“There is no such thing as goodwill” this experienced businessman was often heard to say, except that is when he came to sell his own business. For a healthy business goodwill is the major part of the overall value of a business. Many of the younger entrepreneurs today are very much focused on the value of their business and increasing that value. They see their business as an investment, in the same way as they would an investment property.
These younger entrepreneurs are working on getting their business “sale ready” even though they do not have immediate plans to sell. They recognise that it takes a few years to get your business to the place where you can maximise the sale price. They are also ready to sell it if the price is right, or another Alan Bond should come along.
You can increase the value of your business by having consistent or growing profits. Strong systems also increase the value as they minimise the risk on takeover. The less the business is reliant on the business owner the greater the value of the business. Likewise a quality, stable workforce that is adequately paid gives the buyer confidence. A strong brand, image and reputation also increase the value. Working on these areas as well as growing profits will make your business an attractive proposition and will help you get closer to the price you would like.
Tax on the sale of your business can significantly reduce the end price you may be expecting. By looking at the sale of your business well in advance you have the opportunity to reduce the tax impact. By handling the tax smartly it is possible to receive the bulk of your sale proceeds tax free.
A business is generally valued by capitalising its future maintainable earnings. This is the same way a commercial property is valued. The only difference is the larger range of capitalisation rates for businesses. The more sought after a business the better the capitalisation rate. The higher the profits and the less the owner works in the business the better the capitalisation rate.
If the profits of the business are say $500,000, and you believe this can be maintained, and the capitalisation rate is say 30% the business would be worth $1.5mill. The difference between the $1.5mill and plant and equipment and stock is the goodwill of the business. The greater the goodwill the greater capital value you have created.
By working on increasing the value of the business you are working on the second form of return from your business, the capital growth. The good thing – as your capital value grows so too will your profits.
Peter Ambrosiussen is the principal of Ambrosiussen Accountants & Advisors and Certified Gazelles International Coach. www.ambrosiussen.com.au
