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

• 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?

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.

There’s risk everywhere you look when buying or investing in a business.

If you’re looking to sell or attract an investor you need to be on the front foot addressing those risks for the prospective purchaser / investor before they even think of them.

Just some risks you might want to consider:

     With the outgoing owner goes all the customers

     The GFC isn’t over

     Potential regulation changes

     Key staff won’t stay

     Interest rates are likely to be going up

     The outgoing owner will start up elsewhere and take all our business

     New technologies in the industry

 We know for sure there are ways to mitigate all of these risks for a prospective purchaser / investor.  Contact us if you need a hand addressing any of these issues.

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!!)

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.

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.