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Would You Buy Your Own Business?

As business brokers we are talking to business owners everyday and it’s amazing how few know the value of their business or that there may well be a queue of buyers if their business came to the market. Surprisingly (to many it seems), demand for businesses is very strong. This demand comes from several independent sources; migrants looking to meet immigration requirements, returning NZ ex-pats, companies growing through acquisition, individuals looking at leaving their jobs and owning a business, among others. Because businesses are most often valued on the basis of a ROI (return on investment) the actual multiples of earnings have not changed and in some cases have actually increased due to a shortage of available businesses.

Determining the likely selling price for your business, and what drives this value is very important. With the right information you can make an informed decision about whether you should continue to own this business, buy another business, retire, or do something entirely different. Value drivers are varied, but the following are the most influential; barriers to entry, risk profile, sunrise or sunset industries, customer base, location, likely buyer demand, ease of operation, how long the business has been operating and comparable market evidence. All of these factors will determine what multiple of earnings a buyer might pay. If you are considering selling your business, it is also important to consider whether you would buy the business yourself. Are your books in order? Are your premises clean and tidy and well organized? Is your stock in good order? There are many aspects to preparing your business for sale, but the important point to note is that you should probably be running your business like this anyway.

Thought Experiment 
For anyone that has had even a passing interest in Quantum Mechanics you will be aware of Erwin Schrödinger’s famous thought experiment known as “Schrödinger’s Cat” (if not you could always Google it!). The following is rather more simplistic and certainly not as difficult to comprehend (also no cats die in my experiment – no matter what the outcome). When we talk to business owners and they tell us that they have no interest in selling their business, it is often because they are not aware of the current demand or the value of their business. So what about if we asked the question in a different way? What about if we conduct a simple thought experiment? Well here it is; You own a business. It manufactures widgets. You work 50 hours a week managing the operation and take home about $150,000 per annum before tax. A business broker comes along and asks you if you would consider selling. You say no thanks, I’d rather carry on doing what I’m doing. The broker didn’t get the opportunity to appraise the value of the business, but let’s say it’s worth around $600,000. Now…what you are really saying by saying “no thanks” is “I would buy this exact business myself for $600,000 today”. Because that’s what would be happening. By turning down $600,000 you are effectively buying the business back at that price (let’s say we physically put the $600,000 in your hand – you are handing it back and buying back the business). So give that some thought. Would you really buy back your exact business if you had $600k in your hand? If you own a business, you should definitely establish your “buy-back” figure so you can ask this important question.

This article was written by Aaron Toresen, 
Managing Director of LINK Business Broking Ltd  
Level 1, 401 Great South Road, Ellerslie, Auckland. 
Phone (09) 579 9226, Fax (09) 525 1457 or email aaront@linkbusiness.co.nz