Over the years I’ve seen so many Small Businesses sell out for much less than…
At Your Age? Selling a Small Business?
Is it part of your retirement strategy to sell your business? Does the value of your business represent your superannuation fund?
Many small to medium enterprises I’ve spoken with over the years haven’t invested in superannuation, believing their business to be the equivalent. If you are one of them, hopefully, you still have a minimum of two years before you want to sell and retire or move on to doing something you’ll enjoy more. As you’ll need about that amount of time to get your business sale ready.
What are the top three things small to medium enterprises are looking for when they buy a business?
- Nett profit.
- Return on investment (ROI).
So often, when small to medium enterprises are working in their business day to day, they are making decisions based on what’s important right now and perhaps not spending as much time as they should on decisions they make that may impact on the future value of the business.
One of those mindsets is to minimise tax. Sometimes this is done transparently through the books, and still now, some small to medium enterprises will skim a percentage of sales ‘off the top’. That percentage may be small in relation to turnover but have quite a significant impact on the ‘nett profit’ of the business.
When you’ve made up your mind that you want to sell in the next 18 months to two years, it’s time to start thinking about how much you can sell it for, and more importantly, how much you need to sell it for to move on to the next chapter of your life.
How do you put a price on your business?
There are many ways of valuing a business. You should talk to your financial advisor as soon as possible to find out how your business type will be valued. For me as an investor or potential buyer, I’m looking for a return on investment of both my time and dollars.
For my time, I expect to earn more than I would if I was working for wages, for the dollars I have invested, I would anticipate a return well above what I would receive choosing other investment strategies.
So, if your business asking price is $500,000 and I was working full time for the business, I would calculate the absolute minimum nett profit I would be expecting like this:
Return on investment = 15% of $500,000 = $75,000
Return on my physical labour = Salary and on costs (super, sick pay etc) = $120,000
The nett profit I would expect to see is $195,000.
Some buyers may accept a lower percentage ROI and a lower salary, and subsequently, their profit expectations will be less.
I would also calculate how much I could sell the plant and equipment for if for any reason, I needed to, and/or if I would need to replace any of the plant and equipment in the first two years. I would factor that projected expense into my calculations and reduce the offer.
How do you increase the turnover and nett profit?
- Look more closely at the ‘tax deductible’ purchases you are making and/or attributing to the business. Are they truly business expenses and really necessary? If you are skimming 2%, 5%, x% from your turnover or even if you are just buying your lunch (or fuel, or anything else) out of the till and not recording it … Stop doing it.
- Secure discounts from suppliers on bulk purchases and/or for paying cash, 2%, 5%, x% will help.
- Increase your selling price where you can. Clear out dead stock. Sell surplus plant and equipment.
- If you are selling to a ‘hands-on’ owner who will be working in the business and you’ve been working less and paying more in wages than you really need to, then get back into the business and cut those wages down. If you are already exhausted and re-entering the business could risk burnout, then maintain your staffing levels and stay away. But be clear in defining the role of the person who will not be required when the new owner takes over, so they are able to honestly take that person’s wages and on costs, out of the equation.
I will never buy a business where the seller has already deducted the ‘non-business-related expenses’ from the profit and loss. I inevitably don’t trust the accuracy of the reported bottom line.
See your accountant today. Find out what your business is worth right now and start working towards building it up and preparing it for sale before you find yourself in a position where you have no choice and no options.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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