Selling a business on goodwill alone is a thing of the past
The days when a business looked and sounded good - when someone walked into the local cafe with a $500,000 cheque based on a quick assessment of passing trade - have long gone. The days when banks lent 95 per cent of a business' value are also history.
Most important is the risk profile of the business. How easy would it be to replicate it and steal market share? How is the customer spread? Does a single customer take up more than 8 to 9 per cent of the business? What would happen if the customer left?
The valuer will look at the competition, how long the company has been in business, the size of the business and the security of the leasehold. He will look at the market and apply his own micro and macro outlooks for the business. He will look at the legislative arena and the economic environment that may affect the business.
He will look at the age and durability of the plant and equipment. Does the business need new capital outlay to either replace or increase capacity?
Mark Jason, a director of LINK, which values businesses of all types and sizes, says the level of scrutiny is what has changed since the GFC, not the multiples. It's the value considerations that have changed, they are that much tougher now.
"The risk profile is all-important," he says. A really good niche manufacturer, suffering no competition and with a patent on its product, may achieve four to six times earnings multiples. A similar-sized business with no niche and susceptible to competition may be lucky to get 2 times.
Valuer Max Kurz says: "It's still a buyer's market and a prudent purchaser can dictate terms. My advice to anyone with a good business is to hold on to it a little longer. If it's a good business now it will be a good business in the future."
Frequently Asked Questions about this Article…
Valuation has become much tougher since the GFC — valuers now act more like bank analysts, forward-pricing a business and probing every weakness. It's not just about multiples changing; the level of scrutiny and risk assessment applied to businesses is what has shifted.
Valuers examine the business' risk profile and replicability, customer spread and concentration, competition, how long the company has operated, size, leasehold security, market micro and macro outlooks, legislative and economic factors, and the age and durability of plant and equipment.
High customer concentration is a red flag because if a single customer represents more than 8 to 9 per cent of revenue, losing them could materially harm the business. Valuers probe what would happen if that customer left and how easily market share could be stolen.
A strong niche business with little competition and protections like a patent can command higher multiples (the article cites around four to six times earnings), whereas a similar-sized firm exposed to competition may only achieve about two times earnings.
Yes — according to valuer Max Kurz quoted in the article, it's still a buyer's market and prudent purchasers can often dictate terms, meaning sellers face tougher negotiation conditions.
Max Kurz suggests holding on a little longer: if a business is genuinely good now, it is likely to remain a good business in the future, and given the current buyer-friendly conditions, waiting may be prudent.
No — the article notes the days when banks lent 95 per cent of a business' value are over, and lenders now apply much stricter lending standards when financing business acquisitions.
Valuers assess the age and durability of plant and equipment and consider whether the business requires new capital outlays to replace assets or increase capacity, since required investment can reduce the business' attractiveness to buyers.
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