Think HBR

How to increase the value of your business before you sell

dreamstime l 24887914 Dollar sign
Michael Kinniard
Lambourne Partners
 
The goal of every business owner is to maximise the value of
their business so that they can achieve the highest possible price
on sale. Depending on the nature and size of your business the
method of valuation can vary.
 

Business
Type

Turnover
($m)

Valuation
Method

 Explanation
Micro < 1

Rule of
Thumb or
Capitalisation
of Future
Maintainable
Earnings (CFME)

• Large number of industry
participants
• The sale of these businesses
occur frequently
• The sale price is known to
the broader public
Small 1 - 10 CFME

• Applies to mature, profitable
businesses
  10 - 50

Discount Cash
Flow (DCF) or
CFME

• The business is more likely
to prepare reliable forecasts
Large 50 + DCF

• Forecasts are readily
available
• Shares are liquid and can
be publically traded
 
As can be seen from the above table businesses in the small to medium range are most commonly valued using the CFME method. This method of valuation applies a capitalisation multiple to the adjusted earnings of the business before interest and tax (EBIT).
When speaking with business owners there is a common misconception that their business is worth 3 times EBIT. While this might be true for some businesses, it is not uncommon for businesses operating in this market to achieve capitalisation multiples ranging between 1 to 5.
So what strategies can be applied by the business owners now to help maximise the capitalisation multiple and sale price?
 
Reliance on the owner
The roles and relationships which are typically taken on by the owners need to be transitioned to the employees so that they remain with the business when it is sold.
 
Guaranteed Income Stream
A guaranteed income stream will increase the value of the business, whether this is achieved through securing long term contracts with customers or restructuring your revenue so that it is of a recurring nature.
 
Quality and mix of Customers, Products and Suppliers
Reliance on a limited number of customers, products or suppliers can be a considerable risk for a purchaser to take on.
Business owners need to work on diversifying all these areas within their business.
 
Innovation
A business is more attractive to potential purchaser if the product or service they offer is unique and their brand stands out from their competition.
 
Business Systems and Procedures
Ensuring that your business systems and procedures are streamlined, cost effective and well documented will also improve value.
If you are planning on selling your business in the coming years it is important that you review the above areas and implement any possible changes now, and not at the time you sell your business.
 
For further information contact Michael Kinniard at Lambourne Partners on (02) 4969 6600, email michael.kinniard@lambourne.com.au or visit www.lambourne.com.au
Michael Kinniard Michael Kinniard
is an Associate Partner at Lambourne Partners, a Newcastle based firm with a history dating back more than 25 years.
Michael has over 15 years experience working with business owners to achieve their goals. Michael has Masters in Applied Taxation and is also a business valuation specialist.

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