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Succession & Forward Planning Go Hand In Hand |
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We have previously looked at in previous issues, factors that influence business value.
This was considered in light of succession planning and it's likely impact on the small to medium enterprise community.
A recent survey conducted by CPA Australia again highlighted the issues confronting local SME operators. It seems owners are not optimistic about selling and they are not prepared to take the necessary steps to maximise the sale price of their business.
This is clearly a critical issue as the baby boomer bubble of SME owners rolls through the system and we will witness the largest transfer of business wealth in SME history. Traditional supply-demand theory says that as supply increases, prices will be driven downwards. This theory will probably not hold true when we look at the SME sector.
The much greater probability is that we will see a dramatic polarisation in price in small businesses for sale. The outcome of this will be twofold.
- Quality businesses will command premium prices
- Low-quality ones will be highly price-sensitive and in many cases unsaleable.
This means forward planning for succession is a critical issue for SME owners who want to exit their business this decade. This planning, with an adequate time frame, allows business owners the opportunity to actively enhance the value of their business.
The key questions, then, is what do you need to focus on to enhance business value?
In the main there are four key areas:
- Growth
- Capacity
- Profitability
- Risk Management
Buyers will generally pay a premium for a built-in growth level.
- Growth, if well managed, will produce increased profits. So a potential buyer knows that the revenue stream they are purchasing with the business comes with a growth increment. Not only does this growth factor offer future profit increments, it also insulates the business against the "what if" factor. Any major change in a business causes a disconnect. These disconnect events can affect revenues and profits. Built-in growth patterns offer some protection against eventuality.
- Capacity provides for both the present and the capability to facilitate growth in the future. Areas where capacity needs to exist include infrastructure, systems capability and management capability. Systems and management are often the areas given the least amount of focus, yet they are the very areas where value can be most leveraged and enhanced. One reason why franchises command price premiums is because they offer a level of systems and management. These same factors can be built into any business.
- A history of profits and strong cash flows are normally the two greatest influences on business value. In assessing your profitability, you need to compare yourself at two levels. First, compare your performance against the top quartile of your industry sector. Top-quartile businesses always attract higher valuations. Then,look outside your own business sector. Measure your return on investment (ROI). Buyers will not only be comparing you with your industry. They may be looking for investment return more than they are looking for a specific business. You may be competing with a business from another industry to secure your buyer. You should be looking for a ROI in excess of 25 per cent.
- Finally, business owners are becoming more sensitive about risk. Strong corporate governance and risk management policies will enhance business value.Buyers will be looking for a history of compliance and a risk-averse culture. Risk management can include the existence of current employment contracts, operating licences, customer and supplier agreements and occupational health and safety procedures.
These four areas will normally be high on the business value hierarchy and are areas where change can most significantly affect business value.
If business succession is on your agenda, you need to assess your business under these criteria. Where your performance of position falls short, you can identify issues on which to focus to change your business value.
This process may be the difference between a sale that releases your business capital and no sale at all.
Tony Martin - Director
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+ 61 8 8333 1944
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