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?

Investor Buyers

There are a lot of people with a lot of money at the moment (in Australia anyway) and they are looking for
low risk high return investments (aren’t we all?). A good small or medium size business can offer what
they are looking for.

Think about it. A business with a track record of turning in a maintainable net profit of $250,000 per annum
for say, 3 years or more – and being offered for $625,000 – will potentially give the purchaser a return on investment (ROI) in 2 1/2 years. After 3 years the buyer has got his money back and can sell the business
for what he paid for it (or more if they have grown the business). They’ve doubled their money in 3 years!
What other kind of investment gets that sort of return.

To attract an investor buyer, your business will need to have a good track record, clean and detailed
financials, and be in a market that is low risk and likely to return the same maintainable net profit. The risk
to the maintainable net profit will affect the price the business will sell for. The lower the risk, the higher the
value. A business running well under management will be even more valuable to an investor buyer.

Would your business be attractive to an investor buyer?

What To Do About It

Hi Again (so soon!),

See previous post. This is exactly why we, Denton & Associates, are committed to help business
owners prepare their businesses for sale and achieve the best possible price in the shortest time with the highest degree of confidentiality. All businesses sell at some point – many involuntarily. Only the
best prepared businesses will sell easily and at the best possible price. Contact us to get a Business Appraisal and find out where your business stands. CLICK HERE to contact us about an appraisal.

Regards
John

Business Sale Prices Falling

Hi Everyone,

My posts have been infrequent – but WOW they’re good when they do come.

As I have been telling my clients for some time now, businesses values are going to decline as more baby
boomer business owners go to the market. This has been backed up by a recent article in BizExchange – here is an extract – for the full story go to www.bizexchange.com.au

A national business index, which monitors the value of private businesses, reveals that even before the impact of the US sub-prime fallout had reached Australia the value of privately owned Australian businesses was sinking.

The BizExchange Index, which covers the last quarter to Dec 07, says this trend is likely to accelerate in the wake of the tightening of credit flowing from the US sub-prime crisis and particularly if economic growth in Australia slows as a result.

The underlying driver in the Australian market is demographic change as more business owners approach retirement. This is increasing the volume of businesses for sale and decreasing prices as supply outstrips demand. The availability of funding, or lack of it, for potential Gen X or Y buyers is another factor to be considered.

Key findings included that the market is developing a definite pattern of listing volumes increasing (up 25% on last quarter) while prices are falling (down 5% on last quarter). This follows several quarters of fluctuations around a declining trend. The volume of businesses being advertised for sale continues to grow, up 25% on the previous Quarter (to Sept 07), and 46% on the same time last year. The majority of this growth in listings has been online The average price, expressed as a multiple of earnings, has dropped slightly this Quarter, and is also below the same time last year.

For further information please go to www.bizexchange.com.au

Who Will Buy My Business

I am often ask “How do I find a buyer for my business?” It’s an obvious question that I get when I tell business owners that we build businesses for sale and lifestyle.

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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