End Of Year – An Opportunity

Well, it’s the end of another financial year – well at least it is in Australia. The end of the year is a good opportunity for reviewing your business performance over the last year as well as setting strategies, goals and plans for the coming year.

One of the opportunities which is often overlooked, is the opportunity to restructure your chart of accounts in your accounting package. Why would you want to do that?

Your management accounts are your ‘instrument panel’ for the business. They should be set up to provide you, the business owner, with the information you need to make informed decisions in your business. Correctly set up, your accounts will tell you; what are your most profitable products and services, who are your most profitable clients, the life time value of your clients, where your cash is going and where you can increase your profits – just to mention a few.

When it comes to selling the business, the profit and loss statements are crucial. Make sure you identify different income streams – not just “Sales” or “Income”. Break it down in to logical product or service lines. Track your cost of sales in the same way. Accounting packages these days allow you to assign product codes and associate costs to ‘project codes’. Make good use of the powerful features of the accounting package. Seek help from a good accountant and if you don’t know one, just give me a call.

When it comes to selling the business, it makes it much easier to put a value on the business if you separate out items which can become add-backs. That is, such things as owner’s wages and super, subscriptions and memberships and anything which is discretionary and not part of the day to day operations. It also makes it much more attractive to a buyer and improves the likelihood of getting through due diligence quickly and painlessly.

On the 28th July I am running another of my half day workshops on preparing businesses ready for sale. You can get the details and register through the Small Business Centre – Stirling web site. Just CLICK HERE

All the best

John Denton
“Helping business owners realise their dreams through buying and selling businesses!”.

New! Businesses For Sale Page

Hi Everyone,

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

Read The Damn Documents BEFORE You Sign Them!

Hi All,

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

And They Wonder Why They Have Problems ….

Hi Again,

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!”

GST And The Sale Of A Business

I was asked today the very good question “Does the sale price of a business include GST and is GST payable?”

(For the non Australian readers, GST is our Goods and Services Tax (10%) collectable by the vendor or service provider on most things – there are exceptions but not worth going in to here.)

The answers are “No” and “No” – if the business is sold as a “going concern.”

The sale of a business as a going concern is GST free if:

• everything for the business’ continued operation is supplied to the buyer
• the seller carries on the business until the day it is sold
• the buyer is registered or required to be registered for GST
• the sale is for payment
• before the sale, the buyer and seller agree in writing that the sale is of a going concern.

Example: Selling a business

You are registered for GST and you sell your florist business. The sale includes the shop, delivery vehicle, stock, equipment and all the other things necessary to continue operating the business. You continue to operate the business until the buyer takes over, the buyer is registered for GST, and you and the buyer have agreed in writing that the sale is of a going concern. This is a GST-free sale.
Always consult your accountant for a definite ruling on the sale of your specific business!

Learn about this and a lot more at my next half day workshop CLICK HERE for details.

Regards

John Denton
Committed to helping business owners realise their life’s goals through buying and selling businesses

If I Could Get OUT For What It Cost Me To Get IN, I’d Be Happy!

It happened again today! I was talking to a franchisee about her chances of selling her franchise business and she came out with the statement I hear so often from franchisees – “If I could just get out of it for what it cost me to get in to it, then I would be happy”.

I hear this so often from franchisees struggling to make a profit in their business. Usually they are in a retail situation in a shopping centre. After a few years they realise that the only people making any money are the shopping centre owners and the franchisors. In effect, the franchisee is working to keep the shopping centre owners and franchisors in the lifestyle they have come to expect!

Unfortunately, once you are IN and have invested the money, it can be very difficult to get out and recover your costs. And if the lease is in the franchisees name then they are stuck with that as well.

The first piece of advice I give anyone considering buying a franchise is “Find out how are you going to get out of it?”  They normally laugh and ignore my advice.

If you really must buy a retail franchise business in a shopping centre then do your homework first. In Australia we have such a strict Code of Conduct for Franchisors – as part of the Trade Practices Act – there is no excuse for a prospective franchisee NOT doing their homework before signing up. At least speak to existing franchisees and see how they are going, and if possible, franchisees who have left the franchise. Under the Act the franchisor must provide details in their disclosure document for you to do this.

To view the Code of Conduct for franchisors CLICK HERE and I recommend page 29 onwards.

Regards
John
“Committed to helping business owners realise their life’s dreams through buying and selling businesses!”
Thinking of buying or selling a business? Then attend my workshop on the 6th August – click on WORKSHOPS tab above.

Do You Treat Your Business Like A Farm or a School?

Well, come on, honestly, do you treat you business like a farm or a school?

Well known author, stephen Covey, develops an excellent metaphor around “cramming” (school) and “farming” (farm). He says that for long term benefit or to give things longevity then they need to be treated like a farm. For example, business relationships or  relationships of any kind, need to be treated like farming if you want them to be successful over time. By farming he means you need to be working on them all the time. Nurturing, developing and looking after them – long term.

On the other end of the scale you have what happens in schools and particular colleges and universities where students often leave everything until the last minute
and then cram for an exam. This gets he student a certificate but NOT an education, according to Covey. To become educated takes time – in otherwords, it’s farming.

What does this have to do with business, you ask? No, I’m not geting in to selling farms and schools!

To build a business “ready for sale” requires farming! It is a long term exercise if you want to sell for the best possible price and quickly and easily. Many aspects of a business which affect its value and saleability need to have a track record of consistency over a longish period of time. Usually a minimum of three years. A good track record of growth and profitability over a period of time are paramount – just to mention one aspect.

As I am committed to helping business owners realise their dreams through buying and selling businesses I am running some half day workshops on “The 7 Key Steps To Preparing A Business Ready Sale”. If you are interested in attending a workshop, or know someone who would like to attend just CLICK HERE for the details. If there isn’t a workshop in your area, just use the CONTACT US tab on the web site to request one! When there is enough demand I’m willing to go anywhere (well almost!).

Until the next time – remember, treat your business like “farming” and not a “school” – and like a well run farm it wil sustain you for a very long time.

Until the next post!

Regards
John

Sleepless In Perth – Franchises

I have been having a sleepless night! Why? Because I know that in the morning I have to deliver some disappointing news to a prospective client. You see, I’ve been asked to do an appraisal on a business ahead of selling that business for the owners.

So what’s the problem?

The problem is that the business is a franchise business in a shopping centre.

So why is that a problem?

Generally in these cases the owners have invested an enormous amount of money to buy the franchise and pay for the fit out of the premises. Often this can be as much as $450,000 or $500,000. Just to get started in the business! Then, every month they are paying royalty fees to the franchisor of typically 7% to 9% and possibly a marketing fee on top of that. Then there are the very high lease costs for the premises to be in a ‘quality’ shopping centre where there are no options to renew on the lease and very little room for negotiation. Then of course the business needs stock as well. Depending upon the type of business the stock value can be anything up to $250,000 and more. I have seen these levels of stock in such businesses.

So the owners work long hours – often 7 days a week – to scrape together meagre profit of $80,000 to $100,000 per year. Great looking business but a long time to get the investment back. In some cases you are looking at 5 to 7 years just to get your investment back.

So after 4 or 5 years the owners are tired and working long hours and decide to call it a day and cash in their business – sell! They go to their accountant who, in most cases, sets an unrealistically high figure on what the business is worth. You see, the accountant looks at what was put in to the business and says, OK, you have a written down value of $250,000 on the fit out of the premises, plus $20,000 plant and equipment, plus $200,000 of stock and you make $100,000 per year net profit. That makes your business worth – $250,000 plus $20,000 plus $200,000 plus $100,000. A total of $570,000.

Wrong! When selling a business as a ‘going concern’ the normal valuation method, in the vast majority of cases, is based upon the maintainable net profit after add-backs and adjustments multiplied by an ROI factor. (For detailed explanation of this visit http://www.businessreadyforsale.com/ArticleKey2.html).

So in the case of my current prospective client they have a maintainable net profit in the region of $80,000 and the business type will attract at VERY BEST a maximum of 40% ROI. That is a multiplier of 2 1/2 times. In other words $200,000 tops! And that is inclusive of stock and plant and equipment and everything else. Not a lot of reward for 5 years of effort. And on top of all of that, the franchisor wants the new owner to upgrade the fit-out (cost of $25,000) and there is only two years left on the lease with no guarantees of a renewal. Would YOU buy that business?

So you see why I am sleepless in Perth. By the way, this is a very typical scenario for a retail franchise business in a shopping centre! Remember, franchising is having a license to operate a business – not necessarily owning a business.

Why We Do The Hard Work Upfront

Hi Readers,

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!

Whoooosh – What was that?

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