Buyers and Sellers BEWARE

 So you’ve won second division in Lotto or you’ve got a redundancy cheque for one-and-a-half big ones burning a hole in your pocket, and all your mates at your farewell function encouraged you by informing you that “there has never been a better time” to drive a hard bargain when buying a business?
Or are you sitting forlornly in your office, way after everyone has left, thinking that another month of banging on with your business, without any chance of a further loan from the bank is simply too much for you or your family to contemplate?
Logically, you’d deduce that we should be in a frenzied market with blood all over the sellers’ walls and gold bars being loaded into the buyers’ basements. But the ASB’s authoritative Succession Planning Monitor for the first quarter of 2009 confirms that market sentiment continues to be cautious about selling. While a number of reasons were stated, a major one was that being a business owner at least assured your own employment. The survey also shows many are pushing selling plans out past the five year mark.
Some comments from business owners are: “I don’t think we would realise the full value of our assets if we sold right now”; “I don’t think it’s best to sell because of the downturn at the moment, it’s not a good time”; or “I want to keep it (my business) because I need a job.”
James Mitchell, ASB’s chief executive Relationship Banking, says: “Many businesses are using this quieter patch to strengthen their foundations, making them more profitable or saleable when the market recovery arrives.”
However, the most important factors for determining the value of a business remain consistent with the results from the ASB’s first survey. These are customer-base, profitability and turnover. Larger businesses place more emphasis on staff and brand-strength, but overall, the results are similar for both small and large enterprises.
Before moving on to the ‘nuts and bolts’ of buying and selling – and what to look out for – here’s a caveat from Triplejump CEO Cecilia Farrow, on what not to take for granted in either situation when a “going concern” is involved – that is, the assets that are movable, the employees.
While Farrow is looking primarily at insuring against the ‘human capital’ dying, becoming incapacitated or needing to be replaced, her advice needs to be extended to buyers and sellers committing to doing a deal which not only rewards the principals, but also key staffers who are integral to the business’s ongoing success.
“Research highlights that one of the most substantial risks that face SME’s is the loss of its key people. A business that is profitable and solvent can quickly become a sinking ship without its most vital asset. You will be taking on risk by the very act of buying a SME. Don’t increase your risks by failing to undertake and implement prudent risk management at the outset,” says Farrow.
Farrow cautions against dismissing shareholder agreements as something to do once you get ‘settled in’. Plus she offers the likely-to-be-overlooked factor that as the new owner, you may not be the ‘key person’ from day one. Inevitably, there will be someone or others with the expertise or business know-how that is vital to the business’s success. That might be hard on the ego, but it could be harder on the pocket if lost in the heat of the sale.
Farrow suggests adding to your due diligence an assessment of the reliance on key individuals and the steps the business has taken to manage the potential downsides – by death, disablement or defection.
• How well documented are the business processes?
• Who are key customers “linked” to?
• How would the performance/ value of the business be affected by the loss of key people?
• How does that affect the value of the business and the risk to your investment/ sale?
Selling the business 
“The ASB [Succession Planning Monitor] finding is no surprise considering valuation multiples have dropped, with buyers less willing to pay historical asking prices and credit limitations reducing buyer competition. But that’s not to say there aren’t still plenty of buyers out there looking for quality businesses,” says Doug Haines, corporate finance partner with BDO Spicers, Wellington.
“Essentially, whatever the economic climate, there is always a market for quality businesses and to achieve the best price and buyer for your business, it is vital to follow a well-planned and structured sale process. Start by choosing experienced professionals to help you through the process and avoid any pitfalls – legal/ethical or financial.”
Ed Whiting, MD of BizOptions, would more than go along with that sentiment. “The right business in the right area, with the right parties involved will always sell, no matter what the economic situation. At the moment that might take a while longer than the previous five years, but communication technology is helping us to cut into that. And that has meant constantly reinvesting and innovating on the technology side of our business.
“The secret is to put your business in front of the niched demographic which has been carefully selected and segmented by the use of the latest technology, including social media like Facebook and Twitter,” says Whiting, whose company charges ‘self-listers’ $199, until sold, or $500 for listing and a professional packaging deal.
Reinvest and innovate
BizOptions has done exceptionally well this year across Australasia in tourism and allied industries, thanks to its linked sites which attract international tourists – who they convert into buyers, accounting too for their ability to link Facebook and Twitter to the marketing mix. A model surely for others with an established web-based clientele to adapt?
Analysing the market, process expert and SME professional adviser, Richard O’Brien, points not only to the current downturn but a continuing over-supply of average businesses, going forward, caused by the exit of many “baby-boomers” over the next decade. His advice?
“Have a business exit strategy. If you are unsure about how to prepare a business exit plan; seek professional help. It’s an investment in your business as it effectively maximises the business’s value.
“There are also short-term benefits from streamlining your business, generating more sales and cashflow, along with creating diminishing reliance on you – allowing you to be ‘sale-ready’.
“Groom your business for sale. Increase the ‘desirability of your business’ by identifying what buyers want; addressing any areas that leak value and are likely to be used to negotiate the price.
“Ensure all systems and procedures are documented and in place. Go through your financial records and ensure they reflect a healthy turnover and profit margin. Ideally, there will be an established client-base with opportunity for future growth and diversification,” says O’Brien.
And a really tough one for many in parting with their ‘baby’ – reduce the dependence of the business on you personally.



“The business will be in more demand if it operates independently, as client dependence on the current owner will not give potential buyers confidence they will remain loyal once the key player has departed,” O’Brien emphasizes.
He and others caution that it can take time to sell a business, so you should always remember to be upfront, honest and realistic with buyers: cover-ups can be exposed and will lead to the buyer bailing.
BDO Spicers’ Haines says ensure all key contracts and titles to assets exist and are up to date, and evaluate the need for capital expenditure (prior to sale) by considering the cost/benefit (and need) of that expenditure on the value of the business.
Buying a business
The experts are agreed: this is the toughie right now. Just how well is any business you buy now going to fare over the next short while, of what will almost certainly be tough trading conditions? What you can bring to the party to ramp up the business will make or break your bold move. Remember the human capital too.
“When buying a business, its financials are a key indicator of its viability and performance.  Most should already be reflecting the impact of the current tough conditions, and there is strength in knowing where the business’s bottom line may be,” says O’Brien, on viewing the upside of tough times.
You also need to understand yourself; potentially another bash for the ego. Assess your passions, skills, knowledge, experience and strengths – research what business size and sector is the best match.
“In the process of looking, you’ll need to keep asking yourself whether you have the skills, ability and passion to make this business a success.”
BDO Spicer’s Simon Peacocke is another well-thought-of guru in this game. “Buyers should consider demand for the products/services of the business. Who are the customers, the sector? Is it doing well, or poorly? What are the long-term trends and what are the competitors doing?”
Play it right and you can find SMEs at low prices that will increase in value once the economy begins to recover.
Peacocke recommends using business brokers to help assess the market, but also encourages the direct approach – particularly if you have experience and knowledge in a specific sector and know the size of enterprise you are after. Or perhaps involve your accountant as the ice-breaker.
He cautions that business valuation is a specialist skill and to constantly remind yourself a business broker acts on behalf of the vendor. 
“Your accountant can tell you how much a business is worth using different methods – the most common being capitalisation of earnings in which a multiple is put on future maintainable earnings. Depending on the sector, you can use another method as a cross-check.”
Buyer beware
Other caveat emptors include: being quite precise about what (and who) stays in the business and what disappears. Are the debtors included? For instance, values differ widely depending on whether you are buying a business and its debtors, or just buying the business. Valuation should also take into account the risk of future earnings continuing.
“So, if you suspect that the vendor is heavily tied-up in achieving these future earnings, negotiate a change. ‘De-risking’ can involve an Earn Out, where the buyer agrees to pay a percentage of the asking price up front and the remainder once the company achieves its forecast earnings,” says Peacocke.
Get an expert involved in the complex and make-or-break due diligence – they do it for a living and a reputation. They are also emotionally detached. As a buyer, you should also do your own due diligence looking at the sector, customer-base, long-term demand for products and location of the business you’re looking at – because this is your future commercial environment.
Peacocke has some good news on the treacle-swamp that is Money and Banking 2009.
“While banks are tighter on credit, they are still keen to lend to SMEs, but will generally look for some property-backed security. Look at your equity and gear it at ‘prudent’ levels. Ensure you don’t take on too much debt, allowing for working capital and some cash reserves.
“Attracting private capital is also still an option. There are plenty of private investors out there looking to back people buying smaller businesses,” he says.
Finally, have your lawyer go over the sales process and the signed agreement, with a restraint of trade agreement to protect you against the vendor setting up down the road. And, never overlook the opportunity to structure the acquisition in the most efficient way. Why not?                       
Kevin Kevany is an Auckland-based freelance writer. Email
kevwrite@xtra.co.nz

 

 

 

 

 

 

 

 

 

 

 

Publishing Information
Magazine Issue 
NZBusiness September 2009