Arbitrary SME sales can be a costly mistake

Small and medium-sized enterprise owners could make a costly mistake by trying to sell their business simply because financial conditions are tight and they have no alternate exit strategy, according to Andrew Kesik, enterprise advisory partner with business advisory firm PKF.

Kesik said owners should be seeking to maintain and even grow their businesses over the course of the next 18 months so their assets can emerge in a strong position when the economy strengthens.

Currently, there’s an “expectation gap between the price business owners expect to get for their business now and what they would realistically get”, he said.

“There are a number of obstacles to overcome if you are a potential vendor, including convincing the market that earnings are sustainable in an uncertain business climate.

“This requires a business to have a solid history of growth and market share to be attractive, and the business needs to have a solid management team.”

Kesik said a vendor needs to understand that multiples of earnings before interest and taxes (EBIT) are likely to be 4 and not 10 plus and that purchasers are unlikely to be able to raise debt to fund an acquisition.

“Valuations of businesses based on multiples of EBIT hit all time highs recently, with multiples in excess of 10 times or more," he said, but this is no longer the case.

Kesik said there are opportunities for owners contemplating selling to instead expand their business through strategic acquisitions and build value accordingly.

“By growing their business strategically and through carefully planning and implementing a succession management plan, owners have the opportunity to be in a strong selling position once the economy picks up.

“The aim is to build on EBIT, and if multiples increase in a buoyant market, that will be a plus,” he said.