Tool Box
Issue No. 26 - December/January 2005/06
How it will all end is the essence of good planning
by John Doughty
We look at factors that influence business value they must be considered in light of succession planning and its likely impact on the small to medium enterprise community.
A recent survey conducted by CPA Australia again highlighted the issues confronting local SME operators.
It seems owners are not optimistic about selling and they are not prepared to take the necessary steps to maximise the sale price of their business.
This is clearly a critical issue as the baby boomer bubble of SME owners rolls through the system and we will witness the largest transfer of business wealth in SME history.
Traditional supply-demand theory says that as supply increases, prices will be driven downwards. This theory will probably not hold true when we look at the SME sector.
The much greater probability is that we will see a dramatic polarisation in price in small businesses for sale. The outcome of this will be twofold.
- Quality businesses will command premium prices
- Low-quality ones will be highly price-sensitive and in many cases unsaleable.
This means forward planning for succession is a critical issue for SME owners who want to exit their business this decade. This planning, with an adequate time frame, allows business owners the opportunity to actively enhance the value of their business.
The key question, then, is what do you need to focus on to enhance business value?
In the main there are four key areas:
- Growth
- Capacity
- Profitability
- Risk Management
Buyers will generally pay a premium for a built-in growth level.
Growth, if well managed, will produce increased profits.
So, a potential buyer knows that the revenue stream they are purchasing with the business comes with a growth increment.
Not only does this growth factor offer future profit increments, it also insulates the business...
