Expert says half of business sales failing to go through due to funding and growth worries

Up to half of all business sales are failing to complete due to problems obtaining finance and concerns about growth prospects, PKF Chartered Accountants partner Brett Plant says.

Plant says his anecdotal analysis of the market suggests that banks have severely tightened their lending criteria for business sales in the last 12 months to the point where they will only fund transactions involving “healthy, shiny” businesses.

Banks and buyers are particularly nervous about companies whose turnover is based on “one-off” or irregular sales, such as property developers or other businesses whose work is more project-based.

What the banks want to see is evidence of a customer base that is highly diversified and that makes regular purchases throughout the year.

“Those sort of businesses are going to be a lot easier to sell,” Plant says.

By way of example, Plant says he recently observed the sale process for a north Queensland business that has $15 million in annual revenue and $1.5 million in sales, and had attracted 14 interested parties. But in the end, not one bid was lodged due to the perceived risk surrounding the business.

Another issue the banks are wary of is key person risk – that is, that once the business is sold and the founder/owner is no longer involved, the business will suffer.

Plant says this is leading buyers and banks to focus on larger companies, which typically have better economies of scale and stronger management teams that can mitigate any key person risk.

To combat this, some small businesses that are looking to sell are being forced to consider quite radical strategies. Plant says he was recently involved in the sale of a rural product distributor that merged with another similar business to get economies of scale, and then sold up.

“People are going to have to start looking at those types of transactions before they get a sale away.”

Plant says sellers who want to get a deal over the line are going to need to prepare themselves to accept lower prices and more onerous sale conditions.

He says where sellers could expect to receive four to six times earnings before interest and tax for their business a few years ago, the credit squeeze means valuations are not down to three-to-five times earnings – if that.

“Anything that has got a question mark on it, the banks are reluctant and fund,” Plant says.

Another thing sellers should expect are earn-our clauses. While these were not unusual prior to the GFC, they are now common place. Plant says he recently sold two businesses where 80% of the purchase price was paid up front, with 20% paid 12 months later after performance hurdles were met.

“A lot of transactions are going to need to have an earnout, because that’s the only way we are going to get those prices that vendors want.”

Plant’s final piece of advice for entrepreneurs looking to sell is to have a clear growth strategy in place and actually underway.

He says many entrepreneurs present growth options to potential buyers, but now buyers and their financiers actually want to see the growth strategies are working.

“You’ve got to be actually executing the growth strategy and getting some traction.”