Now is a good time to sell, for business owners seeking a change; there are plenty of buyers at strong prices. By MIKE PRESTON
Small and medium business are changing hands at an unprecedented rate in a boom being driven by an alignment of factors: a strong economy, changes to superannuation law, owners reaching retirement, executives wanting to be their own boss, and the rise of private equity.
If you want to sell your business, now is the time.
Prices are strong, between five and seven times EBIT for small businesses with annual turnover of about $15 million; multiples are soaring even higher for larger businesses, accountants say.
Demand is strongest for businesses plugged into the “engine room” economies of Queensland and Western Australia, particularly in the mining services, retail and fast moving consumer goods sectors, and labour hire and recruitment, insurance broking and financial planning businesses are also attracting top prices.
“Anything in food or connected to the mining boom is very active,” says Phil Walker, executive director of corporate finance at KPMG. “Queensland in particular is seeing very strong SME sales in these areas, although demand across the board is very buoyant.”
Even at the smaller end of the market prices are strong, with businesses with turnover of $1-2 million that can provide an owner/operator with a good income in high demand.
Cashed-up private equity firms searching for deals in a crowded market are looking at mid to large SMEs. Walker says that a year ago he was getting about one call a month from potential buyers. “Now they’re coming in every couple of weeks.”
Hayes Knight Adelaide partner Grant Miles says businesses turning over between $30 and $100 million a year have been the main targets of middle market private equity firms in the past 18 months; now the focus is widening to include those turning over $5 million.
“We’ve traditionally seen multiples in the three to four range for businesses turning over $5-10 million, but over the past 18 months we’ve started seeing them as high as the seven times range,” Miles says.
Demographics are also playing a role, with young baby boomers now in their late forties looking to abandon corporate life to run their own business, especially at the smaller end the market. “These people are cash buyers, says Greg Hayes, a senior partner of Hayes Knight. “It’s not a matter of if they buy, but what they buy.”
Changing demographics and the Federal Government’s changes to superannuation have also increased the number of SMEs for sale.
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Older baby boomers are heading for retirement and for many that means selling the business. “Baby boomers are looking to exit earlier and in increasing numbers,” says KPMG’s Walker. “We’ve seen them enter the market over the past five years, but numbers have really picked up over the past 18 months.”
The June 30 cut-off for making a post-tax contribution of up to $1 million to super is driving some small business sales, according to Paul de Rome, a director of business broker Jamieson.
“There is a noticeable inducement for people to sell before June 30 at the bottom end of the SME market. But it will only drive people who are close enough that they want to retire; it’s the icing on the cake.”
Take advantage of the sellers’ market
Getting the best price for your business requires careful thought and preparation. De Rome says businesses turning over $1-2 million should establish a strong income flow, to attract prospective buyers looking to work in the business. “We are seeing a lot of people wanting to buy themselves a job.”
Buyers at this level are often looking for simplicity as much as profitability, says Wayne Marlow, a business broker with Blount Osborne Walsh. “Businesses that are complicated to run or rely heavily on technical knowledge, such as engineering companies, are harder to sell, even if they generate higher returns.”
For larger SMEs, however, an increasingly important price determinant is whether the business is in a sector that has attracted interest from private equity.
William Buck partner Phil Bradley says some SMEs are selling for double what they would have obtained one or two years ago. “It’s a phenomenal pickup in value if you can make that step up, even if it involves an initial investment to get into the $10 million turnover bracket where private equity kicks in.”
Strategically placed SMEs in fragmented markets are getting particularly strong prices, as private equity firms seek to consolidate smaller businesses into a single entity (called a “roll-up”) and trade buyers seek expansion opportunities.
“My gut feel is that we’re going to have an SME position where 20% of Australian business will be rolled up by private equity in five years,” he says.
Strong, stable management can also attract cashed-up buyers. Brian Ball, joint managing director of Advent Private Capital, says: “Middle market equity will often invest in a business and work with existing management to find a way to do things better.”
Good management is particularly important for SMEs, he says, where the departure of a long-time owner can leave a big hole in the business.
Ball adds that as the private equity mania rolls on owners should remember the “fundamental” principle of value: a quality business will always attract a good price.
Go to the Growth Resources: Exit for a checklist on how to prepare your business for sale and what a potential buyer will be looking for. Subs:link this to Exit.)