5 Signs From A Business Valuation That It's Time To Buy (Or Sell!)

INTRODUCTION:

Whether you are buying or selling a business or were thinking of staying put, getting a business valuation by an experienced business valuer can provide many benefits in helping you make the right decisions and save you tens and in many cases hundreds of thousands of dollars.

Business valuers will analyse many parts of a business and identify strengths and weaknesses when performing business valuations. One of these of course is cash flow which is crucial to any business and its attractiveness.

If you have a business valuation done on your existing business, issues identified may help you decide whether to get them fixed prior to sale or to get out while you can.

In any case let's look at 5 key areas to look at whether you are thinking of buying or selling.

Figure 1: Groundhog day - if a business looks like it's going through the motions it could either represent an opportunity for the buyer or an indication it's time to leave.

1: Numbers Are On A Downward Spiral

If revenues are showing a declining trend as are profits after the relevant adjustments for one-off income and expenditure, further investigation will need to be done before deciding on a price. Is revenue declining due to:

• lost customers;
• finished contracts;
• competition;
• discounting;
• technology;
• lost (key) employees;
• cheaper/better alternatives to your product or service.

2: The Business Needs Capex

Does the business look tired? How up to date is its plant & equipment and does significant amounts of money need to be spent to get back in top shape so that it and its employees can function efficiently with less disruption due to breakdowns or with better time saving devices?

Figure 2: The Big Dipper. Does the plant & equipment of the business need significant upgrade to keep customers happy?

3: No Systems in Place

Does the business have good systems? If not, then by putting in your own you could identify significant ways of doing things better/faster/cheaper and thereby improve the bottom line and show a much better return on your investment should you purchase the business.

Figure 3:  A business without systems could represent an enormous opportunity at a very cheap price!

4: Customers Are Leaving

If customers are leaving you need to find out why. Do a three year comparison of each main customer spend for the past 3 years and enquire why those have reduced or are no longer present. Sometimes the reason they left or stopped spending can be fixed.

5: Industry Outlook Is Average

It's always wise when valuing a business to determine whether its numbers are sustainable moving forward. Past results are very important but are they representative of what will continue to happen? One reason they mightn't is that the outlook for the industry is poor.

Most good business valuers and small business accountants have access to up to date industry research such as IbisWorld. If research is suggesting that things will get tougher it might be a good time to get out. If the outlook is good then it might be a good time to hang on or buy a business whose owners have had enough.

CONCLUSION:

Owning a business or thinking of becoming an owner of one is not something that should be taken lightly. Getting a business valuation offers so many insights and benefits but you need to consider this and ask how it could help you further if you aren't quite sure.

You'll be extremely glad you did!