Loans and Exit Strategies: The importance of knowing the value of your business
Ideally, when you are looking to exit your business, you will have all of your financial boxes ticked, loans paid off, and an exit strategy in place. But in reality, that is not always the case.
Sarah Eifermann from SFE Loans shared with Bsale some advice concerning managing your debt and understanding the value of your business when it comes time to exit.
Building a Sellable Business
When working with clients, Sarah encourages owners to build their business with an exit strategy in mind. This helps them to grow and view the business as a sellable asset.
“Why else would you invest ten years of your life or 25 years of your life into something that, when you retire, you have to close down and walk away from because nobody wants to buy it because you haven't positioned it in a way that it’s a sellable asset?”
“Any business is a sellable asset. The value of that asset depends on many things, including industry and market factors. More valuable businesses are the ones that can easily and effectively demonstrate their position in financial statements, data, digital footprint, engagement analytics and product or service offerings.” Sarah said.
The more viable the business is, the more valuable and sellable it is as an asset.
Understanding the Value of Your Business
The value of your business is more than just the profit margin, especially when finding a buyer for your business.
“If you’ve got a database that's got a name and a phone number, but half of them don’t work, or you haven’t touched base with your clients, you don’t have an email, you don’t have the history, or you can’t tell if they're opening the emails you're sending them if you’re not doing the data mining you need to do? How do you present your business? What is your business then?”
Having a fundamental understanding of your business and the value you bring to the table in a business sale is crucial. Is it the clients? The product itself or a combination of both? The revenue and profit?
“This is the other thing, a lot of people don’t like paying taxes, so they write their business value down by reducing their taxable income, which means when they want to sell it, why would a potential purchaser want to buy it for more than what you have been declaring that it’s valued on your tax returns?”
“So there are lots of different facets that I think play into it, and business owners probably need to do a bit of work in the 6 to 12 months before they are really are ready to sell to have their businesses in a position where they can then achieve maximum value in terms of a return on their sale price, if possible, subject to the industry they’re in and what they've got on offering.”
Sarah suggests that part of the problem in not understanding the value of your business can lie in the difference between the technical specialist and the business owner.
“You see it more, for example with tradies, they might have been a great electrician or a great carpenter, they go out on their own, and they barely make a living wage because they haven't done a break-even analysis to realise what they’re quoting doesn’t even cover their costs. They don’t build businesses and see them as valuable assets that they can sell in the future. They're not doing what they need to do foundationally to record the data, or to put in place systems and processes etc…”
Debt and Exit Strategies
Of course, the number one tip for exiting a business is simply not having any debt. Sarah encourages business owners to plan ahead and know where all their debts and financial obligations are and, importantly, whether they are included in the business sale.
When it comes time for an owner to exit their business, it’s not always going to be at the time they necessarily want to exit or plan to. What happens if, for example, somebody is looking to sell a business but still has unpaid loans or other debt attached to the business?
“These must be paid out as part of the sale/transfer. Business Owners may consider refinancing these debts into their home loan, but they can only do this whilst they have a consistent income usually over the last two years. It can be complicated. You would want to make sure if debts are transferred to the new business owner, all personal and director guarantees for the previous owner are removed or potentially they are still liable!”. Sarah stresses.
Refinancing can also potentially be an option for buyers and sellers in this position, selling a business with debt still attached, providing the new owners meet the lenders’ parameters.
Top tips for creating an exit strategy from a financial perspective
- Get your books and client data in order.
- Ensure you are profitable in the years prior to selling (who is going to buy a business that isn’t trading profitably, usually?
- Knuckle down on your tax obligations and clear out any tax debt.
- Know what is included in the sale and how that impacts your purchase price
- Do your research as to where the market is at, and what you believe your business is worth.
About the author
Caitlin has a background in media and communications, studying journalism at University and doing various freelance writing and production work over ...