Strong house prices boost equity in buyers’ homes, which in turn increases banks’ appetite to lend for a business purchase.
*Leicester Gouwland is a director in Auckland accountancy firm William Buck.
Is now a good time to sell your business?
Anecdotally, I have noticed more activity around the sale of SME businesses over the past year or two.
Some sellers have been thinking about selling their businesses for a while. However with the global financial crisis having a severe impact on business profitability, these businesses needed to recover and demonstrate consistent profitability before a reasonable sale price could be achieved.
Particularly for older sellers, the sale proceeds may be their future and only retirement fund, as all their eggs went into the business basket.
Is now a good time to sell, or sell down part of the business? In many ways, I think it is.
Solid market for solid businesses
There is always a ready market for good businesses. Nothing has changed in that respect, and a good business will always find a buyer.
In general, there is a strong economy and strong immigration which is driving demand for many goods and services. This in turn suggests that conditions are good for businesses to prosper.
With strong house prices, buyers now have more equity in their homes which provides solid security for banks. Banks will generally heavily discount the value of the assets of a business (for instance plant or stock) for lending purposes, so being able to provide real estate security particularly helps a buyer of a business fund an acquisition.
Interest rates are still at historically low levels, though they have risen recently because of the increased costs of borrowing offshore to fund the loans that banks make in New Zealand.
Yields under pressure
As interest rates rise, generally, the rate of return a buyer requires for the risk of staying in business increases, which has the effect of reducing the value of a business. With a general expectation that interest rates will continue to rise, this should influence the number of times earnings a buyer may offer to establish a sale price.
Rising interest rates will reduce the ability of a buyer to fund an acquisition, thereby reducing the amount they can offer to pay.
To offset the effect of rising interest rates, the yields on investment assets (and a business is an investment asset) that investors are prepared to accept appear to be reducing.
Therefore, if yields for other investments are declining, the yields a business can offer can be attractive, particularly for someone wishing to get ahead. Generally, no one on an everyday salary is going to get rich quick. With limited wage growth, a business could be a better alternative.
With a business, there is the opportunity of increasing its profitability, and therefore its worth. A seller should consider leaving some value or opportunity for a buyer. Just as a good business is easier to sell, a declining business will be harder to sell. A mature, fully priced business with a greedy owner is not the best way to attract a buyer.
Often, business buyers need a push to make the final commitment and the current positive business confidence can have a positive influence on the decision to buy.
For sellers, don’t be greedy. Often you will not sell quickly. Listen to advice about a potential sale price, and once on the market, if indications are that your price is too much, either lower your expectations or take the business off the market.
A well-priced business will attract several buyers. Having multiple parties interested in your business will only help you get a good price.
Planning a sale is often forgotten. A business owner should plan the sale of their business years ahead.
It is a good idea to get a view on the state of your business as often there are simple things that are overlooked, such as reducing the personal involvement of the seller to ensure that value can be passed over to the new owner.
Remember a business is only worth something if the revenue generated before the sale can be replicated by the buyer after the sale.