The number of private businesses for sale reached a record level in the September quarter, according to a new report, which highlights how owner-operators can affect business values.
The findings come from the BizExchange Index, which provides a guide to business values based on the earnings multiple for industries and business size. The index is published quarterly.
It is based on data sourced not only from businesses for sale advertisements, but from advisors actively involved in buying and selling businesses.
According to the index, the September quarter saw an 18% increase in the volume of businesses for sale, with the number of private businesses for sale reaching a record level of 29,060 for the quarter.
This coincided with an increase in values at the smaller end, where earnings before interest and taxes (EBIT) ratios between one and two increased from 35% to 48% of listings.
“Despite these encouraging signs, market conditions generally remained soft with increasing business failures, consumer spending flat and unemployment likely to increase,” the index said.
“Looking ahead, there is a potential positive for private business values.”
“This could result from a new Federal Government initiative to attract business migrants who are prepared to invest $5 million in Australian businesses.”
One of the factors affecting business values, according to the index, is the reliance of the business on the owner-operator.
“If this business is reliant on the owner-operator, then it limits the potential owners to those that possess the key skills required by the owner-operator,” it said.
“They will bring with them a perception of the value difference between their skills and those of the current owner-operator.”
“As such, this value will be highly subjective and the departing owner-operator is stuck between a rock and a hard place.”
“He needs to show that he has a business that is well run with a good reputation, at the same time as presenting a business that has the potential to be run better and go further with the new owner.”
If the business is not reliant on the owner-operator, then it limits the value a new owner may be able to bring to the business, and therefore the perceived increase in earnings, the index said.
“However, it also broadens the number of potential owners, and the perceived reliability of the business,” it said.
“As a general rule of thumb, the less a business is reliant on the owner-operator, the higher the value of the earnings multiple.”