Buying a business is exciting, complex, and often highly emotive and stressful. So it helps to have some tips on how to navigate this life-changing period. 

And it’s no different when it comes to exiting the business; selling can be a highly-charged and testing time. As Poolwerx franchise development manager Mike Geddes has observed, there are emotional and financial elements at play for both the buyer and seller.

“Buyers can get excited about the business and the opportunities, and become attached too early. It can start to cloud people’s decision making,” he says.

So how can sellers correctly value their business, and how can buyers ensure they are not overpaying?

Start with EBITDA

A good starting point is to look at an existing business’s financials and the key metrics to understand the valuation.

The most common valuation is a multiplier of EBITDA (earnings before interest, taxes, depreciation and amortisation). 

Different sectors demand different multipliers, says Mike.

“In retail and hospitality it is commonly between 1.5-3 x EBITDA but in the higher-valued manufacturing setor which has expensive equipment, it is usually 3-4 x EBITDA.

“In our industry, the multiplier is 2.5 to 3.5 times EBITDA. This is because there is huge demand in the service sector as people become increasingly time poor and, more importantly, more Australians are installing pools, which is growing the market.”

Financial ratios need to be in range

Buyers will want financials for the last two to three years to see growth in sales revenue and steady or improving EBITDA, he says.

Important KPIs for buyers to consider include the gross profit percentage, the rent to sales ratio, and the wages to sales ratio.

“You want to make sure the percentages are in the right range,” Mike says.

Good will drives the bottom line

Good will, which sellers often relate to a robust customer base, can be used as part of a sales negotiation but how does this intangible element contribute to the valuation?

“Essentially the customer base generates the profit. Good will is ultimately what drives the bottom line profit. It’s the money you are going to put in your pocket,” Mike says.

“The business has to come with all the assets that generate the income – whether it’s the customer base, the mobile vans, or the equipment. Without these you won’t achieve the results.

“The brand itself can influence this – if the brand is well-known, for instance, that adds percentage points.”

Why accountants and banks are sanity checks

For the seller, the challenge is matching the desired price with the reality of the business financials.

“It’s like selling a house. We all think our homes are worth X, but the buyer only pays what they are prepared to pay. That’s the market value,” he says.

“That’s why you need your accountant. You pay them for the advice and you need to listen to their advice. The accountant’s job is to protect their client,” Mike reminds potential business owners.

Banks can prove to be a good sanity check for a buyer, too, he suggests.

“The buyer is looking for a return on investment; the banks and credit team are looking at the business based on value.”

There’s added value when the business is a strong brand, which makes a franchise appealing.

Banks in preferred relationships with a brand have access to the franchisor’s KPIs so they have an idea of gross profit and growth,” he says.

Look beyond the business’s financials

However, there are important factors beyond the financials for a buyer to consider, Mike points out.

On a macro level, economic issues like higher interest rates and higher inflation can affect the market. Buyers need to understand if the sector has growth potential.

Considering the customer base and whether there is repeat business is also important, as is evaluating the location – does it have high traffic flow and affordable rents?

What systems are in place? Will there be POS, CRM, and accounting in place to drive the business?

Buyers need to put staffing, management and supply arrangements into the equation too. Will these set ups, and the business generally, suit their needs?

It’s also crucial to find out what the tricky business handover will look like.

Transition to ownership is key

This an important transition period and that’s where the support of a franchise can help.

“If it’s a new venture for someone coming out of the corporate world, for instance, looking to be in control of their own destiny, franchising appeals because often people don’t know much about the sector they are buying into,” Mike explains. 

At Poolwerx, the focus is always on getting a franchise partner who is fully aligned with the brand.

“We vet the candidates and once approved a broker does all the negotiations between the buyer and seller, he’s the go between. There is always a little bit of negotiation, then we start onboarding,” Mike explains.

“At Poolwerx we put franchise partners through four weeks training before they take over their business. Then the previous owner stays on for four weeks, and this is invaluable experience the new owner can tap in to.

“It is really important not to get sales slippage and lose clients. Initially a new owner wants to continue to run the business as the previous owner did, and then put their own imprint,” Mike says.