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Value Adding News - October 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.

Each month we provide information you can use to add value to your business.  In addition to short articles all about business value, selling a business or making an acquisition, we will provide commentrary on the latest trends and news items and how this information relates to the value of small 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.

In this month's Issue

Should I Sell My Business During and Economic Slowdown?

How to Double the Price of My Business

Lessons from the Big Boys & Latest Business Trends

Latest Quotes & Value Adding Ideas

Business Buying & Selling Trends

Should I Sell During an Economic Slowdown?

In most cases an economic slowdown usually means businesses experience reduced revenue. If this fall in sales flows through to a drop in profits, then it may reduce the price a buyer offers for your business. So is now the time to sell up? Or should a business owner wait for sales to recover before considering selling?

First of all there is no single correct answer to this question. But there are some key factors to take into account before making the decision:  
    • Are there personal circumstances that might dictate the timing of a business sale?
      This can include pending retirement, your health, family considerations or perhaps you have reached the bottom of your “motivational well” and its time for a change?   Only you know the answers to these questions, and they will naturally have an impact on the price you’re willing to accept.   But make sure you give them the correct priority when making any decision.
    • Can you show sales or profit performance that go against any downward trends?
      If you can show the positive reasons why your sales or profits “buck the trend” then it can work in your favour and add to the premium the business can demand.
    • Can a buyer increase profits from strategic investment in the business?
      Remember a buyer looks for a business that they can have an impact on.   If you can demonstrate that the buyer can implement improvements that you can’t, it makes the business more attractive.
    • Strategic buyers will be out looking during a period of economic uncertainty or change.
      The current climate will bring out buyers looking for good investments.   Whilst they will be looking for bargains, a well presented business will also attract serious bids since the buyer will be aware that the sales should increase as the economy improves. 
Ultimately the decision to sell the business now or later will depend on your circumstances and what a buyer would offer. This can only be assessed when someone makes an offer, but in many cases an economic slowdown doesn’t necessarily mean you should put your sale plans on hold.   It just means you need to be prepared. 

If you do choose to sell, the most important thing is to present your business in the best possible manner.   If you want to know more information abour what is required to present your business effectively to potential buyers, contact Maxell Consulting for a free consultation.

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How to Double the Price of Your Business

You don’t always need to double your revenue to double the value of your business.   It all depends on how your profits (or more importantly cash flow) changes as your revenue increases.   This month we find that a 23% increase in revenue can double the value of a business from $0.5M to $1.0M. 

Our example business has:

  • Annual revenue of around $1.5M 
  • Fixed expenses of $500,000 
  • Gross profit margin of 43%
  • Adjusted EBIT multiple (before tax) of 3.4 
This values the business at approximately $500,000.   

Some business owners may be happy with this, unless you have some debt that you have used to fund the business in the past.   However many business owners may want more than this to fund retirement or their next venture.

What does it take to go from a sale price of $500,000 to $1M or more?   The best way to do this analysis is to take your current situation and increase revenue till you reach the desired price you want.

  • In this case, revenue only needs to increase by 23% to justify a sale price of $1M. 
  • Of course other factors also need to support this case – you need to show that the cash flows are sustainable over the longer term.   This can be done using a well documented Sale Plan. 
  • Is a 20% growth rate realistic in the current climate?   A survey of private companies published in September 2008 by KPMG has revealed that half of the respondents are expecting growth between 6% and 20%.   That was prior to the current financial crisis, but many industries may still be able to achieve this growth if they plan ahead.
Many small businesses that employ 2-4 full time people will have a similar cost structure, although not identical.   How different is your business from this one?   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.
  • How is MYOB defending its hostile takeover by a private equity firm?  In a recent press release its Chairman Simon McKeon said "MYOB has a very strong balance sheet, a high rate of recurring revenue and strong underlying cash flow.  These factors make MYOB an attractive investment, especially in the current environment...MYOB's trading performance and outlook remain strong."
  • MYOB is demonstrating how attractive it is have repeat customers, steady cash flow and a low debt levels.  Each of these factors have a large contribution to cash flow, and it demonstrates the importance of a good cash flow in generating value in the business.
  • Toll Holdings also see the current climate as an opportunity for rationalisation of the transport industry.  Toll's managing director Paul Little said "...they're are a mixture of distressed opportunities and strategic opportunities."  The message is clear - be prepared to sell your business even in current times as people are out there looking for opportunities.
  • A more specific lesson is directed at all transport-related businesses - get your house in order and you could find an attractive offer in an industry where rationalisation will continue to happen.

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Latest Economic News

The economic news that may impact your business value.
  •  RBA says that Australia is likely to be able to avoid the recession that is now gripping the US, Europe and other countries.  Why? 
  • 1.  Our trading is heavily influenced by Asian countries, especially China.
  • 2. We avoided the 2001 recession - we should be able to repeat this again (bold statement)!
  • The impact of a recession will vary for different businesses - the key is to demonstrate your business can at least maintain revenue in its core markets.  This gives a buyer confidence that when the recession ends, business will improve even further.  This can boost the cash flow projections used to justify the business value you deserve.
  • The low Aussie dollar will help boost revenue for exporters, but don't bank on a sustained low dollar in your cash flow projections.  Be conservative so that a buyer can see there is more room to generate cash if the dollar does stay low.  It helps give credibility to cash flows that you use to justify the value you want. 

Quote of the Month

  • The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow – Rupert Murdoch

Value Adding Ideas

  • Ask a few close friends or associates to list the top 3 strengths that they associate with your business.   Write down a one paragraph description of each and ask yourself “would a buyer who doesn’t know the business be attracted by the three points you have described?”   How can you improve these strengths to increase the attractiveness of your business?

Business Buying and Selling Trends - October 2008

  • Reports of business sales for the March quarter of 2008 suggested that the number of businesses being sold had increased by 14%, but average values achieved had dropped by 10% compared to the previous quarter.
  • The number of businesses for sale advertised in the Tuesday's Australian Financial Review and Saturday's The Age for the month of October up until the 14th, totaled nearly 1,000 advertisements.  Less than 5% of these were manufacturing businesses.
  • Cafes and restaurants are likely to see a fall in revenue of between 1 - 2% as rising costs and uncertain job prospects result in people spending less where they can.
  • But it is not all doom and gloom with growth in the road transport sector predicted to exceed 3% in the next twelve months, with lots of opportunities for smaller road transport businesses to rationalise.
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

  • Risk and your business value
  • What happens to value when you decrease your overheads?

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