can accept. Buyers are now spoiled for choices.
The over-supply may last for perhaps another 10 to 20 years. Unfortunately this doesn't just affect baby boomer business owners looking to sell. Any business owners looking to sell their business are affected.
Good businesses can still command a good price because the demand for these businesses hasn't weaned. People still wat businesses and buyers are still willing to pay top dollars for top businesses. But the majority of businesses are run-of-the-mill.
The problem most business owners have is the wrong belief that their business is amazing, when it isn't. They see their business in one dimension. For instance, if the business makes good profits, it must be good. Or if the business has potential to scale, it must be good.
In today's market, buyers want more. For example, a business needs to be (1) profitable, (2) have excellent verifiable documents and (3) a system to create low dependency on the owner. Most micro and small businesses fail on the later two dimensions even if the business is profitable.
Suffice to say, most micro, small and medium sized businesses have little idea on how to ready their business correctly for sale. It can take years to prepare a business for sale (for instance, most buyers expect to see 2 years of Profit & Loss Statements subm&tted to the tax office. To get this ready will take 2 years, if the previous 2 years haven't been accurately reported)
For many micro, small and medium business, the business broker is faced with businesses that just aren't ready or able to attract buyers. However, most businesses fall into this lot and competing for the same buyers. It just isn't a good look.
A small handful of businesses have done the groundwork and prepared their business for sale properly. You will need to work with competent advisers to make this happen.
Hiring A Good Team
Against a wave of businesses competing for the same buyers, you will need professional help.
You are likely to need the help of good accountants, lawyers, bankers/finance brokers, leasing consultants, management consultants, business brokers and any other specialists that can help you in your mission to sell the business, quickly.
Choosing the wrong lawyer or an incompetent team member could cost you the sale. In this market, you may only have one chance to sell the business.
You along with your advisors should recognise the price that meets the market, make changes to the business in preparation for a sale, ensure that your business tick all the boxes for the buyers and thus secure your expected price.
For instance, if your business isn't performing to expectations, then hire an external management consultant to analyse your operations and make decisive changes to improve key indicators before putting on the market.
If your business is in retail and yo have problems verifying the turnover, then meet with a consultant to replace your cash register and CRM to enhance your capability to keep accurate and trustworthy record of transactions.
This is a buyer's market, only if you let it be.*
Josh Foo contributed to this post.
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