Relaxing business growth targets erodes sales value: HLB Mann Judd Sydney

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Simon JamesAn increasing number of business owners are seeking to sell their business but many are finding the demands of potential acquirers more challenging than they anticipated, says Simon James, corporate advisory partner at HLB Mann Judd Sydney.

“We are starting to see the effects of the baby boomer generation reaching retirement age and deciding it’s time to sell their business, with a noticeable increase in businesses going ‘up for sale’ in the past 12 months.

“However, as a result, a ‘buyers market’ is beginning to develop, and those businesses that don’t have their house in order either have a lot of work ahead of them to get everything organised, or will need to accept a lower price than they had otherwise hoped for.

“One big issue we are seeing is that many baby boomer business owners have taken their foot off the gas.  They have decided they are going to sell in the next few years so as a result they are no longer focussed on growth, causing the value of the business to deteriorate.

“Some have been hanging on to the business for longer than they expected, in the hope the business value will rebound out of the doldrums caused by the global financial crisis.  They have now come to the realisation that this is as good as it’s going to get and they might as well sell up now.

“It can be tempting to start winding back effort before exiting the business but this can damage the business’s value and saleability by failing to demonstrate growth capabilities or by allowing competitors to gain market share.

“Most potential acquirers are looking for businesses in a strong position for future growth and profitability that they can take to the next level, not one that needs a lot of work and investment to bring up to speed,” Mr James said.

One key area that potential purchasers look at, and one that usually holds a good clue to any problems that may lie ahead, is the financial records and reports of the business for sale.

“We are seeing a number of issues around the quality of financial information from many small businesses that are looking to sell.

“While potential acquirers expect this to be a problem, it still causes frustration and could result in a purchaser choosing to invest their money elsewhere.

“They expect that the financial systems and structures of a business should correlate to its value.  For instance, if a house is on the market for $2 million then prospective buyers expect soft-close cabinet doors and an ensuite bathroom.  Likewise, if you spend over $5 million on a business you expect a robust financial and reporting structure.

“Business owners should make sure they have a complete record of all the organisation’s dealings, from customer and product profitability; corporate information such as assets, leases and debts; related party transactions; and stakeholder and shareholder records.

“All potential acquirers will undertake due diligence and being able to provide this information quickly and easily will not only help get the process moving quickly, but will help give the purchaser reassurance that the business is well-run and successful,” Mr James said.

HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.

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For more information please contact:

Simon James
Phone: 02 9020 4212