Trio Business Intermediaries Blog

If you’ve decided to pass your business onto family / staff or you’re heading towards selling, you will want to maximise the value of the business.

The list of things you can do to improve that valuation is long and been discussed here before so, here are a few more big ticket items:

• Put the sale or succession on the agenda – monthly meetings, accountant’s review, business plan

• Identify the personal expenses and assets in the business (we call them the ‘boats n benzes’!)

• Take a holiday – a long holiday – without being in touch.  Fix whatever falls apart in your absence so that you can disappear forever

• Get the tax and structure sorted – some structures are more advantageous on sale

• Focus on profits – hard profits beat blue sky every day

Where do your will and your business intersect?

Hopefully in the cold hard light of day with all interested parties present and accounted for!

To avoid unnecessary angst it’s advisable to discuss your plans for the business in the event of your passing.

Please don’t assume that everyone involved – partners, children, advisors – has guessed your plans for the business and are in agreement.

If, say, the business is to be shared between children some important matters to consider:

• Are you sure your partner doesn’t want to run the business or indeed need to run the business if the children are still minors

• Do all the children want to be actively involved in the business?

• If not, how will the business be valued?

• How does the business sit with other assets e.g. cross guarantees, landlord / tenant?

• Are roles within the business clear or promotion paths plain?

• Has an ‘advisory board’ or a mentor been appointed?

What more can be added to this list from your experience?

We’ve just had a call from the liquidators of a business we were asked to value about 12 months ago.

We’re disappointed for the directors and staff that it’s come to this but not really that surprised. Even a year after the event the issues that really struck us included:

• The accounting records were not up to date and pretty messy

• The directors were not all on the same page

• A manager, who was not an equity partner in the business, was often asked to do the ‘dirty work’

• Director’s loan’s terms and conditions were not documented and some elements not properly recognised as liabilities of the business

• Despite deteriorating results the expensive trappings of boats and cars were fixtures

Confidentiality is a critical issue that influences everything we do in business sales and valuations. 

It’s plays out in a number of ways:

• Ensuring staff aren’t unsettled by tales of a pending sale or change of ownership

• Preventing competitors using news of a sale to undermine existing customer relationships

• Maintaining dealings with suppliers, sure of an ongoing stream of orders

• Customers may become unnerved by rumours of a change of ownership, concerned about continuity of supply

• Professional advisors, whilst likely party to the planned sale or valuation, may leak an anticipated sale to other parties in the hope of securing a buyer

Whilst keeping all of these balls in the air, there’s another side to this whole confidentiality issue that warrants some thought:

How can someone buy the business if they don’t know it’s for sale?

Where do you sit on this vexed question?

Well there’s no new news in this statement is there?

Cash has always been a critical element of any business.

What then are the business valuation and sales implications of the cash elements of the business?

Underfunded business are usually underperforming businesses

If cash is doing the triple bypass and going straight into the pocket then it is extremely hard to prove to a prospective purchaser / investor that it ever existed.  If it’s not in the books it never happened as far as the sceptical advisor and the potential financier are concerned.

Sure some industries are notorious for skimming cash off the top but you can’t have two bites of the cherry – if you take advantage of some ‘free’ cash, you can’t then assume that you can reap the benefits of that income when you are looking to sell or attract an investor.

Good cash flow = good relationship with the business’s financiers = better prospects of having the acquisition funded by that financier.

Cash is mostly tied up in Accounts Receivables (Debtors) and Inventory (Stock) – it’s a strain on the new owner / investor to have to fund stock that can’t be quickly turned into debtors and then into cash.  Work towards keeping both stock and debtors as low as is efficient.

The level of cash demand often equates to the life cycle of the business – early on there is huge cash demand to fund growth, later in its life the pressure is on the business to maintain assets and develop new offerings.

We are often asked to do business valuations as a precursor to new investors coming into a business.

If the business needs a cash injection the potential investor, coming in on their white charger, saving the day is difficult to look past.  The realities though are that there are a number of potential scenarios that need to be considered before we’re all sitting around the table at the celebration lunch:

Will the investment be made in tranches and what will the hurdles for further contributions be?

What impact will there be on Management and Board structure?

Assets that might sit on the periphery of the business like non-core assets or Director’s assets – how will they be treated?

What happens to the debts / borrowings – will they be taken on by the new regime?  What about owner advances to the business – repaid or forgiven?

Then of course there are Director’s guarantees currently in place.

If new investors are being brought in for their expertise or contacts – how will the success of that strategy be measured?  Is there a fall-back position if the strategy or relationship fails?

Would it be better to sell the existing business to a completely new entity?

What are the tax implications for existing owners?

What happens to the Management team and who decides that?

In the work we do in Business Sales and Business Valuations we often speak with business owners and managers about their financial statements (Profit and Loss and Balance Sheet) and wonder why they are not being used more as tools to manage and grow the business.

Some opportunities the Balance Sheet present to keep track of the business:

Stock / Inventory – make sure you have a complete list that adds up to the figure called “Stock” and then go through that list and make sure everything exists and is valued at the lower of what you can sell it for or what it cost to bring in.

Receivables – again make sure you have a list that adds up to the figure for “Debtors” (people that owe you money) and go through that list to make sure all are collectible. A good reality check is required here.

Trade Creditors / Other Creditors – your work is a bit tougher here.  This time you’re looking for what’s NOT on the balance sheet.  Some possible omissions include full employee entitlements (annual and long-service leave,) taxes payable, superannuation payable and commitments you’ve made for new equipment that’s not yet delivered.

Related party loans – hey, we’re accountants; we know the jiggery and pokery that goes on in businesses!  Reality hits though when a buyer or investor comes in and looks at the real substance of any loans.

Any issues you find with these values need to be addressed post-haste.  At a minimum making the adjustments will give you a clearer picture of your assets and liabilities.  A new owner or investor / partner will go through all those assets and liabilities with a fine tooth comb and discount any that look dodgy.

We have too often been involved in business sales and business valuations because things have gone pear-shaped in a business partnership and a shareholder or partnership agreement doesn’t exist or doesn’t address the demise of the business arrangement forged in the trenches of the war for customers / staff / premises  ………..

So many business partnerships start off as a couple of mates / old work colleagues having a good idea and just kicking off to see how things might pan out.  Statistically we know most of those fail but some don’t.  Happy Days.  Problem though is that the inauspicious start often meant no agreement on how things were going to play out when it was a real-live-business or if someone wanted to get out.

There might be an age difference.  There is often a motivation difference.  There can even be a ‘scary wife’ difference!!

Partnership agreements should consider inter alia:

Keep a copy of the agreement at the ready and another at the solicitors.

While you’re there get some good advice on the structure that’s best employed i.e. partnership v company.  The Accountant will also have plenty of war stories to relate in this regard.

We’ve recently undertaken a number of business valuations for family businesses which are the subject of divorce proceedings.  The great thing to see is that most of them have been amicable, calm and sensible arrangements between the parties.  Some issues:

Often only one party works in the business and the other knows little or nothing about the day-to-day running of the business.  For us it’s absolutely critical that an unbiased view of the business is offered and that means ensuring the inactive party gives a ‘reality check’ over the information provided, especially the more fluid commentary like the business’s competitive position and the outlook for the future.

The accountant who has been advising the business cannot be independent because they’ve been advising both parties.

Incremental movements in the value of the business will by nature adversely affect one side and benefit the other.  We provide the ‘umpires decision’.

Tumultuous times at home can result in bad karma at the office.  This can affect recent business results but could also mean that selling the business seems like an easy way out.  We advise one step at a time because, as we’ve said here before, selling a business is hard work and could create more problems than it fixes.

What if the children work in the business? We’re obliged to treat them as any employee and ensure that commercially realistic salary and benefits are accounted for.

It makes sense to have agreement between couples on how a business and its value will be handled long before things go pear shaped.  If you were going into business with a partner you’d draw up a partnership or shareholder’s agreement wouldn’t you?  Same here.  Agreements between husband and wife in the cold hard light of day won’t stop a divorce in future years but it will make things easier to unravel.

Some of the factors influencing business valuations right now (yes there is some upside!!)