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Is it time to sell a business?

Australians are often described (in an affectionate and possibly jovial way) as a nation of gamblers – and I bet you 2-1 odds you have often thought the same thing!  We often wish our timing had been better when we want to:

  • Sell those shares at the top of the cycle.
  • Buy that property 6 years ago when it was “dirt cheap”.
  • Agree  to the fantastic distributor deal that would see you become the exclusive dealer for iPhone products in Australia.
  • And the list goes on….

But most wise investors who have made their millions will also tell you that “timing the market” is really a game of chance.  They will say that we should be making investment decisions based on sound guidelines and results rather than a “gut feel” that we are at the top or bottom of a trend.

When it comes to selling a business or buying a business I couldn’t agree more.  Overwhelmingly the key to a good sale is to have solid performance results communicated in a clear manner.  The key to a good acquisition is to understand the past and know what you will be doing with the business in the future.

But there is also a level of preparation and awareness that is required.  It is important to be able to answer the question “what would I do if XYZ happened to the business?”.

Trends From the Experts

So it is timely to consider some trends that the experts have identified, and the best summary of this I have seen is from the latest newsletter from IBISWorld.

This article lists some key trends that are possible, summarised below.  Bear in mind these are just possible trends – they aren’t locked in concrete(and not an exhaustive list).  But if you wanted to prepare for the coming year, these are useful to know.

  • The Asia-mega region (Asia Pacific, excluding Japan but including Indian sub-continent) accounts for 35% of world GDP and is growing 3 times faster than the Europe / US / Japan region.
  • Australian population growth is the same or faster than world population growth.
  • Australian economic growth follows a 8-9 year cycle and we appear to be in the early stages of an upwards growth path.
  • Inflation is likely to stay within the 2-3% band the RBA is seeking.
  • Wages growth appears to have reached a low point so expect upwards pressure in wages in the future.

External Issues to Consider:

  • A falling AUS/US dollar exchange rate will improve our competitiveness of exports but will increase the costs of imported goods.
  • A collapse in the oil price (although may not be sustainable in the long term) may minimise the impacts of falling exchange rate on transport costs (through fuel costs).
  • Jobs will disappear from traditional sectors such as manufacturing, mining and agriculture but will be generated in new areas such as professional services, health and hospitality.

So now let’s come back to the key question – is now the time to sell your business?  The answer is “yes” if:

  1. Your past financial results show some consistent trends in sales or profits (or both).
  2. There are systems in place that deliver scalability to the business.
  3. There is evidence the business does not rely on its owners.
  4. There is a competitive advantage that can deliver sustained profits.
  5. You can deliver evidence of growth in either sales, profits (or both) that are likely to continue.
  6. The future risks have detailed mitigation plans in place that management can implement.
  7. The opportunities to improve performance are well defined and included in your business plan.

It is worth noting that the first four criteria are associated with the efforts you have already invested into the business.  The last three criteria are associated with what you plan to do next.  The future trends listed in the IBISWorld newsletter will influence the outcomes of the last three criteria.

In our experience this is about the right balance – higher business valuations often result when the past results show positive performance.  Whilst the past is no guarantee of the future, they provide confidence of what can be achieved.  If you have delivered results (especially positive financial results) in the past and can point to a well planned strategy to grow and improve the business into the future then this will support a good business valuation.

So when you go on holiday and start to plan the next half of the year, think about these trends and whether you should adjust your business plan to accommodate them.

Contact us now if you want to find out how your past results translate into business value and what the impact of your business plan is on your business valuation.  We provide free phone consultations to understand exactly what you need.