House prices.
The nations favourite dinner party topic, second only to our national religion, the NHS.
Ask anybody how much their home is worth and I guarantee that they will overvalue it by at least 10%, and quite often by around 20%, due simply to wishful thinking rather than ignorance. The ignorant guests will be out in the region of 50% or more, but you wouldn’t be mixing with these sorts, would you?
Let’s move swiftly on to business valuations.
Discussing the value of your own business in polite company is taboo, but other people’s is fair game.
Business owners, and by the word “business” I mean a proper business, not simply that you are working for yourself, but let’s say an enterprise turning over £1m or more, employing a few people and generating profits in the region of £200,000.
Ask the directors, who will be the majority or sole shareholder, what their business will fetch on the open market and they will respond with a figure well in excess of £1m and very likely closer to £2.5m. Not higher, because that would be greedy, wouldn’t it?
Nope, not greedy, just the realms of “cloud cuckoo land”.
That got your attention, didn’t it!
Unlike house owners, business owners, as a general rule, suffer not just from wishful thinking but a hefty dose of ignorance to boot, making for a toxic mix.
Okay, a mistake is a mistake but what does it matter so much?
Simple, my dear reader.
When the time comes to sell, typically upon retirement, their dreams of walking away with a couple of million quid are realised as exactly that – dreams.
In our example above, they might be entertaining a headline figure of £500k during their initial call to a business broker, but after a potential buyer, assuming they can find a serious one, has crawled over the books and operational details they’ll be lucky to see the think end of £325k.
Worse still, although there are no official figures, it is widely believed that 80%+ of these kinds of business fail to sell at all, which is quite a sobering thought, or maybe a depressing one.
But if they are lucky enough to achieve a sale it can take several years for this to happen, but I’m sure that is something you DID know already.
So, can anything be done about this?
Absolutely, but only if one acts early enough and is prepared for some hard slog over 2 or 3 years, maybe a bit more, coupled with a change of mindset.
The first thing to understand is that the headlines in the financial press that hail takeovers, especially those at strong multiples of profits, are in a totally different realm to yours.
Not only are they true corporate beasts but the reasons for the deal happening are almost certainly not applicable to your size of business. It’s a totally different ecosystem to the one you will be experiencing when you sell.
I will direct you later in this article a great article by Clinton Lee, which explains it in more detail.
Secondly, what you need is a full and frank root and branch assessment of your business through independent and experienced eyes, such as an accountant with the relevant experience or a business consultant who understands what buyers look for in a business.
In my experience, these businesses are stuck in their comfort zone, making steady money and coasting along, which is fine if they have no intention of selling. Actually, it is only fine from that single aspect but in truth coasting along and feeling secure is not a great idea in the business world and never more so than today as the pace of change quickens every day along with regulatory and political risk, but that is an entirely different conversation altogether.
“We’ve been around for 34 years and always done things this way” . Really?
I’ll wager that you have definitely made changes along the way but will concede that change has probably been pedestrian at best and certainly none too radical.
Back to what can be done.
Let’s consider just a few of things that can impede the sale of your business, and certainly will prevent it achieving what you would LIKE it to achieve.
Never forget that your business is an investment. It is likely to have been built up over your working lifetime and after your house is very possibly your largest single investment
If only MY investments were worth what I would LIKE them to be worth I would not be sitting here bashing away at a keyboard, although in truth I do actually enjoy business consultancy.
Let’s start with a few simple questions about the profit and loss account.
How many of the expenses are directly related to the business?
Does it reflect you taking a salary commensurate with your position?
Is it dragged down by legacy overheads?
Are your margins in line with the market?
Why is there no growth in sales?
Wages seem to be quite low.
I could go on and on and on but this is not the place to elaborate.
Moving on to the balance sheet, just scratching the surface of course.
Fixed assets are negligible for your sort of business
What’s that loan for?
Why don’t you collect your debts?
Is stock accurate?
And we haven’t even looked at the operation itself, such as staff, sales and marketing, products, customer profile, supply security and so on.
Not forgetting my favourite question to business owners : What would happen to your business if you went under a bus on the way home from this meeting?
Somewhat macabre I know, but maybe this one will force a smile: What would happen to your business if the staff lottery syndicate became tomorrow’s headline story?
As a parting thought, have you even considered WHO might want to buy your business?
Will it be a genuine trade buyer or a charlatan posing as “private equity” whose sole aim is to swindle you out your “life’s savings”.
Email me or message me on LinkedIn for a no-obligation chat and start realising your retirement dream today, because selling your business is a journey not a destination.
You only sell once, get it right FIRST time!