Trio Business Intermediaries Blog

We’d like a $ for every time we’ve mentioned that the banks still aren’t lending and the sentence is barely complete when the response comes back something like “I know ! followed by a long story of the short shrift from what’s historically been a friendly banker.

Well we can whinge or we can work around it.

Some ways to address the funding issue might include:

• Sellers offering vendor finance – Ok so not an original thought but has the huge benefit of backing the business to be sold.

•  Buyers asking for vendor finance – you don’t ask you don’t get and the appetite for this possibility is being driven by necessity

• Package the business professionally – it is now even more important to present the business, projections and upside in a way that the financiers can easily understand.  The business case needs to hit their cash-generating hot buttons

• Consider other funding sources – angel investors want equity and a say but a smaller bit of a bigger pie has to be a consideration

• Staged Acquisition – consider an acquisition over time with a pre-agreed timeframe and terms to provide certainty for both parties

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?

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.

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

We’ve recently read two very interesting articles on business sales.

Firstly Sue Prestney seems understandably concerned about the lost opportunities arising from the lack of debt funding available for business acquisitions.

Ms Prestney laments jobs never created, innovative products never produced and profits never made because enthusiastic business buyers can’t get finance.

Leon Gettler has penned a lengthy article on exit strategies in the excellent online publication Smart Company.

The section of the article that really caught our eye and gave a wry smile was an excellent two line comment at the end of the article by reader ‘eyesopen’ who suggests that was all very well and good but it comes unstuck in the execution phase because banks aren’t lending to SMEs.