KEY POINTS:
Many enterprising New Zealanders toil away at their small businesses, working crazy hours, weekends and holidays, but always with the thought at the back of their minds that they will sell it for millions.
Unfortunately the forecast by the MGI 2007 New Zealand Family and Private Business Survey
2007, prepared by RMIT University, is that 83 per cent of business owners - many of them babyboomers, will be looking to sell up in the next nine years. This means there will be rather a glut of small businesses up for sale soon and only those who have their companies in investment-ready state will emerge with the triumphant "gone to the Bahamas" stories.
Grant Raynor, a principal at MGI Wilson Eliot, the boutique business transition specialists, works on both sides of this delicate matchmaking business.
"Value is a combination of risks, potential and the people," says Raynor.
"Is it a business model that works? Is your product a good product?"
When valuing a company, Raynor looks at the company's earnings, future maintainable profits, and then times it by a multiple. For most Small and Mediumsized Enterprises (SMEs) the multiple tends to range between one and five. If it has strong robust systems, its multiple stays high, says Raynor. The bigger the company, the bigger the multiple TradeMe went for a 16 times multiple.
Key things to make your business attractive and "investor ready":
Goodwill
" You have to show that the business is capable of operating on auto-pilot without you. That the goodwill is with the business, not with the owner, otherwise buyers will run a mile. If the buyer is someone who knows nothing about the business, they will often link their offer to a condition that the owner
stay involved for the first couple of years.
Improve profitability
" Make practical improvements before a trade sale. One company Raynor is advising has a seasonal business which could be off-putting so he is working with the owner to see if the business can at least break even during the off season by diversifying. If successful they may raise their multiple.
IP
" Is the intellectual property (IP) protected? Where is the product in its life cycle? How well run are the processing and systems? Don't try and DIY it
" "A lot of value is created in the transaction process," says Raynor.
It 's all about "holding off the attack on value" he says, as buyers and their lawyers nitpick at certain concerns.
Don't rush things
" If you rush you'll lose money. Raynor is selling a business for a client with health problems. "My client will sacrifice $1 or $2 million because he wants to sell quickly," he says.
Likely buyers
" If it's a trade sale it will often be an industry buyer or an investor, looking for a company, any company, to buy. Sometimes the most obvious person to sell to, is an ambitious manager in your business, rather than a stranger. But you have to deal with them professionally and not keep them hanging on if you haven't decided your exact exit date.
You may not only lose a good potential buyer but also one of your best staff.
Most owners have an emotional investment and care who they sell to so they can make sure staff are looked after, says Andy Hamilton, chief executive of business growth centre, The Icehouse.
And a tip - beware of naming your company after yourself. "It's not called the Stephen Tindall Warehouse, it's called The Warehouse. Separation is important," says Hamilton.
