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.

Selling a business

What to think about

Some of the issues you should consider before selling are:

• What are you selling, e.g. are the assets to be sold separately? is the business a going concern? is the goodwill for sale? is there proper title for each asset?


• What information will be provided to the potential buyer, e.g. accounting records; the accuracy of statements made to entice the buyer.


• Whether the buyer can continue to run the business successfully during any transition period following purchase, e.g. training the purchaser and introducing them to established customers.


• Whether the financial records of the business are up to scratch and what should be done to get them into shape, e.g. detailed information about business debts, loans, whether the debt will be assumed by the buyer etc.


• Is the business is leased premises? If it is will the landlord agree to transfer the lease?


• Tax implications, e.g. capital gains tax, value of stock, roll over relief etc.


• The business's market and the nature of competition.

Valuation

Formal valuations of businesses are normally carried out by people with the appropriate qualifications. There is no specific method or manner of valuation, and often it depends on the type of business and the circumstances of its sale.

A valuation may also include a determination of the "net tangible assets" of the business, i.e. taking into account the liabilities of the business and the current value of the assets. The current value must reflect the written down value of the assets, which may be different depending on whether the business is a going concern or the assets are to be sold.

Goodwill

This is part of what is being sold in a going concern, and will often be the largest percentage of the saleable assets of the business. Considerations should include whether:

• the business name and any trademarks or other intellectual property is part of the sale;


• the seller has an obligation to maintain the goodwill until the transfer of the business;


• training of the buyer is included in the sale;


• the buyer will be introduced and promoted to established customers;


• contracts with customers and suppliers are part of the sale;


• there will be a restraint of trade agreement, e.g. the vendor agrees not to open a similar business within a certain geographical area or restrictions on the right to assist a competitor.

Selling expenses

Don't underestimate the expenses that you may face in selling the business, for example:

• repair and maintenance of assets before sale;


• advertising the sale;


• professional costs to lawyers, accountants, business brokers etc.

Who sells?

• Brokers are professionals who sell businesses in a similar way that real estate agents sell private property. They may be able to identify a competitor or investor as a potential buyer;


• Accountants will often be able to help in the sale of a business and its valuation;


• Lawyers are a good start when beginning negotiations with potential buyers, and can handle the legal aspects of the transfer.

Advertising

It's important to choose the best method of advertising the sale of the business, and to take professional advice before you make any decisions. Possibilities include:

• Newspaper advertising, which usually has a separate classified section devoted to "businesses for sale". You should also get advice about whether an advertisement should be placed in a trade journal and specialist publications;


• Sending letters to potential buyers, usually competitors;


• Direct approach by a broker or other professional who can also negotiate on your behalf.

Payment

You should think about:

• the deposit that will be required following the agreement to sell and bind the parties to the contract of sale;


• when and how the balance of the purchase price will be paid, e.g. the number of days for settlement (usually 30 days);


• ensuring there is no doubt about the buyer's obligations to insure the business when this becomes applicable.
  
  

Sell your business

Recent statistics reveal that over the next 5 years, 40% of small business owners’ surveyed plan on selling. If the survey results reflect a broader trend that means 400,000 business owners trying to get the best price for their businesses over the coming 5 years.

The increasing supply of businesses coming onto the market is unlikely to be met by demand. As a result, buyers will focus on either price or value. Only a limited number of businesses will achieve the value anticipated by their owners.

But don’t let the statistics scare you. With good advice and planning, Australian Business Sales can help you achieve the best possible result.

Whether you are 3 months or 30 years away from selling, your ultimate sale objective is something every business owner needs to think about. After all, your business is an investment and selling it is all about realising the full dollar value.

But before you sell, there are a few key questions you need to consider. Issues like:

Timing: What’s the best time to sell or when do I need to sell?

Value: What is my business worth? And what can I do to improve the value of my business before selling?

Market: Who will buy my business? Is my business saleable?

Structure: How should the sale be structured?

Tax: What are the tax implications of selling my business and how can I manage the tax consequences?

Protecting your company secrets in a sale

You need to show the goods to make a sale, but at the same time you don’t want to give away your value-creating edge to competitive shysters. There is the safer way.

Many entrepreneurs are wary of giving away company secrets during a due diligence process involved in selling their business. Their fear is that that the potential buyer will pull out and then use that information to compete against them.

Since most firms don’t have the luxury of unique, patented or protected assets or processes, this is a very reasonable position to take. Imagine how foolish you would feel if you gave away the very competitive advantage that had created the sale value.

However, you still need to get through the due diligence process for the honest buyer.

What you need to do is to balance the need of the potential buyer to be able to assess the quality and impact of your confidential information with your desire to not give away the store to the dishonest scavenger.

To do this you need to have a process that gets rid of the latter but keeps the former in play. But how much can you provide to satisfy the serious punter while still protecting yourself against the dishonest or opportunistic competitor?

Your best protection against the theft of confidential information during the sale process is to be very well prepared for the due diligence investigation. This information can then be released in stages, subject to your own due diligence on the potential buyer.

You should be looking for commitment from the buyer at each stage of the investigation. Buyers who are only fishing will not want to spend much effort in the process and will soon fall away.

You should balance their effort with your own. Thus, as they require meetings with management, you should request similar meetings with theirs. As they require more detailed information, you should request similar data from them. If they are not prepared to share information, you can probably assume that they are not serious and terminate the discussions. You can also have them sign a non-disclosure document with damages for use of confidential information.

Your second level of protection is to withhold sensitive information but have it examined and verified by an independent and credible third party. Thus you can cite performance data, market statistics and forecasts but hold back the detail. This data would then only be released to the successful bidder as a final condition of the sale but could be done in such a way that, if validated, the sale would then be concluded.

Your best strategy, however, against this type of invasion is to have pre-selected the potential buyers. If you have determined that the potential buyer has a real need for your business, is capable of funding the acquisition, and has the capability and capacity to make it work, then you should be dealing with genuine buyers who would rather buy than copy.

By ensuring you have several willing potential buyers, and that you are well prepared for due diligence, you can also speed up the sale process and dramatically reduce the exposure period.

In the end you will have to take some level of risk to get the deal done. But with some investigation you can determine the ethical values of your potential buyers.

Just make sure you steer clear of the doubtful ones.