Prices are down, so focus on future earnings

An estimated 44% of Australia’s businesses will be sold over the next 10 years. If you want to snare the full value of your business, presentation may make all the diference. By ANDREW KENT.

By Andrew Kent

A recent international study by business advisers Shirlaws has confirmed that as many as 84% of senior executives and business owners are looking to exit their businesses.

As we approached the end of the March quarter, the BizExchange team was working on the next issue of the BizExchange Index of private business valuations. We monitor the impact of baby boomer retirements on the value of private businesses. An estimated 44% of Australia’s businesses will be sold over the next 10 years.

This is bringing an increasing number of businesses for sale into the market, and may even be taking some potential buyers out of the market. This is a combination that will place downward pressure on the value of businesses.

The global nature of the trend may also have repercussions for the planning of some of the mid-sized privately owned companies in Australia. This band of companies between $5 million and $20 million in value are often regarded as too large for many individual private owners, and too small to float publicly.

Although this is not always the case, these companies have often seen overseas investors as the white knight of their exit strategies. If the abundance of businesses for sale is a global phenomenon, then there may be fewer overseas buyers interested in Australian businesses.

However, it is not all doom and gloom for business owners looking to sell. A recent study by a large employment website found that 80% of job seekers wanted to own their own business.

The problem is not that the next generation is not interested, but there remains a question whether these potential buyers can afford to pay real market value for the businesses. In this regard, the willingness of Gen-X and Gen-Y to go into debt may prove to be the answer.

Generational change is not just affecting the overall value of businesses. There is a change in emphasis among buyers on what is worth buying. Increasingly the emphasis is on projected future earnings rather than on net assets.

As this becomes more widely accepted in the market, the structuring and presentation of businesses prior to sale may also change.

For business owners contemplating selling, this may require better recording keeping over several years before selling. It will be the long-term data on financial performance that will be used to plot expected future earnings, which in turn will be a major factor in establishing the price the buyers are willing to pay.

Andrew Kent is a director of BizExchange, an independent marketplace for business for sale or seeking investment.