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.

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!!)

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.

It seems that the big banks are calling all the tunes in business transactions right now.

We hear from all quarters that the main financiers are making it very tough to get finance for business acquisitions and that their requirements are changing on a daily basis.  And this at the time when many entrepreneurs are seeing opportunity all around, believing there hasn’t been a better time to buy.

Some suggestions from Trio as we sit between all the parties:

If you know a finance good-news story drop us a line and we’ll spread the word

Those investors seeing great opportunities in this challenging environment are still doing deals.  Is the due diligence process any more difficult or important in these tough times?

We say the short answer is NO

Yes there might be an inclination for sellers to, say, divert attention away from a downturn in sales and profitability but the risks aren’t so much more overstated now as they have always been.

It is, and always will be, important to look around every corner and under every customer list to make sure the due diligence process addresses all the potential risks – not just the ones with a $ in front of them.

Up to date and accurate debtor payment terms might be something to take a thorough look at – especially if that type of information had been provided many months before at the initial investigation stage.

On the flip side though, it could be that the current management have reacted to slower trade by taking the paring knife to costs.  If you have a great plan to increase sales this could be a deal sweetener worth spending more time on in Due Diligence.

You were always going to do profit forecasts and cash flow projections right? You were also going to take a pretty thorough look at the underlying assumptions right?  Not much has changed here then either.

The financial stability of suppliers (so often now offshore) was important before and it’s important now.  Same old same old.

Bottom line = Due Diligence is always important enough to do as thoroughly as possible.