Market Makers
Business Brokers and Small Business
Hail to the business brokers. The band of brothers that get an illiquid jumble of disparate assets, called a small business. Standardise them. Market them. Negotiate them. And turn them into cash.
These people are market makers.
I googled how many small businesses there were in Australia as part of my ‘in-depth’ research for this article. Google placed the most important information from its search engine at the top of the search results. It came from a website called “Small Business Loans Australia”.
The site told me that in August 2022, there were 2,506,012 businesses having 1 – 19 employees in Australia.
Of these businesses, there are many that have no meaningful market value. Essentially, because they are made entirely of personal goodwill and if the person embodying the goodwill is also the person who wants to exit the business, there is not much left to sell.
Some Elements of a Business
There are many more that contain the elements of a business. But what are these elements? Some of them are:
- Staff
- Premises
- Plant and equipment
- Customers
- stock
- Profit
- Intellectual Property
- Working Capital
- Product or service
- Systems
- Did I say profit?
The list goes on. Few of these, if any, are essential.
Many of these small businesses are very rarely traded with a DNA that is unique to the business and built up over many years.
They represent a nexus of agreements and contracts between many stakeholders that are critical to the ability of the business to function.
Liquidity
The liquidity of small businesses is rarely an important factor because they have few owners. Quite often they have a single owner.
The frequency of the need to convert ownership into cash increases with the number of owners. Where a business has the scale to support many owners there is therefore a tendency to develop liquid markets to support the need for different owners to exchange their stock of equity in a business for cash.
Stock exchanges are a place where stockbrokers and owners can buy and sell equity stock, or shares.
When the seller of a small business wants to exit from the ownership of his or her business, they face the problem that there is no market where there are stockbrokers who buy and sell shares to an existing pool of traders in their business.
Instead, they make use of business brokers.
The essential difference is that the price or value of the business is not determined by the most recent trade of a portion of the business in a liquid market which can then be multiplied by the number of equal-sized portions of the business to find its value.
That is the method for valuing large companies. For instance, on any given trading day, it is possible to arrive at a valuation of a large company like Apple, even though only a small portion of the company is sold at any time. The most recent share price is multiplied by the number of shares.
A liquid market stands ready to deliver its verdict of value.
The Small to Medium Business Market
In the small business market, this information is not available.
A sensible business broker will use a different set of tools to arrive at a valuation for a business.
This is an important process that should be done prior to marketing the business for sale otherwise the possibility of overpricing the business and not satisfying the seller’s desire to exit, or worse, under-pricing it and giving away precious value becomes a risk.
As there is no liquid market in small businesses, a business broker uses a different method to value a business. They will look to take the cue from comparable sales. Some research will have to be done.
This is the most direct method of valuing a business. It uses data from recent and similar sales as a yardstick for the valuation of an illiquid business.
It is a method of valuation that is limited to those who have access to such data.
There is a cohort of several hundred business brokers in Australia who have access to this data. They are members of the Australian Institute of Business Brokers, and they number in the hundreds. There is an even smaller cohort of Registered Business Valuers who know how to use it. They number in the dozens.
This breed of business broker is becoming a much more important tool in the commercial world.
Business Valuations
Business valuations have customarily been required to facilitate mediation in marital disputes or a business partnership that is no longer amicable. Another use for a valuation is to form the basis of calculating a tax liability if, for instance, a business is moving between entities.
A more recent call for valuations has come from business owners simply wanting to track the valuation of their business over time in the same way as they track their profitability and other KPIs.
It is a valuable tool because a business valuation will provide a business owner with information that can help improve the performance of a business over time in relation to the market.
Another reason for a valuation is to start a conversation within a family business so that the founder can talk about an exit strategy with less emotional baggage. I have written about that in my “Family Business” article.
The market for businesses is a very competitive one. The residential housing market is afflicted with a chronic shortage which has driven up the price of accommodation. The small business market is in a phase of oversupply with baby boomers who own small businesses exiting the market.
If you want to exit the market with the highest possible value for your business, it is in your interest to secure the services of a business broker who can provide market-making services. Just as important is to get one who can provide valuations in a manner that can help you prepare your business for the market.
Just as accountants have a critical and regular role to play in your business. It is becoming more apparent to small business owners that business brokers and business valuers also have an important role to play.
If you like this article, you may like a recent one I’ve written on “The Australian Labour Market in 2023” where I find that the tightness of the labour market may be overstated by the commentariat with the risk that interest rate policy is tighter than it needs to be.
If you think you would benefit from a valuation of your business, you can visit my site, “Hunting Business Sales and Valuations” to message me and I can talk to you about having one done on your business. https://huntingbusiness.com.au/
The recently published Intergeneration Report produced by the Australian Productivity Commission has committed an egregious error of completely overlooking small business. This is something I have written about in the article “Small Business and the Intergenerational Report“.
