Back from the dead

Small business sales are on the up and directors with an eye on an exit would do well to act on this opportunity before it’s too late, writes Alexandra Cain. 

In the aftermath of the global financial crisis (GFC) business owners were practically giving away their companies, so tough was the market for selling businesses. Those who did achieve a sale did so at a deep discount to the price they may have achieved prior to the crisis.

But all that has changed. With the dive in the dollar and improving economic conditions, it is now a seller’s market – as long as it’s a quality asset that is on the block. Overseas buyers are also clamouring for cheap Australian assets, which adds fervour to the market.

Simon James, a partner with accounting practice HLB Mann Judd, says the market for small business sales is extremely active. “There’s lots of interest from the sell-side and buy-side. If you’re ready to sell, [making a sale] is relatively straightforward. If you’re not, it’s harder. It’s about being able to articulate value and being ready for an acquirer to do due diligence,” James says.

Recent research bears out anecdotal evidence of the strong market for business sales. According to EY’s October 2014 Global capital confidence barometer, which surveyed 157 senior executives in Australia, 74 per cent of the respondents say they expect the mergers and acquisitions market to improve this year (up from 52 per cent in the previous survey released in early 2014). In addition, 66 per cent indicated they would look to make an acquisition this year, up from 32 per cent in the previous survey.

EY partner Gary Nicholson says: “We’ve seen a significant increase in deal activity in the last year and deals are more likely to close.” He says there has been demand from corporate and private equity buyers. The initial public offering (IPO) market is also an option for businesses at the larger end of the SME market.

According to James, there’s particular demand from overseas buyers for small Australian businesses. “Australia is on sale at the moment. We’re seeing lots of interest from Asian investors buying with US dollars.”

Seller’s market

Tony Arena, who runs BCI Business Brokers, says from his perspective it’s a seller’s market. “There’s plenty of buyers chasing little stock. I can get between 10 and 100 inquiries for a business, depending on the sector it’s in and the characteristics of the business,” he says, citing a franchise business he recently listed for sale, for which he received more than 130 enquiries from buyers.

Arena says valuations are also improving after plummeting during the GFC. “Business valuations are a function of actual profit and a multiple of that profit. In the early years of the GFC multiples fell from a high base. They are still under their peak, but that was really a false reading.” His experience suggests valuations have almost recovered as a result of a dearth of supply and high demand for good quality assets.

EY’s Nicholson echoes this sentiment. “The valuation gap has closed significantly. We’re seeing a 10 per cent difference between sellers and buyers.”  This is down from a gap of around 20 per cent between the price being offered for a business and the price sellers wanted, coming off the back of the GFC.

Interestingly, he says there are fewer baby boomers wishing to sell out than might be expected, which is also contributing to a slim supply of businesses for sale. He says there are more 40-year-olds than 60-year-olds in the market on the sell-side, wishing to realise profits from a successful business they have built up. “They don’t want to be caught out when the tide turns. They want to make $1 million to $2 million and roll that over.”

Zoran Sarabaca, an associate with business brokers Xcllusive Business Sales agrees that the sell-side largely comprises of 40-year-olds.

“Two things happen with baby boomers. They might have already exited their business due to a rapidly changing world. Or they have the ability to pass the business onto family members so they don’t have to sell to retire,” says Sarabaca.

“There is a segment of the market that doesn’t have family to pass the business onto. But they will sell the business at the right time. I don’t think there will be a glut [of baby boomer businesses on the market] because they have been thinking about it for 10 years and a lot have been smart enough to already exit,” he argues.

Tax implications

When it comes time to sell, James says vendors need to understand clearly the taxation implications of selling, given many small business sales are capital-gains tax free if the asset has been held continuously for 15 years and the business owner is older than 55 years of age.

“But if a business has been held through a trust, or if its shares have been bought or sold, there might be tax consequences,” he says. Selling a business is also more complex if there are minority shareholders holding out for a higher price. James says it is in the interests of majority shareholders to line up minority shareholders to present the business as one package.

In terms of active areas of the market, Craig Bryan, a Deloitte Private partner, says there are hot spots across every industry sector.

“IPOs in the healthcare sector are driving consolidation further downstream. Large listed businesses are also looking for quality assets,” he says.

Bryan says there is also demand for financial services businesses and health-related professional services outfits. There’s also demand for assets in the food production and fast moving consumer goods spaces. It is understood that there is real demand for accounting and financial planning practices and anything in aged care.

Overall, it is a hot market for business sales. Directors with an eye on an exit would do well to act on this opportunity now because no-one knows what economic events may by lurking in the future to cause this window to close

How to get a great price for your business

• Businesses that are already invested in online opportunities achieve a higher multiple than those that have not made the digital transition.
• Business owners need to have extracted themselves from the day-to-day running of the business to demonstrate to prospective buyers that an enterprise is not too reliant on them.
• The systems and processes used to run the business need to be documented to make it easier for the new owner to take control.
• Good buyers want to see there’s an established management system.
• Good buyers want to see the potential for the business to increase its market share or diversify revenue streams.