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Value Adding News - November / December 2008

Welcome to Maxell Consulting's newsletter - Value Adding News.

The newsletter is designed to help businesses increase their value , make their business more attractive or have greater confidence about the decisions they are making about the future of their business.

In this month's Issue

How does risk impact the value of your business?

Risk has a big impact on the value of a business as it effects the fears of a potential buyer - "will this business continue to do well or improve when I am running it?"  So what is risk, how does it affect the value of a business and what can you do about it?

What is risk?
Put simply risk is the probability that a certain event will happen.  In business terms, risk often refers to the uncertainty of future cash flows.  If there is some uncertainty about whether sales of a product or service will continue to grow, or that profits will be negatively impacted by a falling exchange rate, then this represents a risk that cash flow in the future will be lower than it is now. 

Sometimes risk may result from external factors - such as a general industry downturn or new regulation (such as emissions trading and carbon taxes).  In other cases risk may result from internal issues such as an over-reliance on the existing owner or a lack of key documentation on how the business works.

Many companies have recently felt the wrath of uncertainty - ABC Learning, Allco Finance and some smaller businesses exposed to the automotive sector.

How does risk impact your business?
As the level of uncertainty about a business' future cash flows increases, the potential value of your business decreases.  A buyer is simply saying "I am not sure your profits will continue at this level in the future, so therefore it is not worth as much as you think".  This is often a source of heated discussion between buyers and sellers - but one rule must be remembered:  it is up to the seller to convince the buyer of the certainty of future cash flows.  After all - the buyer has the money!

What can you do about risk?

Be Prepared!

You need to assess the future risk of your cash flows before you put your business up for sale.   Will you achieve revenue growth greater than inflation over the next three years?   Can you show consistent growth in net profits, or can you show how a new owner will generate consistent net profits in the future?   What external events will impact the cash flow of your business and how well prepared are you for these events?

Being able to answer these questions convincingly will give the buyer a greater level of confidence about the future of your business.  An increased level of buyer confidence will translate into a higher premium for your business. 

Are you ready?
So how prepared are you for your exit strategy?  Do your financial statements really tell a buyer that your business is worth more than the reported cash flows? 

If you're prepared, most businesses can demonstrate some level of opportunity for the future, but it is how well that case is put forward that will determine the price you get for your business.  After all, the price you get for a business will depend on how much someone is willing to pay, given the information you give them.  So just how good is that information?

If you want to find out what information you should present to a potential buyer and how it should be prepared, contact Maxell Consulting for a free consultation.

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How to Double the Price of Your Business

Cutting costs can also double the value of your business - under some circumstances.  This month we look at a typical professional services business with a high degree of fixed costs built into its business model.

Our example business has:
  • Annual revenue of around $810,000. 
  • Fixed expenses of $450,000 
  • Gross profit margin of 85%
  • Adjusted EBIT multiple (before tax) of 2.1 
This values the business at approximately $500,000.   

By how much does overheads have to change to go from a sale price of $500,000 to $1M or more? 

  • In this case, overheads must be reduced by over 50% to justify a sale price of $1M. 
  • Why?  Because the increased profits required to justify a higher business valuation must come from cost savings, not any increases in revenue.
  • This example highlights how hard it is to impact the value of a business through just cost reductions alone.  Cost reductions of this size may also affect your capacity to service your customers effectively.  And that is bad news for the value of your business.
Be careful when trying to preserve the value of your business by cutting costs.  You may not get the real impact you're after and it may hurt you in the long run. 

What would you need to do to double the price of your business?   Sign up for a free assessment to gain some ideas on how this could be achieved.

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Companies In The News

The latest corporate activity and what small business can learn.

  • Now is the time to buy a business:  Recently the Australian Financial Review reported that a major US private equity investment fund manager (Steve Schwarzman from Blackstone Group) told the North American Venture Capital Summit last month that it was a "...wonderful, wonderful time to be an investor" and the current climate presented "...an opportunity of enormous proportions".

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Latest Economic News

The economic news that may impact your business value.
  • We now have a much more alarming picture of world events, with all economic commentators indicating Australia will suffer from an economic downturn.  Most companies are reporting a drop in revenue and profits, which will ultimately lead to a lower value for the business.
  • With bank interest rates for business remaining at a higher level than consumer rates and many businesses now having difficulty accessing debt finance, the key to preserving value will be to maintain cash flow.  Ensuring businesses have minimal working capital demans and focus on reducing debt will be critical in preserving cash flow and business value.
  • Not all industries will experience a reduction in revenue, as other external factors can drive increased demand.  These industries will include:
  • Water & Energy conservation technology and service providers.
  • Training and education providers for key industries needing increased employee productivity.
  • Health and pharmaceuticals industry - an ageing and obese population must still be looked after.

Quote of the Month

    • Out of debt, out of danger. (Proverb)

Value Adding Ideas

  • Identify the customers that contribute the least to your profit (measured by customer contribution to profit) and devise a plan to either gently move them on to other suppliers or turn them into profit generators.  Alternatively identify your worst performing products or services and devise a plan to either get rid of them or make them profitable.

Business Buying and Selling Trends - December 2008

  • Advertised businesses for sale during December plummetted to less than 25% of October 2008 levels.
  • The holiday period and the recent economic downturn has meant many businesses have taken a "watch and see" approach before deciding what they do with the future of their business.
  • Although it makes it harder to find good businesses for sale, buyers should not be discouraged in looking for great value opportunities.  If you have finance and the skills to manage a business during a downturn, acquisitions will never be cheaper.  But it will take planning and care to identify the good buys from the ones that should be left alone.
Contact Maxell Consulting to discuss more detailed information on the latest business trends and what they might mean for your business.

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Next Month's Newsletter

  • Preserving cash flow and value. 
  • How gross profit can give a massive boost to the value of your business.
If there is something you would like to find out about, let us know by sending us an email or by going to our Contact Us page and filling out the enquiry form.  We want to provide you with the information and help that you need.  We are only too happy to find out about what you want.

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