As forensic accountants we often prepare business valuations for many varied reasons including:
- Family law disputes
- Business interruption calculations
- Shareholder disputes
- For the purposes of lending
- For the purpose of selling, and many more
It goes without saying the more profitable and systemised a business is the higher the value of the business. Obviously a business that makes a higher profit is worth more, all things being equal, in comparison to a business that makes less profit. A business that is systemised and less reliant on an individual, all things being equal, is worth more than a business that will not survive if an individual leaves.
Yet, why is it so common for struggling business owners to resort to selling or attempting to sell when they hit bad times? There can be funding issues, technology changes, economic influences, personal problems and many more reasons to “get out”. All too often, owners resort to selling in hard times without trying to identify and fix the fundamental business problems first.
SV Partners was recently asked to consult to a business owner and assist him in selling his business to a competitor. The business in question is a large company which manufactures doors. Our first impression of the owner was that this is a person who loves what he does, with incredible passion. This guy loves doors so much that we are confident that he cuts holes in walls just so he can put a door in it.
So the business is currently going through some hard times and not turning a profit for a number of reasons. The owner has been under quoting on jobs so he can build more doors (he loves them !!). The particular segment of the door industry he is in involves ongoing maintenance of the doors through maintenance contracts. This provides an ongoing secure income stream and this segment of his business is profitable. The business is grossly understaffed in maintenance technicians, to such an extent that they have had no capacity to take on new maintenance contracts for 5 years, as they simply cannot keep up with the workload in the maintenance contracts they already have. The maintenance area of the business is the profitable part of the business, yet the owner has been starving this area of staffing resources. He quite literally uses as many staff as he can to build and make more doors.
We are currently assisting the owner to develop a number of simple strategies to turn his business around, including:
- Encouraging him to increase his quotes in relation to the door manufacturing side of the business
- Introducing proper handover of manufactured and installed doors to the maintenance staff
- Resourcing the maintenance area of the business properly so they can handle a greater workload
- Getting timely reporting on key levers fo the business together with up to date accounting numbers
- Holding regular management meetings to resolve issues as they arise
Given the poor financial situation of the business at present, the owner is struggling to sell it. Hopefully in a year or two, with much improved financial numbers, the owner will get what he wants from a business sale.
SV Partners provide our clients with an objective and defensible opinion of the value of their organisation. Our valuations combine expertise with leading valuation and corporate finance knowledge. In this particular scenario, we were able to act as an independent party, without any preconceived ideas of this particular business, to come up with a series of solutions. Often it is better to address and fix business problems before a sale or in the lead up to a sale as in most instances this will increase what a business is sold for.
If you would like assistance with a business valuation, please contact our forensics team on 1800 246 801 or visit our website for more information.
Article written by Ross Mottershead, Director – Forensics, New South Wales.