Looking to sell a business today? Be prepared for some tight scrutiny. The way valuers look at businesses after the GFC is more like bank analysts forward-pricing a listed company. The buyers - and their agents - are probing everywhere for weaknesses.
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."