It pays to think ahead if you own and run a family-based business.
According to the Institute of Directors in New Zealand (www.iod.org.nz), an estimated 50% of businesses are family owned. And according to the NZ Herald, 69% of family businesses are forecast to be coming onto the market in the next ten years as baby-boomer small business owners look to retire.
That’s a lot of family based businesses up for sale. But for many, their retirement fund is going to be much less than they had hoped for.
Why? No succession planning.
For many family businesses, the main value of the business is seen to be the owner. They have often worked hard to promote and grow the business by sheer hard work and persistence. The owner is seen as the essence of the business. And if you take the owner out, then there is often not much left.
There may be a history of profits to show, but again, that is often driven by the will of the owner. There is nothing tangible for potential purchasers to buy.
So what does a buyer want in a business? Most sellers think that the obvious thing a purchaser wants is a steady increasing profit history. That’s true but they usually want more than that.
Let’s look at what we advise our own clients when they are considering buying a business:
- Trading history – how long has the company been in business?
- Profit – what are the profits like over the last 2, 3 or 4 years?
- Cash-flow – how good is the cash-flow, what is the level of debtors?
- Customer base – is it a broad and growing customer base or does it depend on one large customer?
- Supplier base – as with the customer base, is it dependent on one supplier who could raise prices or stop supply or are there other suppliers available?
- Forecast – what do the profit and cash-flow forecasts look like?
- Goodwill – how much of the valuation is goodwill?
- Competitor valuation – what are recent prices for other companies in your market?
- Market conditions – is it a growing or declining market?
It can take up to five years to bring your business into shape to maximise your sale value. As most sale prices are based on a value of the profit, it makes sense to maximise the profit in the business. Every dollar of profit is worth 4, 5 or more in a sales price.
This can include, managing expenses, trimming “leakages”, lowering your drawings, marketing systems that don’t rely on the personality of the owner, a strong management structure or executive development, processes and systems that make the business flow.
Give us a call to see how your business can achieve a maximum sale price.