Trio Business Intermediaries Blog

• If your gut tells you it’s got legs – push on.  If your gut tells you it’s a dog – run.  If your gut is giving you a niggling feeling of indigestion but you generally like the fundamentals – that’s normal; keep digging.

• We have a theory that buying a business is like finding a life partner – there’s only one!  Just because no one has bought the business yet doesn’t make it a bad business.  The best owner and the business just haven’t met yet.

• No two or twenty-two businesses will ever exactly fit with industry benchmarks - there’s always some reason the benchmarks don’t apply so don’t rely too heavily on them

• All successful businesses have a competitive advantage – that thing that sets them apart from the rest.  Average performing businesses often just need their competitive advantage refined.  A well priced plodder business will likely represent more opportunity than a top flight winner that may have run its race.

• When you’re looking at the financials, comparing businesses, make sure you are comparing like with like i.e. have you considered the commercial rate of rent, what owners need to be replaced by staff, what revenue streams are fixed / contracts vs discretionary subject to an economic tsunami?

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.

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

A few thoughts from those of us who sit between business buyers and sellers:

• Nothing new under the sun here!  Buyers have always been cautious about everything they’ve been told and sellers have always tried to put the best shine on the business.  Buyers who make successful acquisitions make a measured assessment of the risks.
• One of the many factors in coming to a business valuation is historical performance – there are plenty of others.
• Asking the same questions lots of different ways will help to uncover exaggerations e.g. ‘How long have your top 10 customers been with you’ and ‘I’m thinking of the 80/20 rule – where does 80% of your revenue come from now, compared to 2 years ago’ are both delving into customer retention
• Revenue is not the only measure of success in tough times; think payment terms, customer retention, online vs instore sales, contracts / preferred supplier status vs on-offs.