Have you thought about what your business is worth? When you come to sell it, it may not be worth as much as you think.
In my experience, most business owners don’t start thinking about what their business is worth until they start thinking about getting out. A recent global survey by Grant Thornton identified that 45 percent of Australian owners of privately held businesses are thinking of selling in the next ten years. This figure is only topped by New Zealand, where 69 percent of business owners anticipate selling in the next decade.
My question is: who is going to buy them?
These figures are consistent with the Baby Boomer population bubble that is affecting many markets in Australia (and NZ) as the baby boomer generation approaches and enters the retirement years. This population bubble means that the number of businesses coming onto the market will certainly rise in the next few years, meaning we could have a glut on our hands.
In any market, a glut means that prices will plummet. There will be many more sellers in the market than buyers. We only have to look at the housing market to know what happens when the number of sellers exceeds buyers. Crash go the prices!
The reality is that if you are planning to sell your business in the next few years, it may not be worth what you are hoping for.
There are two factors that will work against you getting a good price when it comes to selling up.
- The disruptive changes that need to be made to extract the owner at the time they choose to leave creates a major distraction to the conduct of normal business, which means that profits (which affect the valuation) may be lower than normal.
- A business that is reliant on the owner is very hard to sell, or has to be sold at a much lower price than the same business is worth if it is self-reliant.
What does this mean for you?
You don’t have to wait until you want to sell to start working on getting the best price. Because of the coming turbulence in the market, you should prepare by creating flexibility with the options you have. You should start to build your business by doing the things that maximise value, but also establish a “Plan B” in case you can’t sell for the price you want.
You will be best placed to extract maximum value from your business and achieve maximum price by building a business that works without you. Whether you have been in business for a while, or just starting out, it’s time to start planning to put your business on autopilot.
When your business runs on autopilot without you, you have all options open. You can run your business profitably and have the freedom to live your life as you want. You can still retire, but don’t have to sell your business to achieve that goal, because it will supply you with ongoing residual income without having to work in it.
On the other hand, your business is a much more saleable prospect if it runs successfully by itself. It has much more value to an investor if they can walk straight in knowing that there does not have to be a transitional time of weaning the business away from the exiting owner. You need to make the transfer easy and set up your business to be attractive to a potential buyer. There will be many that will end up being un-sellable and worthless by being dependent on the current owner.
Only the best businesses will sell in the coming economy. Why not make yours one of them? It’s time to start now.
Photo: The US Army