If you are looking to sell your business in any type of industry, ready carefully because this concerns you
There are two changes within the economy that are starting to impact the value of retail businesses, and we are already seeing a decline in the demand for the “buy yourself a job” type of business in the last 12 months.
The first change is the unemployment rates.
Since January 2017 we have seen unemployment drop by 10% down to just below 5.5% according to the Australian bureau of statistics. What this means for business sales is simple, more people have jobs, less people need to buy them.
The second change is the lending environment.
With APRA tightening their lending guidelines earlier this year, some buyers have seen up to a 40% drop in their assessment of borrowing capacity, when they are using their home equity as security.
Not enough money to buy the business = NO business sale.
If you own a cash business, buyers cannot borrow against unverifiable profits any more, even if their home is being used as security. Your only buyer pool in these current lending conditions is someone who is a cash buyer, i.e, they don’t need to borrow to purchase the business. This makes it much harder to create a competitive buying environment, with a smaller pool of buyers to work with.
So what can you do now if you own a retail business to ensure you still maximise the sale value of your business?
Firstly, don’t panic, this will most likely not be long term. The banks provided a lot of cheap and easy money in the last few years, and this is APRA’s way of evening out the pendulum. In the longer term, more favourable lending conditions will surely return, perhaps as early as early 2019. If you do run a cash business, it's better to realise now that you can't have your cake and eat it too!
Here are some tips for staying on top of your business, your mindset and your investment.
1. Transition out of the business. If you are and owner operator working full time, try and transition out of your business to be working part time at the very most, this is far more appealing for a buyer.
2. Focus on at least 1 key staff member. Invest in their professional and personal development, give them extra responsibilities, and build their emotional commitment to the business. The customers will start to recognise the staff member as the go to person, and your business is easier to promote as genuinely run “under management”
3. Remove the cash in your business. This goes without saying, quite frankly if you are still receiving non-disclosed revenue as a portion of your profit, you are kissing your equity goodbye in today's evolving market, let alone the current issues of borrowing.
4. Audit your fixed operating costs, and costs of sales. The beginning of the financial year is a great time to open the conversation with your suppliers, and look for discounts that can stack up over the next year and add to bottom line.
5. Look at more creative ways of selling the business. As an example, vendor finance can be an excellent method to ensure that the right buyer buys the business for the price that you want or higher. Speak to Vision Brokers about how to structure a deal that protects and incentives you the seller to look at this option seriously.
6. Never hold onto a business for too long. The real money is made when the sale is well timed. This can feel counterproductive, and is difficult for most to identify as this is when the business is at its peak. Most Owners make their decisions emotively, rather than commercially. Selling a business that is declining in sales, drastically reduces the perceived value of the business, and the final sale price.
7. Review your operating procedures. What efficiencies can be achieved by updating, simplifying or streamlining your procedures. In most cases more efficient systems improve profitability, scalability and decrease stress.
And remember - always stay stay positive. Small business is extremely rewarding when the changes you make work! And especially can be rewarding for you at the time of exit.