Trio Business Intermediaries Blog

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?

There’s no doubt that marketing and making sales is tough in any business.

If business buyers can see that there are great sales and marketing machines already in place and actively churning away then they will feel much more comfortable about the transition to them as the new owner.

So if you’re thinking of selling your business we’d recommend putting some effort into documenting your sales and marketing systems, collecting good examples and shining a light on your achievements with customers and prospects.

Some of these areas might include:

• Graphs and other visual aids showing sales / marketing / leads / customer service / online stats

• Key sales and marketing people (NOT the outgoing owner)

• Smarten up the website, including testimonials and recommendations

• Tidy up the customer list and enhance it with each customer’s tenure, avg sales per month, industry  etc

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.

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.