At a time of the year when business owners are returning to work, many have given thought to the future and asking the question “should I try to exit or should I keep pushing on”?
There are typically three styles of questions that jump into the business owners mind at this point:
What is my business worth?
Can I sell my business?
Who would buy my business?
All three are connected, but we will focus on the second question in this blog post and deal with the others later.
There is a school of thought that any business can sell – it depends on the price. And there are many examples where businesses have sold for rock-bottom prices. Even on the ASX – 40% of Tiger Airways sold for $1 after Virgin Australia Ltd initially paid $35m for a 60% stake.
So can you sell your business?
In our experience a business can be sold if it meets three criteria:
The owner can transfer legal title to the assets – whether tangible or intangible.
The assets will infer a commercial benefit to some buyer.
Buyers exist at the price desired.
The first criteria tend to be self-satisfied, as attempting to transfer assets without title has legal consequences. However this question often arises when selling intangible assets such as contractual rights and IP assets. It is also important for licensees and franchisees to consider what they can actually sell.
The other aspect is that it is able to be transferred. Some IP may not be able to be transferred as it is too reliant on the existing owner. In other cases there may be regulation that prevents transfer of assets, such as customer contracts that have certain license or regulatory requirements.
The second criteria also tend to be self-satisfied – buyers want an asset for a reason, so they are not likely to pursue something that has no benefit. On the assumption that business owners and buyers make rational decisions, it would be expected that if you are prepared to pay for something then it is going to deliver some increased value. In the case of art, the buyer may place some perceived value in the enjoyment of the art rather than the expectation that the art may appreciate in value. Many purchasers of vintage cars are not banking on any appreciation of value, but the benefit of driving a relic of the past (or a myriad of other weird but valid reasons).
In the case of a business, we expect the assets will provide a commercial benefit, in terms of an immediate cash flow or the ability to increase existing cash flow. Even if you are buying a brand, you expect that brand to deliver some improved cash flow result. In some cases, you may be buying a competitor or brand to remove it from the market – in which case you are expecting to increase revenue as a result.
It is typically the third criteria that trips up the owner of a business – there may be no buyers at the price the owner wants. In some cases there may be no buyers at any price. In this case the contingent liabilities may be so great that ownership of the asset is not worth it even if it is given away.
I am reminded of a chess coaching business that had arrangements with primary schools to coach children in chess, and help generate further interest in chess competition. I was convinced the value of the business would be nil on the basis that there would be no buyers. As it turns out the owner had a choice of three buyers and negotiated a deal. The business was worth something to a small circle of buyers.
Another online media business struggled to sell recently because there was a lack of buyers at the price initially expected. Once the price was dropped (by almost 30%), there were multiple buyers.
And yet another business we have helped in a very niche sector (albeit national in scale) sold for $2.6m.
Each of these examples had different issues that impacted the sale-ability of the business. These issues ranged from the extent of expected cash flow in the buyers hands to number of potential buyers that were interested in the business concerned.
Regional areas often struggle selling local businesses, where there is a very limited number of buyers. Even at low prices it can take more than two years to sell some local businesses, and even then prices are often discounted to asset value.
We have developed a quick and effective audit to determine the likelihood of a business selling. We can complete it over the phone or via email and it gives the business owner some idea of what the key risks that a buyer is likely to consider and whether the business is likely to sell for something other than asset value.
We will delve into more detail about linking the price to buyer fears in our next blog post.