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 far tougher since the GFC. Valuers now apply detailed, forward-looking analysis similar to bank analysts of listed companies. Buyers and their agents probe for weaknesses and assess risk more intensively — it’s the level of scrutiny that has changed, not just the headline multiples.
Valuers examine the business risk profile, how easy it would be to replicate, customer concentration, competition, how long the business has operated, business size, leasehold security, market outlook (micro and macro), legislative and economic risks, and the age and durability of plant and equipment — including any required capital expenditure.
High customer concentration raises risk. Valuers worry if a single customer accounts for more than about 8–9% of revenue because losing that customer could significantly damage cash flow and reduce a buyer’s willingness to pay a premium.
A strong niche business with no competition and intellectual property (for example a patent) can attract higher multiples — the article cites around four to six times earnings. A similar-sized business without a niche and vulnerable to competition might only achieve about two times earnings.
Yes. The article notes it remains a buyer’s market where prudent purchasers can often dictate terms. That dynamic contributes to tougher due diligence and more conservative pricing.
Lending has become more conservative. The article says the days when banks would lend as much as 95% of a business’s value are over, so buyers and sellers should expect tighter financing conditions than in the past.
Prepare for tight scrutiny by documenting customer diversification, leasehold security, competitive advantages (like patents or niches), the condition and remaining life of plant and equipment, and any near-term capital expenditure needs. Clear, well-organised records make a business easier to value and sell.
Many valuers in the article suggest holding on a little longer if the business is genuinely strong. Because it’s a buyer’s market and scrutiny is high, a good business now is likely to still be attractive in the future — selling decisions should weigh current market conditions, financing availability and your personal goals.
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