Buying and selling a business.

I SPECIALIZE IN THE NORTHERN AREA’S OF JOBURG.

· Fourways
· Sunninghill
· Paulshof
· KyasandS
· Honeydew
· Laser Park
· Strydom Park
· Kyalami
· Midrand.

Professional advice is only a click away!

If you need to sell your business, or want to buy a business, in the above area’s, and want the Aldes specialists to facilitate your mandate….please contact;

Kevin Foot - Cell: 082 553 0884.
Email: kevin@aldesactive.co.za


How Different Valuation Methods Affect The Price Of Two Businesses

Let’s look at how valuation methods introduced affect the price of two businesses. One is a garden service business, the other a gift shop.
Both have been established for two years and have profits of R6,000 monthly.
The garden service runs from the owners garage has assets of approximately R60,000 including an old bakkie and various lawn mowers and hedge cutters. It has 50 monthly contracts of which a large part have been going more than a year. It operates a five day week. Its clientele is derived from advertising in local pamphlets. The gift shop has assets of R140,000, comprising stock at cost of approximately R120,000 and fixtures and fittings of R20,000. It has a good position in a busy centre and is open five and a half days a week with its sales coming from passing trade.
Payback period
As a guide, an older, more established business with a high asset base, say 50%, would need 18 to 24 months to recoup the investment. A younger business with a low asset base and particularly businesses perceived to be higher risk because they are easier to start from scratch, would need 12 to 15 months. The gift shop would be calculated at 18 months, times the net profit of R6,000 ( R108,000 ) and the garden service at 12 months times net profit ( R72,000 ).
Why the difference
With the garden service, being home based, it could be easier to start from scratch and have less valuable goodwill. Also the contracts can be cancelled on a months notice and the customers may not take too kindly to a change of ownership. With the gift shop the business stems from its good position in the centre, which is not easy to duplicate and most landlords will not allow businesses selling the same merchandise in their centres. As long as the same stock mix is maintained it won’t matter who is behind the counter.
Return on investment
Assess an acceptable percentage return before tax and how much one would pay a manager to run the business. The norm is 35% before tax for small to medium sized businesses with a managers salary of say R3,000 a month, particularly as both ventures do not require highly skilled people to run them. One could accept that the gift shop has a lower business risk and the expected return would then be 30% and the garden service with a high risk 40%.

The sum would be as follows:
Annual net profit, less salary, times by the return. In both cases R72,000 – R36,000 = R36,000. The difference would now be: Garden service R36,000, divided by 40% = R90,000. The gift shop R36,000 divided by 30% = R120,000.

As can be seen, both the above methods look purely at the net profit of the business and don't take assets into account. The gift shop is therefore valued below its asset value.
Super Profits Method Of Business Valuing

The last method of valuing a business is the extra earning potential, or super profits method. To do this, calculate the income that would be earned from investing an amount equivalent to the asset worth of the company, its fixtures, fittings, machinery and stock, in the bank. Add to it an annual salary for managing the business, then deduct it from the net profit of the business over 12 months. This is called the extra earning / super profit of the business. Multiply by the same factor used in "payback period" method, to determine the goodwill and add the result to the asset value and you get a value for the business.

Example:
Extra Earning potential / Super Profits
Garden Service
With assets of R60 000, the equivalent percentage amount on fixed deposit at 11% would earn R6,600 a year. Add a R36,000 annual salary = R42,600. Deduct R42,600 from the annual net profit of R72,000 to give an extra earning potential of R29,400 a year. Using the one year period of the payback method detailed previously gives a goodwill value of R29,400 ( R29,400 x 1 ). Add this to the R60,000 asset value to give a price valuation for the garden service business of R89,400.

Gift Shop
Asset value = R140,000. Earning 11% pa = R15,400 return + salary of R36,000 pa = R51,400. Deduct R51,400 from the annual net profit of R72,000 to give an extra earning potential of R20,600 a year. Multiplied by 1,5 years = R30,900 plus assets of R140,000 = a price of valuation of R170,900. This method puts a higher price on a business with a higher asset base. This may not always be justified.

Market Value
To balance out anomalies, take an average of results of the three methods I have detailed.
For the garden service, that works out at R72,000 + R90,000 + R89,400 for an average of R83,800
For the gift shop, R108,000 + R120,000 + R170,900 = R132,966 average.
The R49,166 variation between two businesses with the same net profit is justified by the differences in risk profile and asset base.

Although the price of the gift shop is only its stock value, remember assets are only as good as the profits they generate and also each business with similar profits is in competition for the same buyers.

But why should you pay a premium of R49,000 plus to achieve a very similar profit level? Simple. Not everyone wants a garden service business some and would rather pay the extra for a venture with less risk, fewer labour problems, a bigger asset base and maybe most importantly one they can empathise with.
Price and Value Compared


It is one thing to have practical methods for putting a market related value on a business you want to buy, but will theoretical prices be realised in the market place?

We have looked at three methods of assessing the value of two businesses with the same net profit but different asset bases. Both had net profits of R6 000 a month, but the garden service business achieved it with assets of R60 000, while the gift shop got by with assets worth R140 000.

We put an average price tag on the garden business of R80 466 and on the gift shop one of R138 366. There often is a difference between value and price. It can be based solely on horse trading between parties.

But there are many other factors influencing price, a violent robbery, for example. Unfortunately, over the past few years this had been a real concern with buyers. A seller whose wife passes away may want to get out of the business at virtually any price. He is not overly interested in the value of his business. Partners who are at each others throats and are keen to sell tend to accept any reasonable offer, even less than the valuation. A seller with cash flow problems will be forced to accept a lot less than the value.

A seller who is not prepared to provide any financial information about the business will receive low offers. But there are things which help the seller to get value. Offering good terms to a buyer is one way. Having sound records and provable profits creates buyer confidence, resulting in a better price.

Buyers often find they lose golden opportunities by adhering religiously to third party advice on not paying more than a certain amount. Then they spend months trying to find a similar operation, eating up their capital and berating themselves for not offering a little more the first time.

If the business will pay you a salary and give you a reasonable return on your money and the balance of the price is being financed out of the cashflow of the business, it really doesn’t matter what you pay.

The point is you are buying more than plant and equipment, more than a lease to some premises, more than just a profit, you are buying a way of life.
Let's Sum It All Up Again

That’s it, then. If you can’t yet buy or sell your business, you haven’t been reading carefully enough for the
last 21 articles. To end off, here is a summary.

Mr / Mrs Buyer; are you ready to invest sweat equity? Buying a going concern means not having to spend 18 months getting to a profit situation with a new business.

Identify acquisition prospects with a broker or by scanning "business for sale" ads or advertising in "businesses wanted". Get advice from the right people.

Mr / Mrs Seller; making it widely known that your business is for sale sends the wrong message to suppliers and your bank. Tart up the firm to improve price prospects by being liberal with information to a qualified buyer.

Buyer, shortlist good buys and check these aspects:
· Lease on the premises.
· Turnover.
· Gross profit.
· Net profit, bearing in mind these include all owners perks.
· Stock check.
· Staffing and
· List of fixtures, fittings, plant and equipment.
A myth in setting a price for a business is that profit is the major determinant. You can’t put the same price on two businesses with identical profits if they are otherwise quite different.

The methods I recommended involve the payback period, return on investment and extra earning capital.

Remember, 80% of businesses are purchased on emotion, not logic.
So be careful and do your homework.

Tips On Selling A Business


Selling For Top Value
· The secret in achieving the highest possible price is simple.
· Without information there can be no value
Do you want value?
· Listen to the experts
· Overpriced businesses do not attract serious buyers
· Your business is in competition with all others in your profit range
· It takes hard facts to satisfy a buyer
· The average business is on the market for 3 months before the seller becomes realistic about his demands, lowers his price and considers terms
· Very often the first offer is the best offer
· If your business is on the market for a long time, buyers become suspicious and think there is problem with the business
Confidentiality
· The confidentiality of your business is extremely important but once the buyer has been qualified you must supply the information
Price Achieved
· Fabulous businesses receive a fraction of their asking price and other ordinary ones achieve high prices.
· Why? The attitude of the seller
· Buyers are not fools - never treat them as such
· You as the buyer? What would you expect? What would you wish to see? What price would you pay? Would you be interested if the seller was not prepared to divulge the figures etc?
· Remember! No matter how good you think your business is, it will take hard facts to satisfy a buyer
To make A Decision The Buyer Needs
· Monthly turnover figures for the last 12 months
· Breakdown of monthly expenses
· List of assets with valuations
· Copy of the lease of the premises
· List of staff - plus salaries / service / contracts etc.
· Write up on the business
· Management accounts up to date
· Balance sheet/ Income statement for the last 2 years
· Delays in details turn serious buyers away

ALDES BUSINESS BROKERS ©

2008.

I specialize in the Northern regions of Joburg.
Fourways/Lonehill/Kyasands/Honeydew/Lazer Park/ Kyalami/Crowethorne.

If you want to sell your business, or want to buy a business - please let Aldes facilitate.

Contact me on 082 553 0884.

2008

Misinformed Sellers In For a Big Surprise

Everyone who owns their own business believes their little empire is a gold mine. Never mind that it isn’t making any money, when the time comes that they want to sell it, they firmly believe some "naive little buyer" is going to come along and pay them an enormous price – in cash – and how dare he doubt the profit and ask to see provable figures. I do, however, have sympathy with sellers. They are expected to give potential buyers confidential information about their business before getting any commitment at all. Understandably, they fear financial ruin should the information fall into the wrong hands and they don’t make the sale. It makes no difference at all that the house next door is for sale. But it’s very different when the for sale signs are up on the business next door. Competitors cash in, creditors withdraw their credit, customers, their custom and staff become unsettled and look for other jobs. Ironically, it is this very lack of information that stops a seller getting top value for his business. If financial details are not forthcoming, buyers grow suspicious and doubt the credibility of the seller. Often sellers are remiss in not declaring all cash sales. But you can’t have your cake and eat it. If you are unable to prove certain profits, you can’t expect to be paid for them.



How to break the deadlock.

Onto the scene, comes the buyer’s mini-prospectus mentioned in part two of this series. The seller can now see that the buyer is genuine, has the necessary skills and can raise the finance. Next, the buyer signs a confidentiality agreement undertaking not to disclose information to anyone without the sellers permission. Now the seller can safely reveal the business details.



Getting top dollar.

Estate agents decree that to get the best selling price for your home, prepare it for sale. Clean, paint, fix, tidy and see the buyers eyes light up. Businesses are no different. Here are some pointers to getting top value for your business. Remember;

You are in competition with all other businesses for sale within your profit range;

The provable net profit will determine the selling price;

Overprice is and it will not sell;

The longer it is on market, the less chance of getting your price;

Cash buyers are like hen’s teeth – but less common;

You will almost certainly have to allow terms;

Provable figures are essential for a buyer to raise finance against his assets;

The more information you provide increases your chances of the best price;

Sellers should build up prospectuses on their businesses, detailing;

Immediate history;

Present market conditions;

Opportunities that exist;

Provable figures to date;

Budgeted forecasts.

List of plant & equipment;

How the price was determined.

Buyers are not fools, don’t treat them as such, if you want Top Value, you must present Top Information.

Aldes Business Brokers - Contact Kevin Foot on www.kevin@aldesactive.co.za

BUYER/SELLER INTERACTION

In the last Blog post, I asked the question…”why do you need a business broker, to sell your business? “
The following explains the normal interaction between a buyer and seller – and how the broker is an added value service.
In a typical scenario a buyer is pushing hard to get as much info as possible…….” I want to do a due diligence before I make an offer..”
Well, sorry, but that’s not how it works. Do you really expect a seller to expose the IP of their hard won business….
Two basic and key principles are at play;
1. The Broker represents the interest of the seller, first and foremost. Not negotiable. It is the duty of the broker to protect the integrity of the business and apply the right process – and ensure that the seller’s interests are not compromised. This is a moral and legal imperative.
2. The seller must also act in the same spirit of the relationship.
a. The seller must not be dragged into any unnecessary disclosure or agreement, by the buyer. The broker must always handle this aspect of the process; and safeguard the sellers rights.
b. If a buyer expects any disclosure from the seller, the buyer must also offer some reciprocal commitment. Quid Pro Quo.
c. You like? You want to buy? So, make a formal offer!!
d. There are no “test drives” here!
3. So how should the process work….simple!
a. There is a mandate that shows key financial info. This info is taken at face value as being a true reflection of the performance of the business. The mandating broker has tried to ensure, as far as possible, that the info is accurate and correct.
b. The buyer sees this. Decides to see the business and meet the seller. Conversations take place around the business and the buyer will arrive at a decision to proceed ( or not). The buyer accepts the mandated figures as being accurate.
c. An offer to purchase is made, with terms and conditions, as well as Suspensive conditions, to be presented to the seller and to be agreed by the seller.
d. At this point both parties are now fully committed to the successful completion of the sale of the business.
e. The due diligence/discovery takes place.
i. The accountants meet and dig through the detail. And verify the initial numbers.
ii. The buyer meets with key role players in the business; staff, suppliers, landlord and maybe even customers.
iii. There may be some minor issues that arise that then have to be resolved by negotiation. The deal carries on.
iv. There may one or two material issues – these are issues that significantly affect the value/price and or performance of the business. And therefore may be construed as “ a misrepresentation by the seller.”
v. In this case
 Negotiate a mutual settlement and carry on.
 Or, the buyer can walk away and receive a full refund of deposit.

4. If the seller chooses to ignore due process and starts to negotiate with the buyer and various agreements start happening, then the broker must step aside and disengage. The broker cannot be party to/held liable for, proceedings that the broker has not had a material direct influence over.
a. The downside for the seller is that they will be left to juggle the pieces. And the potential for a collapsed sale, is huge.
b. The broker is fully entitled to immediately issue an invoice for commissions and demand immediate payment – irrespective of a successful sale, or not! Bad place for the seller to be!
5. If a buyer starts putting undue pressure/demands on a seller, trying to change the conventional process – and offers no reciprocal commitment – I would view that as “ introducing onerous and unfair conditions..”, almost tantamount to acting in bad faith – or even suspicious.
6. So, be careful seller.
The old saying is “ let the buyer beware!”
I say, “also let the seller be aware..! “



So why do you need a Business Broker?
I get asked this all the time when someone wants to sell. Cannot seem to see any value in the 10% commission a broker will earn.
 Especially one who works for a Brokerage that is the oldest in South Africa, has a code of conduct and strict ethics. And whose brokers are all registered and hold fidelity fund certificates.
 The company that has set the context that all others follow by default.
 The company that has defined and refined the processes and procedures………and I could go on ad nausem!!

So, lets not try and over-intellectualise the answer…short and sweet;
 As a seller or buyer you want a confidential experience.
 That the business represents FAIR VALUE to both parties. The valuation process is tried and tested over nearly 30 years…your accountant/lawyer, cannot make the same claim! And we mandate over 300 businesses a year and sell even more…..makes you think!
 Quality of the process.
 No scams and wasted time. I have just been at the forefront of stopping a seller being scammed – we all know that South Africa now has some world class crooks. At all levels of our society.
 You want to know that the broker has access to a quality data base of diverse opportunities.
 It take about 46 hours to complete the circle – as an individual, do you even have a vague idea of what it takes?
 As a seller why take a chance with the equity and reputation of your business you have grown with blood, sweat and tears?
 As a buyer, why waste your time chasing phantoms – and run the risk of destroying the hard earned cash you used to buy your business?

Then the next question………why 10% commission. “Estate agents earn much less.”
Shame…yes, but they do less and the process is much simpler.
To mandate a business to sell and to be able to represent that business legally, requires that the broker undertakes an extensive review of the financials and activities of the business.

Houses sell on
 Perception of the value of the property.
 The “internal” needs of a family.
 Supply and demand in a given area.
 Sensitive to money supply.
 Equity growth depends on improvements made by spending capital…for which there is no return, until the house is sold.

Businesses sell because
 Reality of the inherent value of the business.
 The locked in value of unleveraged assets.
 There are specific calculation models used to explore the real value of a business.
 There are books of account and balance sheets that clearly state the health and position of a business.
 A business has tangible assets, customers, brand identity and many other market driven attributes.

Seems all to logical to me!

Contact: Kevin on 082 553 0884. Email: kevinjfoot@vodamail.co.za