Biggest Business Broker Myths1. 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.
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