Lachie McColl is a specialist business valuer. In this episode Lachie provides a practical explanation of some valuation basics and makes a compelling case to get an annual valuation.

[00:00:00] Hi, it's Michael Kerr here presenting Small Business Banter.

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[00:01:07] Welcome in to another edition of Small Business Banner Community Radio and podcast.

[00:01:26] Locky McColl is my guest today. First of all a big welcome and a big thank you, Locky for coming in today on Small Business Banner.

[00:01:36] Thanks, Locky. Thanks for having me.

[00:01:39] We've known each other a fairly long time in a professional sense and your expertise is around small business valuations and small business value and extracting that value when you sell is a real deal.

[00:01:56] It is a centerpiece for a lot of owners and so what we want to do today is stay away from the technical but drill down on your deep experience doing small business valuations.

[00:02:09] Let's set some context for the discussion. What we're going to talk about is how and when you should use a valuation, some of the market research you've been doing, where are the gaps between value and reality.

[00:02:28] What owners can do to make better use of a valuation and what I suppose not to expect from a valuation and some of the trends that you're seeing but would you like please just to give us a minute or two on your professional background the work you do.

[00:02:46] Absolutely. I'm a qualified accountant and probably very early on learned that I didn't like accounting all that much so I quickly kind of fell into this world of business valuations about 18 years ago and I've been doing that ever since.

[00:03:04] I've been doing pretty much full time business valuations for a bunch of regions which we'll talk about soon.

[00:03:11] I started off working for one of the bigger accounting firms in Melbourne and gradually inched my way back to my hometown of Jolong where I started our own call it an independent boutique business valuation practice about six years ago and really haven't looked back since then.

[00:03:33] I started jumping around but started working with the larger organisations even some of the big listed companies in Australia and have gradually found herself working more and more with the small and the mid-size businesses in Australia and particularly locally in Victoria.

[00:03:52] I think it's a more interesting conversation to have with someone that actually owns the business that's paying your fee that can look you in the eye and say what are you talking about and why we're doing this.

[00:04:05] We can have a real debate about it which is far better than often working with the bigger companies where you can get lost in management layers.

[00:04:13] It's an OPM other people's money. It is it's that we've got this whole show is about small business owners and getting the most they can out of their small business.

[00:04:31] That work is incredibly relevant. Great to hear you're excited about chatting to owners because you can relate that to real value and real. It's got an impact on them.

[00:04:43] Excuse me we're both recently had coven so we're both a bit croaky. Excuse the listeners from my perspective for being that way but can we start off to put a small business valuation into some context?

[00:05:06] What's the typical range for a value of a small business and what are the couple of key drivers that determine that value again staying away from the sort of the technical?

[00:05:22] What are the sides that we're talking about? They'll probably just give you some context Michael and you may well have already talked about this before but if we sort of set the scene in Australia and we do a lot of research on what's out there for sale to try and understand then what drives a valuation.

[00:05:41] The last look that we did there was about $1.2 billion worth of small businesses for sale and about half of those had an asking price of less than $200,000.

[00:05:55] That can set the scene and maybe to spin it another way if you look at the Bureau of Stats their numbers they would say there's about $1.3 million businesses in Australia and about 60% of them have revenue or sales less than $200,000 per year.

[00:06:15] I think about 80% don't employ anybody either.

[00:06:19] Exactly. So we're talking about a lot of people are rather running their own very small business maybe a cafe or something like that which is really giving themselves a wage so they're buying a job I think is some of the terminology you've used before.

[00:06:36] So that kind of means you've almost got I look at the Australian market and say there's three levels to it. One is the really small businesses that I just referred to, you know those $200,000 and below revenue, kind of the cafe, the business owner working in it full time.

[00:06:56] And they're priced and valued a certain way. And then we have kind of the other end of the spectrum, you know big companies, big listed companies employing thousands and they're priced a very different way and there's a bunch of information that you can look up in the fin review on the internet or anything to talk about their multiples of profit at 20 times or something ridiculous like that.

[00:07:20] And then you've got everything in the middle which is probably mostly where I work. So the below the big and above the 200,000 and we find lots of businesses sort of fall into the $1 million to $5 million range of values to answer your question.

[00:07:37] Yeah, so if we just break that down because there are a lot of a lot of businesses worth a few hundred thousand and that's they're very viable for the owner. And when they come to sell this is is a lot of confusion about how you value it but

[00:07:55] in the main there they're returning a wage to the working owner. So does that so the valuation approach to them is different to the bigger ones because do you value it on the basis of what that wage and that discretionary earnings is for the owner rather yeah.

[00:08:18] And I think a lot of business brokers will play in that smaller space and it's very much well if I'm running a cafe and I might have you know a couple of staff and myself running that cafe then

[00:08:33] someone else was to take that on and buy that from me then what kind of wage or what kind of return might they expect in kind of you know all of the profits and you can use them however you like as an owner.

[00:08:46] Yeah, it might be something simple like well if my wages X how many years or how many times X might I pay for this business?

[00:08:56] Yeah, so and let's not can yet it gets confused with what's the profit after this is where you and I both you know embedded in this stuff but for someone listening in the simple way to think about this is that you if your business is basically paying your wage and it's a viable business and it keeps paying your wage.

[00:09:19] The way you're going to value that is some kind of multiple which is you know one two three whatever it might be times that that wage because with that wage goes it is a business that you have some control over and this is why it's not.

[00:09:36] You know that people will pay different amounts because they want freedom or they want the ability to grow a business so so I think if yeah I think we've established it those micro businesses are going to be valued at some multiple of the earnings or the wage the owner pulls out of it.

[00:09:57] Yeah completely agree with that.

[00:10:00] And if we go to the next level which is the belly of the small business market I think you said let's call it up from a few hundred thousand to maybe up to five million dollars.

[00:10:11] As I understand that we move from a multiple of what the owner earns out of it to a multiple of what the profit of the business is because it's bigger than just the owner so there's the owner can pay themselves and ideally they're earning a profit over and above their wage is that kind of a good start place.

[00:10:33] Yeah and probably another way to think about it you know without getting into the jargon might may well be well if I work in my business and I'm you know the key person I'm managing it if you like but let's pretend that you own my business.

[00:10:50] You're going to have to pay me a wage for doing my job but as an owner you will expect some sort of return hopefully for running that business so

[00:11:02] as the owner what kind of return do you expect after paying all the staff for doing their job and yourself yeah.

[00:11:09] Yeah and if it happens that you're the owner and the manager yeah well let's pretend that you're paying yourself properly because fundamentally one day if you want to actually exit the business or sell the business you may need to think that way and say well if a buyer is thinking that way then I need to almost pretend that I'm paying myself that wage or someone like me.

[00:11:31] Yeah and that's a good way to explain it lucky in all of the work I do when you come the other possible and probable disconnect is between what the financials show the tax returns show the business is making and pretty much I haven't seen too many.

[00:11:56] I haven't seen a lot of business financials where the bottom line is actually the bottom line there's part of the reason you're in businesses you've got discretion on how you how you manage your you tax fundamentally.

[00:12:09] Yeah well you're being very diplomatic.

[00:12:12] I think Jim Sharmers will be listening but you know you're right that we do have an amazing degree of flexibility in our not not only our tech system in Australia but as a business owner you've got

[00:12:24] a bit of bit more flexibility in how you pay yourself so it's not necessarily a P.A.Y.G. wage where you're paying with holding tax it may well be that you're making distributions to a family trust but you know ignoring the semantics of that as a working owner you should be paid something for your effort.

[00:12:44] Yeah and so the fear or the uncertainty that comes when you've time to think about getting a valuation for whatever reason just just for comfort owners it's okay.

[00:12:59] Most nearly all financial statements don't reflect that what we might consider the true bottom line to be used in evaluation that you might do.

[00:13:08] So there's that period of adjustment.

[00:13:11] Another way to put it, Mike, might be that if we were to go through a valuation process or an appraisal with a broker for example they'll go through what we call a cleansing of your numbers and say well okay here are the numbers that we see and this is what you report to the tax office but let's do a cleansing process and say well what would this look like if you didn't invest in that new software platform?

[00:13:37] Or what would this look like if you actually paid yourself a true estimate of your wage?

[00:13:43] Yeah.

[00:13:44] And any other kind of lumps and bumps let's kind of cleanse the numbers and see what it might look like through the eyes of the potential buyer.

[00:13:50] Yeah yeah yeah just to stand alone investor what what would be left if you ran the business properly and paid everything you know at the right time on the right basis?

[00:14:00] Yeah.

[00:14:01] And on today's edition of Small Business Banner chatting with Locking McColle and we're chatting about valuation.

[00:14:10] Locking that that's kind of set it up so I don't want to forget to come back to your research because I'm intrigued about that but just we could round out with a couple of things here.

[00:14:21] What's the typical for those businesses we refer to above a few hundred thousand up to five million?

[00:14:27] Yeah.

[00:14:28] And if you're an owner you'll hear the term multiple lot what what a guideline multiples of the profit that a small business owner could could start to think about.

[00:14:40] When I'm thinking multiples just to sort of give some clarity I'm talking about pre tax and pre interest multiples so you know I know you want to stay away from that.

[00:14:50] But just said that saying that there are different layers of multiples.

[00:14:55] If we talk about that you know broad concept normally we find around the one times to five times.

[00:15:04] Yeah.

[00:15:05] That is.

[00:15:06] So big range but there's a reason for that big range.

[00:15:11] One to the industry that you're working in so it may well be that it's an attractive industry to a buyer because there are others that are buying your kind of business or it's an easy to run business or there's opportunity to grow or whatever it might be.

[00:15:29] And the one times might be more of the smaller end so you're kind of quasi buying a job or it's a rather simplistic business that doesn't command a kind of a higher multiple.

[00:15:42] Yeah.

[00:15:43] So this is I completely agree that I always talk about a potential range of one times to five times and so you can see there's a massive divergence in potential valuation of the business.

[00:15:58] So it's a good that's a good kind of segue into why it's important to understand value of your business today.

[00:16:08] If you were to sell tomorrow not because necessarily want to sell tomorrow but because whilst you're running the business you enjoy the return data the business and the flex and flexibility free whatever else you.

[00:16:23] But you've also got the opportunity to shape the valuation in that range from one times to five times.

[00:16:31] Absolutely.

[00:16:32] Yep.

[00:16:33] And so can you talk about the rationale for doing a valuation what's involved and when you when a owner who's got an eye to maximizing sale value when they should think about doing it?

[00:16:49] Yeah, so I've probably put the work that we do into two categories that there's either the reactive need for a valuation.

[00:16:58] So something has happened in your business or your life that's causing you to be either forced to get a valuation or told to get a valuation and that'll be things like

[00:17:09] you're going through a dispute with a business partner, you're getting divorced, you're losing interest in your business.

[00:17:17] So disinterest if you like the three days.

[00:17:19] Yep.

[00:17:20] So that's kind of the reactive reason for getting a valuation and sometimes you just have to do it.

[00:17:26] The other is more the proactive stuff which is probably the more interesting side of things saying well I'm thinking about my future.

[00:17:35] I'm thinking about maybe exiting.

[00:17:37] I'm thinking about maybe handing my business over to my children.

[00:17:42] I might want to offer some equity to staff.

[00:17:47] So what is my business worth now?

[00:17:50] So I can start thinking about how I go about that so I can start forward planning for either what does that look like or how do I plan to exit in two or three or four years time if that's an outright sale?

[00:18:04] How do I maximize it in two or three or four years time?

[00:18:08] Yeah.

[00:18:09] So that's sort of the context and I think the other part of your question was what's the process?

[00:18:15] Yes indeed.

[00:18:16] So I'll probably again process is really simple in my mind. It's twofold. One is what are the numbers say?

[00:18:24] I'll call it the quantitative side of things. How has your business been performing in the last couple of years and where is it heading to?

[00:18:33] And again we got through that cleansing process we talked about before.

[00:18:37] Yeah, so it's a line by line review of possibly three four five years worth of financial records to cleanse in your words and then to settle on something like an adjusted.

[00:18:53] And then an adjusted profit and from and it's yeah so is that I always think about it in terms of if you think your business is worth or could be worth a million dollars or a few million dollars.

[00:19:12] The cost of getting a valuation, it's a real I see it as an investment in getting a better outcome later. So is it are we talking about thousands of dollars and weeks of work? What's kind of a...

[00:19:29] Yeah potentially. I mean our valuations can range in the thousands you're right. We're not talking a hundred thousand.

[00:19:36] But probably the good context that you're trying to paint I think is that I do a parallel with the financial planning industry and say well if we own a superannuation fund which we all do even if it's a self managed superfund.

[00:19:53] You'll have a portfolio of investments and let's pretend that's worth a million dollars for arguments sake.

[00:20:00] You'll be paying someone if not doing it yourself you'll be paying probably a superfund expert to look after that money and you'll pay them a fee.

[00:20:10] And it might be you know up to say 1% of the value of your portfolio. So you might be paying your super expert if you like 10 grand a year to make sure that one million dollar grows every year.

[00:20:25] So if you draw the parallel to your business if your business is worth a million dollars why should we not be spending up to ten thousand dollars but not necessarily on a valuation.

[00:20:35] But making sure that we can grow the value of the business and we can only grow the value of the business if we know what it is to start.

[00:20:43] Yeah there's a baseline that I think is really relevant and that's if you had to sell tomorrow and there's not easy selling tomorrow but you could paint a picture of this is likely what we're doing.

[00:20:54] This is likely what would happen this is likely what you would get this is likely how long it would take.

[00:21:00] Yeah and you know as we discussed earlier the range of multiples from one times to five times just just shows you or demonstrates how it can vary so much and why you need to invest in moving from whatever it might be up.

[00:21:19] You can move it by a multiple of a half or one and you profit a couple hundred thousand dollars a year.

[00:21:29] You know you can add hundreds of thousands to value of the business.

[00:21:34] Well potentially but occasionally we'll see clients that have a business and they've never really thought about what it's worth.

[00:21:44] Secondly, how can they actually extract something from that? How can they convert that into money and sometimes we'll actually have almost a healthy debate or a heated debate with a client saying well you know my business is worth a million dollars.

[00:21:58] And we might say well no it's not you've never made a profit in the last five years it can't be worth a million dollars.

[00:22:07] It's sometimes a bit of a reality check on the negative sometimes hopefully on the positive.

[00:22:14] That's not always about saying well you're a million now how do you get to one point five?

[00:22:18] Yeah yeah sometimes it's about saying well you've got a real gap in your expectation of now to retirement so what are you going to do about it?

[00:22:26] Yeah yeah we all need to understand those things.

[00:22:31] So where you get your valuation from is obviously important and there's a lot of information, misinformation, misguided information out there.

[00:22:43] Do you want to just talk about the analysis and research you've done on the small business for sale market in the last few minutes?

[00:22:54] Yeah sure we're trying to I suppose make sure that there's transparency of information when it comes to not only just our valuations but anyone that wants to work out what their business is worth.

[00:23:09] So we've kind of got that information in Australia in the property market so we can jump on the website and we can look at all the properties that are sold in our street or our suburb and kind of work it out or get someone to do a valuation for us.

[00:23:23] We don't have that luxury in the business world at least in Australia.

[00:23:28] We've got some information so some business brokers have that information there's some information at the top end of town, the big companies that are buying and then there's this kind of big gap.

[00:23:42] So we're trying to do some homework to find enough evidence to support this whole process.

[00:23:50] So we've been going on a bit of a process for the last four years to accumulate data in order to support our kind of multiple conversation of is it one, two, three, four, five and how do we actually substantiate that with some hard evidence?

[00:24:04] Yeah so what's the research or the report called lucky?

[00:24:09] Oh look it's not live yet. It's just something that we're kind of doing behind the scenes and gradually working with.

[00:24:17] Yeah and I've been privy to some there but it is, you know, I wish it well because it's important that there is a lack of quality data.

[00:24:28] There's plenty of there's a lot of information you can go and scale the internet and find out what people are asking for the business.

[00:24:35] Sure. And that's just, you know, can be completely made up and we do look at that as well.

[00:24:42] We do look at the listings and that might be some of the documents you're talking about.

[00:24:47] That's useful to kind of get a gauge like looking at any business indicator information whether it be inflation or unemployment.

[00:24:55] We kind of look at that to say well, you know what's selling in what state a price is going up or down and how does that then influence our decision about value of this particular business.

[00:25:05] Yeah so it's some really important trends and in what's going on overall across the country.

[00:25:13] Yeah absolutely and it's interesting particularly during COVID to see which states were peaking in terms of businesses people trying to exit.

[00:25:23] What was happening to prices with their particular industries that were more prevalent to be sold things like that.

[00:25:32] Yeah, I think the real takeaway or not one of the takeaways is that it don't compare the process when you're looking to sell your business with selling a house.

[00:25:46] There's a lot more, there's so much data available very precise data on property values.

[00:25:54] Sailor business is at the other end of this spectrum really complex so you need that sound professional advice and you need it early.

[00:26:04] So lucky thank you so much for your time today we've only got a little bit left do you want to just if people were to want to talk to you.

[00:26:14] What where do they catch you?

[00:26:17] Jump on the website smevaluations.com.au that's the new website otherwise I'm sure we can share details if need be but probably the website is a good starting point.

[00:26:28] It's a very self explanatory URL or website name sme valuations.

[00:26:34] Yeah good.

[00:26:35] Thanks so much for your time today Loki really enjoy it very insightful and I hope we can do it again sometime.

[00:26:42] Good on you Michael I appreciate it.

[00:26:45] So that is all for today's episode of Small Business Banta.

[00:26:48] I continued to be inspired bringing you small business experts and other small business owners and hearing their stories.

[00:26:56] If you want to listen to any past episode jump onto your podcast platform of choice and search Small Business Banta.

[00:27:04] There you will find a diverse and fascinating collection of small business owners and experts openly discussing and sharing their experiences.

[00:27:13] For any of the links resources or information we've talked about on the show today or to contact me please head over to smallbusinessbanta.com

[00:27:23] Or you can find us on Facebook and Instagram and it would be great to have you tune in the same time next week for another episode of Small Business Banta.

[00:27:32] Banta.