There is a tendency for  business advisors and consultants (and business buyers themselves) to focus on just the financials of a business; however, there is a wealth of other business information which advisors should understand, in order to properly advise their clients….

I’m not sure how much advisors want to get involved in analysing business opportunities for their clients or how much detail they want to be involved in, so I have written these posts as a series of questions which a buyer needs to ask for himself or have an advisor ask for them.

I’ll begin by setting the context and start with a few definitions.

When I refer to a business I mean a profitable “going concern”. We typically sell “going concerns” in the price range of $200,000 to $10 million. Furthermore, around 99% of the sales we facilitate involve the transfer of assets from one legal entity to another and not the sale of the shares of an entity. This is generally seen as the cleanest and easiest way to do things in the majority of cases and the buyer knows there will be no overhanging lawsuits, tax problems, environmental issues etc. Most buyers want a clean start.

Occasionally, there are situations where it is more advantageous to one or both parties for the buyer to buy the company. Each case needs to be judged on its merit as it can affect tax, stamp duty, transfer of licenses and accreditations, and liabilities and risk. Both parties need to seek expert advice relating to their situation.

In a typical business sale, the assets which the buyer is buying are the plant & equipment, stock and goodwill. In effect, the buyer is buying some tangible assets and a profit stream based upon the past history of the business and the risk against that profit continuing in to the future. The value of the business, therefore, is based upon financial or tangible factors and non financial factors, many of them intangible (for example, goodwill).

In this series of posts, through necessity, I will be talking ‘generalisations’, whilst in the real world every case needs to be assessed on its own merit. There are far too many permutations to be covered in a post like this.

In the next post, we will look at how a business is appraised for sale and what a business is worth?

For details of my next workshop on buying and preparing businesses for sale, CLICK HERE

Regards

John Denton

I don’t say “I told you so” very often, but I felt the urge to do so after reading a detailed article in yesterday’s West Australian newspaper. The article is titled “Small retailers feel the squeeze of big shopping centre landlords”. (Unfortunatley, the article is not available on their web site).

The article backs up what I said in my blog post (on this site) on 1st April 2009. The post was titled “Sleepless In Perth”. I quote from the article in The West Australia – Saturday 5th December 2009, Business Section:

“Most (small retailers) mortgage themselves to the hilt to meet fit-out costs that they are barley able to recoup by the time their five year leases expire.

So when the leases come up for renewal, some owners find themselves defenceless against what they view as often ruthless, complicated and unfair leasing practices of the centre operators.”

This is so true. I have appraised businesses where the owner is still carrying debt from their fit-out after five years and facing a hike in rent for a new lease and another fit-out! I am currently working with an owner of a franchise retail business in a major shopping centre. I quote from his email to me:

“Rent and Electricity currently runs at approx $8,400 per month $108,000 per annum this is what we are paying today, when the new lease rate kicks in this will jump to $10,800 per month ($129,600 pa) and then increase by CPI plus 2% per annum each year for next five years.

We have a liability to carry out a shop fit prior to end of July 2010 which we will either undertake ourselves or we would be willing to discount the business sale by $70K to cover the cost of the refit to the new owner.”

I suspect the $70,000 discount will not cover the total cost of the fit-out. The West article quotes of cases like this with even higher increases in rent and higher fit-out costs ($250,000 to $300,000) and business owners closing down, going broke or moving out as a result of the high costs and demands of the centre management. Many Perth business owners are worried about extended shopping hours coming in, as this will mean another major hike in rent to the shopping centres.

It IS possible to make a profit in shopping centres and you do get the advantage of high traffic, car parking, and security. However, if you are considering a franchise business in a shopping centre and paying these high rents as well as franchise fees – make sure you do your maths first and get good legal advice on the terms of the lease! Do your homework thoroughly before you jump in and make sure your chosen business can generate the cashflow to pay the rent and outgoings (now and with the annual increases), pay franchise fees, pay any loans, pay you a good income and still make a profit. If it doesn’t do all these things – don’t get in to it!

See my post of 1st April 2009 – Sleepless in Perth. Until next time!

John Denton

Just a quick post to let you know that I have created a new page on this web site for “Businesses For Sale”. It contains the latest listings of businesses for sale at Performance Business Sales.

You can find the Businesses For Sale page under the SERVICES tab at the top of this page.

Best Regards,

John Denton

Well, interest rates are on the rise in Oz which suggests that the economy is on the up! How will that affect business sales – well we will have to wait and see. Certainly, right now, the market is pretty buoyant with good offers being made and accepted. So, businesses are selling and it reminds me of something that always amazes me.

Why do people always seem to want to change a winning formula? Even before someone buys a perfectly good business they are asking questions about changing it!

Can I take that product range out and add this one?
Can I stop providing that service and make it this one?
I want a new logo!
I don’t want those staff members to stay on, I want to use my friends.
EVEN – I’m going to change the business name!

All that goodwill and reputation which has been developed can be rubbed out by a new owner in 5 minutes! Why do they want to do that? It amazes me.

Sure, any new owner will want to put his own “stamp” on the business. And sure, there will always be areas where improvements can be made and new potential realised. But at least wait until you have been in the business for a month or two and work out what is working and who’s who in the zoo before making any major changes!

Of course, there are always situations where wholesale changes are required. I know someone who recently bought a “struggling” business which was situated in a brilliant location. So the new owner closed it down, spent 3 1/2 months doing major renovations, changed the name and branding and then re-opened. Still exactly the same kind of business but it needed a major makeover. What the new owner was buying, of course, was the location! Perfectly sound strategy.

Another great tip we can learn from his particular case as well, is that when he re-opened he had a “soft” launch. Why? To make sure that all the systems worked correctly, the staff were trained and knew what they were doing and that they could provide the level of quality and service which would make them a standout. Once everything is tried, tested and proven – then will come the BIG launch. Just good plain SMART business. Not change for change sake!

Until next time! Feel free to comment on this article.

Check out my next 1/2 day workshop on developing a business to make it saleable. Go to the “Workshops” tab on this site or just CLICK HERE.

Regards

John Denton

As mentioned in the last article I posted, associated with the lack of attention to detail is the reluctance for people to read documents before they sign them. Why don’t they do that?

I think there are a number of reasons! One is the lack of time. Everyone is in a hurry and they may feel pressured to sign rather than spend the time in the meeting ‘reading the detail’. They may feel that taking the time to read everything shows a lack of trust in the other parties and they don’t want to be seen as ‘picky’. Whatever the reason, it can come at a cost.

These are legal and binding documents that are being signed. For example, The Agreement To Purchase comes with pages of “Standard Conditions” which are supplied to both parties ahead of finally signing. They can read them or get a lawyer to read and explain them. In most cases they are written in plain English (ours are at least!). Then there are often several or more “Special Conditions” which get negotiated and agreed between business sellers and business buyers prior to signing.

Even though we spell out the consequences of not meeting many of the terms and conditions – in the euphoria of the business sale (for the seller) and the excitement of becoming a new business owner – people forget.

TIP: Get advice before sitting down to sign ANY document. Know what you are signing and the consequences if conditions aren’t met. Ask for clarification and NEVER ASSUME!

As a seller, you will generally have more than one offer to consider. Make sure you look at any “special conditions” as these may make one offer better than another – in spight of the dollars!

As a buyer, make sure you include any conditions that protect you from post sales blues. Don’t go over the top but cover the major threats to ongoing profitability.

Typically you want to make sure;

• Plant & equipment is in good working order. Arrange for an inspection by a technician if appropriate
• Meet with employees, suppliers and major customers to make sure they will continue on
• Consider a specific Deed Of Restraint on the seller not to compete in the future
• Organise a stock take to make sure stock is correct and “saleable”
• Agree how work in progress will be reconciled. This is in standard conditions but I often recommend a specific clause detailing the agree handling of this. It can be a contentious issue if not handled well

A good broker will anticipate most things for you and explain everything – but always get a second opinion and READ WHAT YOU SIGN BEFORE SIGNING!

Want more on this and any topic related to buying and selling a business – come to my next workshop, or sign up for my mentoring group! Go to “Workshops” on this web site and select the one for you.

Regards
John
Helping Business Owners Achieve Their Life’s Goals Through Buying and Selling Businesses

I can’t believe it is so long since my last article. Things have really taken off since the new financial year started (1st July for the non Aussie readers) in that we are now finally getting genuine business buyers in the market place who are prepared to make realistic and acceptable offers. This is resulting in deals being done and businesses changing hands!

Yeah! We say. But it doesn’t come without some frustrations. One of the most common frustrations is people’s lack of “attention to detail”. In Australia we are famous for the “She’ll be right, mate!” attitude. Unfortunately, when it come to legal contracts and the exchange of large sums of money if  “She ain’t quite right mate!” then it can end up costing someone a lot of money, time and stress. And none of us need any more of that.

An example is the legal entity of the seller’s business and the buyer’s business. It’s one of the first questions I ask people. And they tell me it is, e.g.  XYZ Pty Ltd. It gets put on to the paperwork and the owner signs the Authority To Act, for example. In spite of repeated questions it turns out later, at a critical time, that there are multiple directors and some don’t want to sell. Or, there is a “trust” involved and the Pty Ltd is a trustee for the trust.This can cause all kinds of complications down the track.

Another trick that gets pulled on us is the incorrect spelling of business names. Over a period of time the owner forgets that they registered XYZ (W.A.) Pty Ltd and not just XYZ Pty Ltd or something along those lines. When I pull them up for it they ask “Well isn’t that close enough?” to which I always answer “If you are one digit out dialing a telephone number, does it really matter?”

Of course it matters!!! And then settlement of the deal gets delayed and people get angry and frustrated and start looking for people to blame. No matter how much as brokers we strive to get the correct information and detail, we are usually at the mercy of the owner’s memory (apart from certain things which can be searched on government databases) – which has often faded with time!

TIP: Always check what you are writing on forms BEFORE you fill it in. And the old adage “NEVER ASSUME” – please!

Next article to be posted will be “Read the damn documents BEFORE you sign!)

P.S. Check out my upcoming workshops in Perth – next one is October 23rd – go to Workshops tab for info.

Regards
John Denton
“Helping business owners achieve their life goals through buying and selling businesses!”

However, after getting more information, I suggested his wife look at another business we have listed which would suit her background very well and in my opinion would be a much better match. They are
comparable in price so let’s compare;

Fast Food Franchise
7 days a week
Long hours
Low staff loyalty
Low gross profit
Rely on passing trade
Royalties payable

Alternative Business
5 days a week and flexible
Low flexible hours
High staff loyalty
High gross profit
Loyal niche client base
No royalties

And there’s more ……….

And so it goes on. But the client is still leaning towards the fast food franchise. Why? Because it is perceived as being ‘safe’ and the brand is well known. It comes back to that old sales maxim – sell the client what they want NOT what they need! Either business is a good buy – otherwise we would not have listed and marketed them both. And buyers have THEIR reasons for buying which may not be the same as our own.

Just goes to prove, there’s no accounting for taste!

Regards,

John

Last week I was reminded why at PBS we do all the hard work with the business seller “up front”. You see
I had a conversation with a young man who came to me as a ‘buyer’. I, and some of my colleagues,
showed him a number of businesses. Then, as sometimes happens, it all went quiet and no purchase was
made.

Some weeks later I received a call from someone wanting me to sell their business for them. It turned out
the young man I had been helping had referred this person to me as a reputable broker he should use.
When I rang the young man (buyer) to thank him I asked how he had gone with buying a business.

It turns out he had gone to a different business broking firm and had put an offer in on one of their business
for sale. After spending time and ‘emotion’ going through the purchase, it all fell apart in due diligence
because of problems in the financials. The young man put in another offer through that same broking
company only to have this second deal fall through as well.

What this highlighted for me was the strength of our process at PBS and how it protects both the buyer
and seller and minimises the chance of the deal falling through. We get the seller to provide us a lot of information about their business, including finalised accounts, UP FRONT before we do the appraisal. If
things don’t stack up, we don’t take the listing. If we do take the listing, then the next step is the business report and this is such a strict process that all strengths and weaknesses of the business are uncovered
and documented.

By doing the hard work upfront we make it a more successful, lower risk and less stressful process for
both parties.

I thank that young man for reminding why we do the things we do.
Bye for now!

Boy have things changed since my last post!

Banks and financial institutions have virtually stopped lending money for business purchases. Now if you
want a loan, the banks will tell you to get a written valuation on your properties and assets BEFORE
putting in your application. Gone are the good old days of finance approval conditional on a valuation of
your home or investment property. That has really slowed things up! Also, most financial institutions will
only lend 20 to 30% of the business price – provided there is sufficient “assets” to cover the loan.
Businesses which are 90% plus goodwill may not qualify for a loan. Such businesses include service businesses like training companies, professional services, mobile services etc.

If you are a buyer, please determine what you will be able to fund in purchasing a business BEFORE
going to see a broker. In many cases the amount you can loan will be significantly less than you think due to property prices having fallen!
Boy, how times have changed.

John

Think about what it is that people are buying when they buy a business. There are three types of buyer;

(1) Investor buyer
(2) Lifestyle buyer
(3) Strategic buyer

An investor buyer generally buys a business with a “guaranteed” maintainable profitable cash flow with an opportunity to grow the business and sell later on at a profit.

A lifestyle buyer will buy a business to achieve a “sea change” in lifestyle. In other words they are often buying themselves a job (mowing lawns, cleaning cars, serving coffees, fitness trainer etc). They just want to be their own boss and enjoy what they are doing.

A strategic buyer will buy a business as part of a longer term plan – it’s strategic. It could be to gain market share, remove a competitor, asset strip the business, to get access to a product service or IP.

How you prepare your business for sale will depend upon what type of buyer you are trying to attract. Most business owners never consider the “type” of potential buyer – this is mistake. Who would be attracted to buy your business? Think about it and in future posts we will consider the buying motives of the different types of buyers.

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