Today we talk about the concept of preparing a trade business or trade-based business for sale, and by trade business we refer here to small to medium sized businesses that provide skilled trade-based services to its clients or customers like plumbing businesses, electrical businesses, mechanics etc.
So if you’re an accountant or broker who might be advising a trade-based business, this episode offers some great tips and useful information to help you get the best outcomes for your client.
- What makes selling a trade business different from other industries?
- What are the issues that make selling a trade business tough?
- Importance of running a business at a sale-ready state
- Valuation of trade businesses
- Seasonality of buying and selling a trade businesses
- Building a relationship with other professionals in this space
- Valuation approaches
- Importance of communicating the value of the business
- Usual buyers of trade businesses
What makes selling a trade business different from other industries?
Trade businesses are quite different to your traditional shop front business where you might have your customers coming in and buying your goods or services. A lot of trade businesses actually operate from home or from an industrial unit so they can be tucked away a little bit.
A lot of the guys that I deal with are selling because they are retiring. They’re on that generation where there wasn’t a lot of planning from the initial set up stage through to thinking I’m going to sell my business in 30 years’ time.
They have very light balance sheets, not a lot of assets in these businesses. So when a buyer is looking at a business like that, they’re actually buying the goodwill.
What are the issues that make selling a trade business tough?
- Employees and the business itself can be very dependent on the business owner
- The business is named after the owner, making it not easily transferable
- Lack of documented and followed systems
- Record keeping and having a database
- Dependency on one or two large clients
Importance of running a business at a sale-ready state
If a business is on the market for a little bit too long, it can go stale. It is decreasing revenue over the last two or three years before they’ve decided to sell. We can see they’ve taken their foot off the gas.
Previously, I was dealing with a gentleman that owned a rural fencing business. Unfortunately, I haven’t been able to sell that one as yet but we certainly haven’t given up…He had an accident on a jobsite once. He broke his leg and he was out of action for quite a long time, two or three months…But he was one of these guys. He was the business.
He had four guys working underneath him. But he did the quoting. He organised the ordering of all the materials, supervise every job. He is very hands on and didn’t really trust his guys to run the jobs on their own.
But when he broke his leg it was a bit of a double-edged sword. Unfortunately, because none of the guys were trained up to be able to do what he did, they lost a lot of business. Revenue sort of fell off a cliff for a little while. But what it did teach him was the importance of being able to delegate.
Valuation of trade businesses
In terms of valuations, not too different. The same criteria applies. We use the earnings method, asset method and what the market is prepared to pay.
But if he’s got no systems in place, if he’s named it after himself, if the bookkeeping is quite poor, you probably find that the business won’t sell for much more than 1 to 1.5 times multiple if we’re lucky.
Seasonality of buying and selling a trade businesses
With buyers, it’s normally just after the Christmas holidays and sellers as well. I think Christmas holidays is a time for people to re-evaluate their lives. For the sellers it’s really, “I don’t want to go back to work. I’ve had enough of this now. It’s time to get rid of the business” and for the buyers, it’s time to take that next step.
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Building a relationship with other professionals in this space
I love having accountants as part of that sale process. When I say sale process, at the very beginning almost helping me with my appraisal and assisting with the IM. I don’t ask them to do edit the IM or anything like that. But again most of the guys that I’m dealing with are planning to retire so they might have had an accountant for the last 10 years, 20 years. They’ve got a very good relationship with their accountants and their accountant might have done a valuation at some point on their business (and sometimes I’m not sure where the numbers come from) but a number I hear a lot is net profit times 3, which maybe bang on but quite often that’s not what the market is paying for a particular business.
It’s my job to build a relationship with that accountant because the last thing I want to do is say “Look, I disagree with your accountants. They don’t know what they’re talking about. They don’t sell business for a living” because I’m not going to build any rapport with my vendor that way. I’m not going to put the accountant aside. I really want to work, the three of us as a team almost…Nine times out of 10 they’re happy to do that especially if they’ve had that long, standing relationship with their clients. They want to see them achieving a sound result as well.
Accountants or other business advisors who are advising on value or the process can really do themselves and their clients a disservice by commenting on value when perhaps they’re not close to the true valuation methodologies that are being used in the industry or the sector at that point.
You need to know what’s going on in the market to understand it clearly and be able to provide some sort of guidance to your clients as to what the true value is that they might be looking at. There’s no winners from someone that fudges the answer or comes up with a pie in the sky figure that doesn’t reflect reality because it would just lead to disappointment, and sometimes client resentment.
The actual value at market is really at the end of the day is just a match between what a seller is prepared to sell at and the buyer is prepared to buy at. So whatever sort of formulas or approaches we have in place aren’t necessarily always going to be right for every business. There can be strategic reasons for buying that mean that a business is worth a lot more. Generally speaking, it’s a warning out there about approaching valuations and perhaps the benefits in having relationships with people who are on the frontline in terms of selling or dealing with the actual transaction part of the sale of the business in terms of getting good, honest feedback about whether or not the values you’re talking about with the business owners are realistic.
Importance of communicating the value of the business
A business will sell for what the market is prepared to pay provided that the market understands what they’re actually buying. It’s really important for trade businesses or any business to be prepared well and that the value in the business is really communicated clearly through the IM.
Usual buyers of trade businesses
Normally, it is the existing trade business which is looking for growth through acquisition. They are most of the buyers that I have especially around commercial clients or strata clients as well. It might be an electrical business that’s got a relationship with a bunch of strata companies. If you’re an electrician that’s been ticking along quite well, we haven’t been able to tap into that market quite often. It’s easier and quicker to acquire a business that’s already got those relationships. So they’re the sort of guys that I’m dealing with more often than not. It’s not normally those guys who just finished their apprenticeship and then spend four or five hundred thousand dollars on a business to get them started. It’s really those established ones that are just growing through market share.
Reach out to Matthew
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