If “location, location, location” is everything in real estate, then “preparation, preparation, preparation” is equally important when selling a small business.
There are many reasons why a small business owner might decide to sell, but preparation is the one common ingredient that can make the difference between a sale and a fail.
The single most important piece of advice I would give to an SME owner is to ensure they are properly prepared when the time comes to sell. Unfortunately, it’s not as easy as it sounds.
A lack of preparation is a common and growing problem in the Australian SME market. New data published in the latest ValueMyBusiness-RMIT Index of business value multiples shows that the overall value of the SME market has fallen again, continuing an 11-year trend, with businesses of less than $5 million turnover the worst hit.
Yet, in the same time period, there has been an 800% increase in the number of businesses entering the market. In simple supply and demand terms, not enough product is moving and that’s a real problem.
Why is this happening? A look at the baby boomer generation sheds some light on why an all too common lack of proper preparation is causing the market bottleneck.
They may not like to admit it, but baby boomers are collectively approaching retirement age. Without doubt, privately-owned small businesses of this generation have been the backbone of the economy. However, many are confronted with the reality of changing times. Digital retail disruption, different market demographics and general market squeezes all lead to new challenges for this demographic.
Many are experiencing a lack of family business succession. The way they used to do business is not going to be the same as how their children, or new owners will do it.
Therefore, some tough decisions need to be made, and selling is the most common outcome. However, it’s not quite as simple as that, and when they attempt to sell, many are finding they are unprepared and going to market with unrealistic expectations.
So, what exactly is the right preparation?
Firstly, having an idea of what the business is worth is critical. I’m always amazed at how many owners have an unrealistic idea of what their business is worth. Often, they’re in for a rude shock.
Personal attachments mean owners value their businesses very differently from how the marketplace does, which creates conflict between the vendor and potential buyer.
Secondly, a surprising number of businesses also have administration oddities or legacy issues that seem normal to the owner, but could be a red flag to a buyer.
No business is ever perfectly run or managed, and so there is always room for improvement. At the very least it might simply be some fine tuning, such as a marginal reduction in product delivery lead times which can result in a significant improvement in the cash flow. It might even be something more significant such as cleaning up the balance sheet or finding the right people to run the business without having to depend on the owner. But these things all take time to implement.
The daily demand of running the business, often means that small business owners are having to deal with fighting bush fires rather than looking at the longer-term goals––such as preparing for their eventual exit.
By taking an unprepared business to market, owners risk poor returns on what can be a lifetime of investment, and can cost themselves thousands in both wasted time and funds.
Finally, the right advice is equally as important as an awareness of value. At the very least, owners should develop an understanding of the value of their businesses. A certified advisor will look at the business with a critical eye, and recommend improvements where necessary, deal with all the paperwork, develop the marketing strategy and handle all the enquires. A good advisor will allow the business owner to better use of their time in running their business and so not be entirely distracted by the sale process.
The longer the preparation time the better. Generally, three years would be good for larger private businesses, two might do, but it depends on the business’s size, industry, risk factors, and taxation issues that may apply.
Getting these things right cannot be done overnight. What looks good to an owner in their methods and practice will not necessarily look good to someone coming in with other ideas, and a different approach. A buyer needs to see the untapped opportunity.
With a realistic idea on value, you have started the process of preparing your business, and at the same time taming your expectations.
About the author
Dominic Pellegrino is Director of ValueMyBusiness (VMB) – Australia’s only source of market value data for small to medium enterprises. Dominic’s background is initially in engineering, management consulting, and for the past 25 years, an active private investor, whose particular area of interest is in small business, early stage seeding and start-ups.
VMB-RMIT Index – KEY FINDINGS – March 2017 Quarter
- Number of SMEs listed for sale down 1% on the previous quarter.
- A marginal decrease in the overall average of the ValueMyBusiness- RMIT Index value for micro, small and medium businesses.
- Middle Businesses with turnovers of $5mil to $15 mil have continued to grow, a trend that started midway through 2015.
- Overall, the higher valued businesses (2.5%) regardless of turnover have been growing since the September 2013 quarter, although in March values dipped somewhat.
- The distribution of listings with ValueMyBusiness-RMIT Index values between 1 and 2 times decreased by 3% from the previous quarter.
- The overall ValueMyBusiness mean (median) indices show a slight decrease since the previous quarter.
