Number of businesses for sale jumps 6% but valuations under pressure

The number of SMEs for sale has increased by 6% over the last three months, putting pressure on business valuations and hinting that the long-threatened exodus of baby boomer business owners is set to start.

According to an index compiled by Luke White of Gold Coast-based Bizval, business valuations fell 1.6% in the year to June 2012, with the Bizval index falling from 3.18 points to 3.13 points.

The index is based on four factors: movements in the values of small cap stocks on the ASX, business loan rates, the number of businesses for sale, and average multiples seen by Bizval.

White says while there is typically a seasonal increase in the number of businesses for sale in September, October and November – after companies have finalised their accounts for the previous financial year – the lift in the June quarter was surprising.

“To have an increase now is probably a bit earlier than I would have expected,” White says.

“A lot of the baby boomers held off during the GFC and it might be that they are looking to get out now.”

The rise in businesses for sale might also suggest that some business owners are doing it tough and looking for the exit.

White says valuations are under the most pressure in the retail, hospitality and discretionary sectors – basically, anything related to consumer.

Surprisingly, valuations in the construction sector appear to be improving.

“It’s one sector that has hit the bottom and appears to be coming back up,” White says.

While most SMEs are sold on a multiple between one times earnings before interest and tax and five times earnings before interest and tax, White is reluctant to provide a current average multiple across the SME community.

But he says it’s been a long time since he’s valued a business at five times earnings, and the average he’s seeing is more in the range of two-to-three times.

“It’s the same old story. Really good quality, niche businesses will attract good multiples because there aren’t many of those around.”

White says that at present buyers are generally being drawn from within the same industry, and are often competitors to the business up for sale. The number of outside investors or angel investors is limited, he says.

Size is another factor worrying buyers – smaller businesses where the founder remains heavily involved are proving more difficult to sell.

“With a lot of the smaller businesses, if you take the owner out there is often nothing much left,” White says.

“A business where the owner has planned ahead and started to take themselves out of the business will always attract a higher multiple.”