Biggest Business Broker Myths

1.            Foreign Migrant buyers will pay silly money for businesses. WRONG!  Sellers need to realise that most migrant Buyers were experienced business owners in their own country; they have cash but are cautious in spending it.  There are historically a few examples of arrogant migrants who think they know it all and buying something for silly money, but generally they are smarter and more cautious than Australian Buyers, in our experience.  We get really dismayed when a Seller says “Can’t you find some silly, unsuspecting migrant to buy my business”.  That statement says a lot about the character of the Seller and the business and we rarely do business with them.

2.            Businesses that do not show a profit are still worth a multiple of turnover.  WRONG!  Who is going to buy a business and not want a decent return on their investment?  Such businesses will normally be valued at asset value as a going concern or as a closing down asset sale.  Excluding intellectual property (IP) no profit = no goodwill.

3.            Strategic buyers always pay more because they have synergies.  WRONG!  Strategic Buyers will not pay a premium unless they are forced to do so due to competition.  Strategic Buyers know the industry (they are often competitors), they are astute enough to smell the blood in the water and they will not overpay unless they think that they are going to lose out.

4.            Banks will always lend against the business.  WRONG!  Banks prefer real estate as collateral.  Currently only the very best businesses are able to be borrowed against.  Banks are much tighter on business loans now, than they were pre GFC.

5.            This business is 100% fully managed.  WRONG!  There are few businesses that can be left alone for prolonged periods of time.  There is usually some sort of overseeing or consultancy role played by the investor owner.  A ship without a captain eventually runs aground.

6.            My backers will give me the money when I find the right business OR We can find the money when we find the right business. WRONG!  These pretenders don’t like completing our detailed Buyer Registration forms, and have a problem providing details of their own financial status.  Dreamers and genuine Buyers are quickly identified and treated accordingly.

7.            Assets alone can make a business more valuable.  WRONG!  Often the opposite is true.  Generally excess assets are a handicap.  Who wants to pay $1million for a business earning $100,000 because that’s the value of the plant, equipment and/or stock?  We advise “high asset” businesses to sell off their assets and close the business down if their profit, as a going concern, does not provide an acceptable return on investment.  Banks like tangible assets but there also has to be a balance with profits, to allow for loans to be repaid.

8.            Undeclared cash earnings are taken into account when valuing a business.  WRONG!  Cash taken out of the business has a negative affect on the value of a business.  The benefit of taking cash out is the saving on tax (30%).  The benefit of leaving the cash in is that the value will increase between 2-4 x the dollar or in other words you are up to ten times better off (say 300% versus 30%) e.g. $50,000 will save 30% in tax i.e. $15,000 or $50,000 retained in profits of business will increase sale price by $100,000 - $200,000.  Some “cash” businesses can be trialled to prove true earning performance.  But, Sellers are leaving themselves open to blackmail, from unscrupulous Buyers, who may threaten to report the Seller to the ATO, if they don’t sell at the Buyer’s offer.

Practical Tips To Ensure You Buy The Right Business At A Fair Price

 

1.               Take the time to study the businesses in your market place.  Look at the businesses that you feel will suit your experience, personality and the products or services that interest you.  You need to imagine yourself being happy in that business.

2.               Take the time to meet personally with the business broker that has the business listed.  Ask questions and request more information if required.  Meeting personally will achieve a better understanding of the business than internet or telephone contact.

3.               Look at the business “incognito”.  Remember you have signed a confidentiality agreement so do not discuss “the sale” with owners or staff.  Try to study the business as a customer if you can, or watch the premises from a distance.  Obviously there are some businesses that you cannot just “visit”, like manufacturing or service contractors.

4.               Arrange an official inspection and meeting with the owner via the business broker.  Ideally meet the owner and spouse along with your spouse.  It is important to get a good gut feeling for you and your spouse.  The genuine business Seller will treat their business as their baby, so they need to like you before they will negotiate with you on favourable terms.

5.               Never do any “face to face” price negotiating with the Seller.  Ask as many questions as you can think of about the business, request more information.

6.               Does the business provide the income and is the owner’s workload acceptable to you and your family?

7.               Your business broker should already have qualified you with regard to whether you can afford to buy, but confirm your financial position with him.  If in doubt, speak to your current bank and/or ask for a referral to an experienced business finance broker or alternative bank manager.

8.               Remember that you will have to allow for extra costs in the purchase of a business e.g. working capital, stamp duty, legal and accounting fees, bank charges, business name transfer, etc.

9.               Be prepared to negotiate on price and terms.  If you are certain of being able to pay, a “cash offer” is more attractive than “subject to finance”.  Other terms include settlement date, owners’ tuition period, Seller finance, etc.

10.           Get to know what the Seller intends to do after the sale.  An offer to the Seller as a part time consultant might be very attractive if he has a nagging wife that wants him to stay at home!

11.           If you are concerned that the future performance of the business may not live up to the Seller’s claims, think about a “performance based offer” over 6-12 months.  If it performs up to expectations a further full top up payment is made.  If it does not perform then a lower “top up” or nil “top up” is paid.  Performance contracts are often based on sales or gross profit.  A typical payment structure is 70% payment on settlement plus up to 30% based on performance.

12.           The deposit paid by the Buyer is normally 10% of the purchase price.  This can be split to a nominal payment of $5,000 - $10,000 on signing of contract with the balance payable when contract becomes unconditional and finance has been approved.

13.           Finance should be geared so that the business pays the interest and capital.  Interest is a taxable business expense.  Be aware that banks are currently being very hard on business loans at the moment.  Other finance can be sourced from friends, family and the Seller, if they have faith in you.  Get more than one quote for finance and work one against the other for the best result.

14.           A full “due diligence” on the business will take place once the contract is signed.  “Due diligence” means inspecting and being satisfied with the books and records, lease, franchise agreements, premises, plant, equipment, stock, employees, suppliers, customers, etc.  Buyers should use their professional advisors e.g. solicitor, accountant, independent industry expert during this process.  If the Buyer is not satisfied then the contract can be renegotiated or become void in which case the deposit will be returned.

15.           Once the contract becomes unconditional the Buyer will be able to commence tuition from the Seller.  This tuition period will have been discussed and will be itemised in the contract.  The Buyer needs to learn as much as possible during this time so that there are no problems in running the business from settlement day.  Bank account, Eftpos facilities, suppliers accounts, telephones, insurance, employee contracts and payroll/franchise/distribution agreements, utilities, domain names, internet addresses, business name, vehicle transfers, equipment rental agreements, debtor accounts, business cards, stationery, etc have to be organised or confirmed prior to settlement.

16.           The stock take will usually take place on the day before settlement.  Buyers should inspect the stock during due diligence, to familiarise themselves with it all, and particularly to identify any old or obsolete stock.  The Buyer can refuse to take “unsaleable” stock or can negotiate a fair price for the product.  It is best for both Buyer and Seller to have this sorted well prior to the day before settlement.

17.           Settlement day is the day that the Buyer makes the final payment (less deposit).  The stock at value amount needs to be relayed to the solicitor so that the final payment can be confirmed.  Adjustments will also be accounted for such as prepayments for Yellow Pages.  The Buyer is deemed to have taken over the business as at the commencement of the working day, even though the actual payment for the business will take place towards the end of the day.  Congratulations, you are now the proud new owner of a quality business at a fair price.

Getting the Real Deal from Your Business Broker

Buying a business is a major undertaking. This can possibly be one of the most important business transactions you will ever make. And since buying a business is not exactly something most people do on a daily basis, it is only sensible to seek the assistance of a business broker to provide professional expertise in business-for-sale transactions. But are they really worth the extra expense?

Like most types of brokerage services, a business broker is a third party agent that acts as a middleman between business sellers and business buyers. But contrary to the perception of many, a reputable business broker actually offers much more than that. Your business broker can educate you on the processes involved and guide you in making the right financial investment to best suit you.

Business Values Affected By Supply

If you are planning to sell your business in the next five years, be very aware that the timing of your sale may have a significant impact on the value. Your business value may fall if you wait too long to sell. You need to consider selling sooner rather than later to avoid the mass sell-off.

An Inc. Magazine survey conducted in the USA in April 2008 predicted that 65 to 75 percent of small businesses will go up for sale in the next five to 10 years due to retirement alone. Our demographics in Australia would be similar to the USA. This survey was conducted in 2008, so we can now say that these mass sellers are due to flood the market from three years on. We are not scaremongering. The numbers speak for themselves. Large numbers of owners will retire in the next 10 years. You are already smarter than the average owner by reading this article, so please take notice and let us help you maximise your value in your business.

Guide to Finding and Choosing a Good Business Broker  

When it comes to selling and maximizing the value of your business, it is always a good idea to find a good and reliable business broker that offers expert knowledge in the industry.

The process of selling a business can be quite exhausting and frustrating, especially if you lack patience and commitment in searching for potential buyers yourself. In fact, most businessmen who have experience in such an undertaking would readily claim that selling a company for the highest possible price is not always easy. It becomes especially difficult if the business that you are selling only targets a limited number of possible buyers. This is one of the main reasons why Business Brokers exist. They act as agents to assist in making the whole selling process an easy one, as well as finding potential buyers for your company. While this may mean an additional expense on your part, in the long run, it actually presents a highly viable option.

How AIG's Collapse Began A Global Run on the Banks

4 October 2008

By Porter Stansberry

"The following editorial was written in the USA for its American readers. It gives a good explanation of how the global crisis has arisen. Our thanks to Malcolm McColm of McColm Matsinger Lawyers, Maroochydore for supplying this editorial."

Something very strange is happening in the financial markets. And I can show you what it is and what it means...

If September didn't give you enough to worry about, consider what will happen to real estate prices as unemployment grows steadily over the next several months. As bad as things are now, they'll get much worse.

Improve Your Business Skills

15 Jan 2009

Information on a Business Owners program that will help owners to better understand and then improve their business. We believe that this program will also benefit potential business owners (Buyers) to identify better quality businesses and those with potential to improve.

We have known and respected Geoff Butler and the Vestra Advantage Team for over 5 years. We can fully recommend his workshops and all round practical advice. Please note that your partner can attend with you for only an extra $50 per day which makes it very good value for money.