Maximising the Value Of Your Business

It’s important for owners to realise the work and effort they’ve put into their business with a worthwhile sale, said Eoghan Trehy, National Head of Insurance Broking, Macquarie Bank at the NIBA National Conference on Tuesday.

Macquarie Bank’s own research found insurance brokers have a long life in the industry. Over half (52 per cent) had been in the business for more than 20 years, and only 16 per cent had been around for five years or less. Of these, two-thirds (65 per cent) had a succession plan.

Of those with a plan, 31 per cent said they would sell to a key staff member, and another quarter to a family member, which means more than half will not go to market. One of the main reasons for those without a plan was that they were “too busy running the business to think about the business”.

Trehy highlighted this may be costly in the long run. But it’s important for owners to start thinking about the next steps at least three years before selling.

Trehy highlighted the different stages of succession planning:

  1. Identify your successor.
  2. Valuation of the business
  3. Tax advice – which is vital
  4. Getting the business sales ready
  5. Clarify your future role, if any
  6. Invest the proceeds!

He also identified some steps for identifying a successor and questions for brokers to ask themselves and their potential successor, such as: Are they aware of your plans? How will they impact your business? Do they share your vision?

Then, the big question was what drives value? The factors identified included:

  • nature of revenue
  • barriers to entry
  • quality of earnings
  • quality of staff
  • customer base
  • sales
  • competitors
  • type of sale: internal vs external sale.

It seems a majority of sellers used a multiple of earnings approach (56 per cent) as opposed to a multiple of adjusted profit, known as EBITDA (earnings before interest, tax, depreciation and amortisation).

The strength of these factors above would drive what multiple would be used. Trehy presented an example of the different approaches, using multipliers of five and seven, then ‘stress tested’ these against a loss of customers of 10 per cent and the disruption of a new player taking half of retail sales, and 10 per cent of commercial sales. The differences were quite dramatic. A multi-million dollar business could suddenly be worth only tens of thousands. Trehy stressed it was important to look at scenarios over two to four years, and the multiple would be determined by the market. There was no one rule.