Many business owners currently considering selling their businesses have assumed that with the economy strengthening and credit becoming more available, banks will be more willing to lend to their potential buyers. However, they may be disappointed to find that many challenges to a good sale remain, according to PKF Chartered Accountants and Business Advisers.
Brett Plant, Partner at PKF, said based on recent business sales and attempted sales, it appeared banks were continuing to be very guarded about who they lend to and still prefer funding purchases of only the most ‘healthy, shiny’ businesses that demonstrate a minimal exposure to risk and very strong and secure growth prospects. Because of this, a significant number of transactions are failing to reach completion.
“Anecdotally, looking at businesses that are considered to be relatively ‘healthy’ and good prospects for sale, up to 50% of business transactions are failing to reach completion. However, this percentage would be even higher if we took into consideration all types of businesses, including those unsuitable for sale,” said Mr Plant.
Mr Plant said that of particular interest to banks and buyers when assessing a company’s risk is whether the company has a well balanced management team that is not dependant on one key person. “If too much corporate knowledge is tied to a single employee, that business will likely be deemed to be a high risk purchase,” he said.
He noted that a company’s revenue is also of high interest to banks and buyers. According to Mr Plant, if a company’s revenue is evenly distributed across a spread of customers rather than provided by a single or small number of customers, the business will appear to be lower risk.
Other key points of interest include whether revenue is generated primarily from one-off projects or in the form of ongoing retainer agreements and whether the company has distribution agreements in place that are subject to cancellation or renewal.
“Another obstacle for sellers is the likely purchase prices being achieved in recent times. In the past, when the economy was booming and business transactions were frequent, the majority of quality private businesses could expect to get 4-6 times the earnings before interest and tax (EBIT) value for their business. However, in the aftermath of the global economic downturn, this figure has dropped to 3-5 times the EBIT value,” he said.
A recent example of a business that achieved a successful transaction is facilities management company, FM Solutions. According to Mr Plant, FM Solutions had initially lined up a multi-national purchaser that ultimately withdrew its offer due to the global financial crisis.
However, he said that, “because FM Solutions was able to demonstrate both minimal exposure to risk, such as recurring revenue and a well balanced management team, and a strong growth history, another purchaser was secured in March this year.
“Businesses that are able to tangibly demonstrate their minimal exposure to risk along with growth prospects, will likely be in a far stronger position should they decide to sell,” he said.
According to Mr Plant, the key risk issues that are of interest to banks and buyers alike include:
- Does the company have a well balanced management team that isn’t dependant on one key person?
- If the company has distribution agreements in place, are these subject to cancellation or renewal?
- Is the majority of revenue provided by a single or small number of customers, or is revenue evenly distributed across a spread of customers?
- Is revenue generated primarily from one off projects or is revenue secure in the form of ongoing retainer agreements?
- Does the business have a strong growth history and the capacity to continue to grow?