Kirsten lowis

Two Factors in Creating a Valuable and Sellable Business

<Article Published 16 October 2016, http://www.queenslandbusinessnews.com&gt;

Starting and running a small business is one of the toughest jobs in Queensland. It’s plain hard work.

According to the first edition of the Advancing Small Business Queensland Strategy 2016-20, our state is home to more than 426,000 small businesses (employing less than 20 people) that are at the core of every industry sector.

If you are one of these small business owners, we will find you in every community in every region, and represent over 97% of businesses statewide, and you collectively employ approximately 44% of all private sector workers.  You may be a start-up, or you may be a boomer owner – whatever you are, I salute you!

When you set out on your small business journey, did you realise that there are only two ways to exit your business?  One is to transfer and the other is close.

Long hours, burnout, financial strain, poor cashflow, sickness, divorce, overwhelming debt or retirement is the cry of many small business owners in Queensland who need to sell. It is at this point that many sellers realise that there is a huge gap in their knowledge of the exit process.

It is unfortunate that in 2018, one in six business owners who spend years building their business will sell, and most of those will receive only a fraction of what their business is actually worth. Why? Because times have changed.

For over twelve years, I have worked closely with the best advisors across Australia. I have also had the privilege of being involved in many variations of small and medium business and franchise valuations and exits – including my own – capturing the key factors that affect the success or failure of a business sale:

1. Business Model

The number one business model for valuable and saleable business is one with contracts or systems in place to create recurring income.  This is referred to as Goodwill. A buyer will pay a premium if they are assured that sales and profits will continue when you’re gone.

2. Working vs. Passive Owner

Many small businesses don’t sell because a working owner is the reason why the business exists.  The goal to creating a ready and attractive business is to become a passive owner, who does not get involved in the day-to-day operations. This not only creates a managed business, you also have more options of how to run the business while you still own it.

Pig in a Python Effect

If you have a business that scores high in these two factors, you are primed for the market.  Beware, because there are thousands of businesses which are for sale, and whether or not you took an economics class, you would have heard of the law of supply and demand – when there is more of something to sell (supply), the value drops.  The Baby Boomers have had a pig in a python effect, and they have been selling their homes and their businesses for the past decade flooding the market with stock.  During that same period, technology has moved the traditional shopfront onto blue screens in the living room – bricks and mortar are no longer required to operate many small businesses.

Prepare ahead of time – years ahead of time

Regardless of your age, location or industry, I want to emphasise that the longer the preparation time, the better. Generally, a three year exit plan to create a strong business model with a passive income, depending on the business size, industry, risks, and taxation, particularly when you bring in a new management team – you can’t do it overnight.

In the case that you have already decided to sell, or have already listed your business for sale, and you haven’t yet found a buyer, you have only a few options. You can address the feedback from the enquiries or lower the price. You can take it off the market and strengthen the business model. Or you can wrap it up and call it a day.

Looking towards the future

Personally, I would love to see less Queensland businesses closing down and more fresh new owners come into the Queensland market when Boomer owners exit.  This will spark a new generation of young, eager entrepreneurs (like my 19 year old daughter) who are looking to plant their flags and make their mark.  It is an exciting time for buyers to recognize that boomer owners want to sell, and entrepreneurs are looking to buy.  The trick for them is recognising the value of buying an existing business and knowing where and what to look for.

 

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