How to value and sell your business
| Given the age demographic in New Zealand, it is more important than ever to have a strategic plan in place to sell your business. Baby boomers are now approaching retirement, and as such there may be a significant increase in the amount of businesses for sale in the next few years. Assuming the demand to purchase businesses remains the same, the increase in the supply of businesses for sale may have a significant effect on the sale price achieved. Therefore now is the time to prepare your business for sale, even if you are not considering selling your business in the foreseeable future. |  |
One of the first things to consider is who may actually be interested in purchasing your business. Many businesses are sold to people who already have an existing knowledge of, or relationship with the business, such as employees, customers, competitors or suppliers. Such parties have an understanding of the role the business has to the industry in which it operates. Other businesses are sold to third parties who have no previous relationship with the business. Such sales often occur with the assistance of a broker.
To sell a business you need to value it. The most popular methods for valuing a business include multiplier of earnings and asset valuations. Typically the former involves a calculation of the future maintainable earnings of the business and a judgment call on the appropriate multiplier to use. There is no standard or average multiplier which is appropriate – rather, this depends on the particular industry, the future potential of the business as well as the economic outlook both in New Zealand and overseas. Asset valuation methods may include a registered valuation or appraisal of the business assets for sale. This method may be appropriate if the business requires significant investment in capital assets rather than say, a service type business.
The sales price achieved may be the result of the purchaser's need or wish to purchase rather than a multiplier of earnings or asset valuation. A competitor may be willing to pay a premium to purchase an existing client base and reduce competition in the marketplace. A customer or supplier may be willing to pay a premium as a strategic means of vertical integration in the particular industry. Purchasers are advised to refrain from getting emotional during the negotiating process, and should focus on the fundamental principle of return on investment rather than industry averages. Given the current economic climate both in New Zealand and overseas, it is likely the value achieved from the sale of a business today may be less than (say) four years ago. Vendors should be realistic with the price they expect from the sale of the business as over-priced businesses are inevitably harder or impossible to sell.
Rather than marketing your business when you decide to sell, it is important you market your business as a successful business on an ongoing basis. This involves a strategic approach to developing a reputation as a quality business, i.e. explaining to the marketplace what makes your business unique and therefore successful (e.g. excellent service). The key is to focus on who you want to appreciate your success, such as competitors, suppliers, staff and customers. If these parties perceive the business to be successful, the value of the business may increase accordingly.
The key to a successful exit from a business is to actually develop an exit strategy well in advance. The value achieved from a sale may often reflect the current and potential profitability of the business, as such business owners should not loose focus on the business operations or profitability when thinking about selling. However business owners should make sure there is a robust business model in place for someone to purchase. As such, all processes, policies and intellectual property should be documented and kept at the business premises rather than being 'stored' in somebody's memory.
The sale process may involve a considerable amount of time and resource for the business owner. Therefore, it is imperative professional advisors are consulted to assess the value of the business, assist in the due diligence process, help find a buyer, and advise on the financial and tax implications of a sale.
Paul Manning is a Director of RHB Chartered Accountants Limited.
Disclaimer
It is recommended that you consult your advisor. No liability is assumed by RHB Chartered Accountants Ltd for any losses suffered by any person relying directly or indirectly upon the article above.
Published in Bay Business Times, June 2011
