Investor interest on the rise (more)

THIS MONTH HAS SEEN ANOTHER INCREASE IN THE NUMBER OF POTENTIAL BUYERS LOOKING TO INVEST IN PRIVATE BUSINESSES.

WHILE THE MAJORITY OF SEARCHES DO NOT SPECIFY A PREFERENCE BETWEEN BUSINESSES OFFERING EQUITY AND THOSE LOOKING FOR A FULL SALE, THE NUMBER OF PEOPLE LOOKING SPECIFICALLY FOR EQUITY IS SUBSTANTIALLY LARGER THAN THE NUMBER LOOKING SPECIFICALLY FOR A FULL SALE.

THE REASONS BEHIND THIS TREND WILL UNDOUBTEDLY VARY BETWEEN INDIVIDUALS, HOWEVER THERE HAS BEEN SOME SUGGESTIONS THAT DIY SUPER FUNDS ARE NOW LOOKING AT THE EXCELLENT RETURNS OFFERED BY PRIVATELY OWNED BUSINESSES AND ARE CONTEMPLATING DIVERSIFYING THEIR PORTFOLIOS.

AT THE SAME TIME THERE IS ANECDOTAL EVIDENCE THAT THE NEXT GENERATION OF BUYERS IS MORE ATTRACTED TO SHARED OWNERSHIP THAN GOING IT ALONE. SOME OF THE APPEAL IS THE ABILITY TO REDUCE RISK BY BUYING INTO A LARGER, MORE ESTABLISHED BUSINESS THAN THEY COULD OTHERWISE AFFORD.

AT THE SAME TIME SOME SEE THAT SHARED OWNERSHIP MAY FACILITATE A BETTER LIFE-BALANCE. AT THE OTHER END OF THE SCALE THERE APPEARS TO BE A CONTINUED ESCALATION OF INTEREST FROM PRIVATE EQUITY FIRMS WHICH IS GOOD NEWS FOR ANYONE WITH A BUSINESS FOR SALE.

WITH THE MAJORITY OF BUSINESSES STILL BEING OFFERED FOR SALE IN THEIR ENTIRETY, THERE IS A REAL POSSIBILITY FOR A MISMATCH IN THE MARKET BETWEEN WHAT IS ON OFFER AND WHAT IS BEING SOUGHT. THE LEVEL OF BUYER INTEREST IS STILL HIGHEST IN RETAIL, PARTICULARLY IN MELBOURNE AND SYDNEY, AND THIS IS REASONABLY IN LINE WITH THE NUMBER BUSINESSES FOR SALE IN THESE AREAS.

CONVERSELY THERE IS AN APPARENT SHORTAGE OF BUYER INTEREST IN CONSTRUCTION, AND A SURPLUS OF BUYER INTEREST IN PERSONAL SERVICES.

ANOTHER INTERESTING RESULT FROM ANALYSING THE SEARCH DATA RELATES TO FRANCHISES. WHILE THERE IS CLEARLY DEMAND FOR FRANCHISES IN RETAIL, HOSPITALITY AND PERSONAL SERVICES, IN SOME OTHER INDUSTRIES LIKE CONSTRUCTION, WHOLESALE AND BUSINESS SERVICES THERE WERE FAR MORE POTENTIAL BUYERS OF NON-FRANCHISE COMPARED TO FRANCHISE BUSINESSES.

INTERESTINGLY, GIVEN THE VERY DIFFERENT NATURE OF OWNERSHIP THAT FRANCHISING PROVIDES, MOST BUYERS DID NOT SPECIFY A PREFERENCE.

SO YOU WANT TO RUN YOUR OWN BUSINESS !!!

ACCORDING TO SOME RESEARCH EARLIER THIS YEAR, THE MAJORITY OF EMPLOYEES WOULD RATHER OWN THEIR OWN BUSINESS THAN WORK FOR SOMEONE ELSE. BUT WHAT IS THE BEST WAY TO GO ABOUT IT?

THERE ARE THREE DISTINCT PATHS TO BUSINESS OWNERSHIP. YOU CAN START ONE FROM SCRATCH, YOU CAN BUY AN EXISTING BUSINESS, OR YOU CAN BUY A FRANCHISE.

STARTING FROM SCRATCH STILL SEEMS TO ENJOY SOME ROMANTIC APPEAL, BUT THE ABS FIGURES SHOW THAT OF THE NEW START UPS IN 2003-04, ONLY HALF WERE OPERATING TWO YEARS LATER. THERE IS NOTHING NEW IN THESE FIGURES – STARTING FROM SCRATCH HAS ALWAYS BEEN THE HIGH RISK OPTION.

A POPULAR CHOICE FOR THE FIRST-BUSINESS-BUYER IS THE FRANCHISE. IT IS LIKE BUYING OFF THE PLAN - YOU KNOW WHAT YOU ARE GETTING EVEN IF IT DOES NOT EXIST YET.

SOME FRANCHISES ARE VERY SUCCESSFUL, OTHERS ARE NOT. UNFORTUNATELY NEW FRANCHISE TERRITORIES USUALLY DON'T ADDRESS TWO MAJOR REASONS FOR BUSINESS FAILURE: CASH-FLOW PROBLEMS AND TIME TAKEN TO ESTABLISH A CUSTOMER BASE. THIS MEANS THAT A FRANCHISE IS BY NO MEANS A BULLET-PROOF WAY TO START A BUSINESS.

THE UNFASHIONABLE OPTION IS BUYING AN EXISTING BUSINESS. THESE COME WITH EXISTING CUSTOMER BASES, PREMISES, STAFF, AND FINANCIAL HISTORY. IF YOU DO YOUR HOMEWORK IT IS A SAFER OPTION, WITH THE ADDED BONUS THAT AT THE MOMENT THE PURCHASE COST IS ALSO VERY REASONABLE – IN SOME INDUSTRIES YOU WILL RECOUP YOUR COSTS WITHIN A YEAR OR TWO.

SO WHAT IS A SAFE BUSINESS TO BUY?

WHILE SOME INDUSTRIES ARE HIGHER RISK THAN OTHERS, FOR EXAMPLE IBISWORLD RECENTLY DECLARED BEEF AND SHEEP FARMING TO BE THE HIGHEST RISK INDUSTRY IN AUSTRALIA, THE INDIVIDUAL ATTRIBUTES OF THE OWNER ALSO PLAY A MAJOR PART.

SO BEFORE YOU DECIDE ON YOUR PATH TO BUSINESS OWNERSHIP, DO SOME HOMEWORK ON YOURSELF.

• WHY DO YOU WANT TO OWN A BUSINESS?


• WHAT ARE YOUR STRENGTHS AND WEAKNESSES?


• HOW ARE YOU GOING TO FINANCE IT?


• WHERE DO YOU WANT TO LOCATE IT?

THESE QUESTIONS WILL HELP YOU DECIDE ON WHAT SORT OF BUSINESS YOU WANT TO OWN, THEN YOU CAN LOOK AT HOW YOU CAN ACHIEVE THIS. EVERY BUSINESS NEEDS TO MAKE MONEY BUT THAT IS ONLY PART OF THE EQUATION.

FOR EXAMPLE, THERE MAY BE GOOD MONEY IN FUNERAL PARLOURS, BUT NOT EVERYONE WANTS TO BE AN UNDERTAKER.

IF YOU NEED SOME CONVINCING ON THE PERSONAL FACTOR TAKE A LOOK AT THE RESTAURANT INDUSTRY.

THERE ARE SOME VERY SUCCESSFUL RESTAURANTS MAKING VERY GOOD MONEY. AT THE SAME TIME, NOT VERY FAR AWAY, THERE WILL BE RESTAURANTS STRUGGLING TO STAY IN BUSINESS. SO THE SAFER OPTION IS TO BUY INTO A BUSINESS THAT YOU UNDERSTAND AND TO WHICH YOU CAN ADD VALUE.

IN THIS WAY YOU MAY BE ABLE TO BUY A CHEAP BUT POORLY PERFORMING BUSINESS AND TRANSFORM IT INTO A GREAT SUCCESS. IF YOU ARE DOING THIS IN RETAIL OR HOSPITALITY, DON'T FORGET THE VERY VALUABLE ‘UNDER NEW MANAGEMENT' SIGN – IT ENCOURAGES PAST CUSTOMERS TO GIVE YOU ANOTHER TRY.

THE KEY MESSAGE FOR WOULD-BE BUSINESS OWNERS IS THAT UNLESS YOU ARE SET ON DOING SOMETHING NOBODY HAS EVER DONE BEFORE,

THEN BUYING A BUSINESS IS LIKELY TO BE A MUCH BETTER AND SAFER OPTION THAT STARTING ONE FROM SCRATCH.

AS YOU CAN SEE ON WWW.AUSTRALIANBUSINESSSALES.COM.AU THERE ARE A HUGE VARIETY OF BUSINESSES FOR SALE ACROSS A WIDE RANGE OF INDUSTRIES, THROUGHOUT AUSTRALIA.

TAKE A LOOK FOR YOURSELF, BUT BEFORE YOU BUY MAKE SURE IT IS THE RIGHT BUSINESS FOR YOU – BUSINESS OWNERSHIP IS PERSONAL.

MORE BUSINESSES FOR SALE IN JUNE QUARTER

IN THE PROCESS OF COMPILING THE JUNE EDITION OF THE BIZEXCHANGE INDEX WE HAVE COME ACROSS SOME INTERESTING STATISTICS ABOUT THE STATE OF THE MARKET.

THE NUMBER OF BUSINESSES FOR SALE (COMPILED FROM PRINT, ONLINE AND BROKER ADVERTISEMENTS) IS UP BY 33% ON THE PREVIOUS QUARTER. AND THE NUMBER OF BUSINESSES SOLD , JUMPED IN MAY AND JUNE, OUTSTRIPPING THE NUMBER OF NEW LISTINGS.

SOME ADVISORS SAY IT'S NOT UNUSUAL FOR THE NUMBER OF SALES TO INCREASE EITHER SIDE OF THE END OF FINANCIAL YEAR, SO WE WILL MONITOR THIS TO SEE IF IT IS A SEASONAL PATTERN OR PART OF A LONGER TREND. THE OTHER STANDOUT IN THE DATA IS THE ABUNDANCE OF RETAIL BUSINESS (42% OF LISTINGS) AND ACCOMMODATION, CAFE'S AND RESTAURANTS (27% OF LISTINGS) CURRENTLY ON THE MARKET.

RETAIL BUSINESSES REPRESENT JUST 20% OF ALL BUSINESSES AND ACCOMMODATION, CAFE'S AND RESTAURANTS REPRESENTS JUST 3% OF ALL BUSINESSES. SO THEY ARE OVER-REPRESENTED IN THE MARKET AT THE MOMENT.

THIS IS DUE IN PART TO THE FACT THAT SOME BUSINESSES ADVERTISE ON MULTIPLE SITES FOR EXAMPLE HOTELS AND MOTELS ARE OFTEN PROMOTED ON PROPERTY SITES AS WELL. THE OTHER REASON IS THAT RETAIL AND HOSPITALITY HAVE TRADITIONALLY HAD HIGHER CHURN RATES WITH SOME BUSINESSES CHANGING OWNERS SEVERAL TIMES IN A DECADE, WHERE AS A PROFESSIONAL CONSULTANCY MAY BE SOLD ONCE IN A LIFETIME.

WITH THIS IN MIND IT IS PERHAPS NOT SURPRISING TO FIND THAT THE MOST UNDER REPRESENTED INDUSTRY SEGMENT IS BUSINESS SERVICES - JUST 4% OF LISTINGS BUT REPRESENTING 25% OF ALL BUSINESSES. THE OVERALL NUMBERS FOR BOTH ARE UP, WHICH MAY BE DUE TO THE INCREASING NUMBER OF BABY BOOMERS LOOKING TO SELL OUT AS THE APPROACH RETIREMENT.

THE INITIAL INDICATIONS ARE THAT RATIO OF BUSINESSES FOR SALE BY SIZE IS CONSISTENT WITH THE OVERALL NUMBER OF BUSINESSES. THE MAJORITY OF BUSINESSES ARE AT THE SMALLER END WITH ONLY A FEW WITH A TURNOVER ABOVE $15 MILLION.

Investor interest on the rise

This month has seen another increase on BizExchange in the number of potential buyers looking to invest in private businesses. While the majority of searches do not specify a preference between businesses offering equity and those looking for a full sale, the number of people looking specifically for equity is substantially larger than the number looking specifically for a full sale.

The reasons behind this trend will undoubtedly vary between individuals, however there has been some suggestions that DIY Super funds are now looking at the excellent returns offered by privately owned businesses and are contemplating diversifying their portfolios. At the same time there is anecdotal evidence that the next generation of buyers is more attracted to shared ownership than going it alone. Some of the appeal is the ability to reduce risk by buying into a larger, more established business than they could otherwise afford. At the same time some see that shared ownership may facilitate a better life-balance. At the other end of the scale there appears to be a continued escalation of interest from private equity firms which is good news for anyone with a business for sale.

With the majority of businesses still being offered for sale in their entirety, there is a real possibility for a mismatch in the market between what is on offer and what is being sought. The level of buyer interest is still highest in retail, particularly in Melbourne and Sydney, and this is reasonably in line with the number businesses for sale in these areas. Conversely there is an apparent shortage of buyer interest in construction, and a surplus of buyer interest in personal services.

Another interesting result from analysing the search data relates to franchises. While there is clearly demand for franchises in retail, hospitality and personal services, in some other industries like construction, wholesale and business services there were far more potential buyers of non-franchise compared to franchise businesses. Interestingly, given the very different nature of ownership that franchising provides, most buyers did not specify a preference.

The X factor in buying a business

There is no doubt that buying a business has a higher probability of success than starting one from scratch. But what are your chances of success if you buy a business with which you are unfamiliar? Plenty - according to the franchise promotions. On the other hand there are plenty of career professionals who believe that in order to run the business you must be able to ply the trade, whether it is plumbing pipes or pulling teeth.

The fact is that being good on-the-tools is not a requirement, or even an indicator of success in business ownership. However it is very important to understand what is required for the business to succeed. In this regard there are some business basics for particular businesses and industries which you must address.

First and foremost, where does the money come from? In which market does the business operate?, Who are the potential customers and who are the current customers? What are they buying and what will they buy in the future?

Secondly what is required for the business to operate efficiently? What are the major costs, fixed and variable, and how can they be monitored and controlled? Also what are the risk factors, within and outside the business?

Thirdly, cash flow. What are the margins, payment track record, terms of trade, and seasonal fluctuations? How will these factors impact on the financial requirements of the business and its ongoing profitability?

Finally, how will you impact on the business? This is the real x-factor if you can satisfactorily answer all of the questions outlined above, and see the issues that sit behind them. Will you provide the business with vision, working on the business over the long term while managing the business day to day. If you can see a way of taking the business and improving its functional and financial performance then you might be looking at your next business.

Shopping for a retail business

With so many retail businesses for sale, potential buyers may like to finetune their wish lists to find the ideal purchase. First of all potential retailers need to understand the market in which they will be operating. The retail industry is dominated by the larger players (the top 5 have nearly 50% of the $250 billion market), and franchises (predicted to be 20% of retail outlets by 2015). This means that the average retail turnover outside the big players is around $750,000. With a number of mid-sized retailers in this mix, the majority of the nearly 200,000 retailers have a turnover of less than half a million.

With this in mind, don't expect a retail business to have a large turnover. Next thing to look at is margins. Traditionally retailers have aimed for a gross margin of 50%, however with Australia's population now accustomed to sales this is rarely achieved. Margins will also need to be considered in line with the shelflife of stock. The shorter the shelf-life the more actively the stock needs to be managed – this is particularly true for fruit, fashion and similar items. One of the key ways to manage this is by marking down the stock. So when looking to buy a business try and determine the starting margins, average margins and clearance margins. Then make an assessment on margin management and whether you can do better.

Stock turnover. The slower the stock moves, the more expensive it is to finance. Review stock levels, order patterns and sale patterns. Consider what the average stock value is and how much this would cost to finance. Also look to see if you can improve on this. For example, a business with a turnover of $500,000 may have 50% of its sales in the two months prior to Christmas, and yet carry the same stock levels all year. You could save money by adjusting the stock levels accordingly. Also see if you can negotiate stock on consignment rather than buying it at the outset.

Customer traffic and sales conversion. When buying a business one hopes that with a few minor adjustments you can improve its performance and subsequently your return on investment. In retail, an indication of a store's potential is how many people go past the store, and more importantly how many people go in. An indication of its operational effectiveness is the proportion of visitors that buy, and the average transaction spend. Also important in this mix, particularly if the lease is nearing renewal, is how many of the visitors were specifically looking for the store, and how many visited because of its location. Related to this is the level of advertising spend, and how much this drives the traffic.

Finally, consider your own level of knowledge and interest. It is important to have experience in the product; it is dangerous to assume everyone has your taste and priorities. It is essential to have an interest in retailing. If the considerations outlined above don't interest you, then perhaps retailing is not for you.