When It's Time To Cash In

The astute owner will take steps to maximise the reward from years of hard work

- Warren Otter

Three years ago, Don, the 65-year-old owner of a clothing wholesale importing business in Melbourne’s south-western suburbs, decided to sell it and retire to Queensland’s Sunshine Coast. He had worked hard for three decades building up the business – $12 million in annual revenue and consistent profits of $800,000 a year. Don was not greedy but, given the work he had put into his business, he was hoping to get more than $4 million from the sale, representing five times annual earnings.

However, he got a shock when, after a long sales campaign, the best offer was $1.6 million (two times annual earnings). Don was disappointed and rejected it. He continued to run the business, reasoning that he would put it back on the market two years later when conditions may have improved and buyers may be prepared to offer more.

Two years later, the best offer he got was $1.2 million, representing one-and-a-half times earnings.

A seismic shift is happening in the private business sector, as baby boomer business owners look to cash in and retire on the proceeds. But many are getting shocks when it comes to doing deals. Either buyers are not there or they are offering far less than the owners expect.

In many cases owners have spent decades building up their operation. They believe they have a clear idea of what it is worth, possibly lured by the historic PE ratios paid on the Australian Securities Exchange – 15 times annual earnings. Many expect to get at least six or seven times annual earnings for their businesses, but buyers have other ideas. They know that they can pick up private businesses for a lot less.