Musings on business value, sale preparation, sale negotiations, sale structure.

Archive for the ‘PrepareYourBusinessForSale’ Category

Rental agreements

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PYBFS021

The sale of a business requires a rental agreement. The sooner you ensure that you have yours in your PYBFS file, the better. Why do I say this? Many business owners do not have this very important document because they have never received a copy.

Mad rush

Think back to the time you signed your first lease. There was a mad rush as you prepared to get the whole show on the road. Then there was a rush into the rental agent or landlord, some last minute reading, and queries. Then you rushed out the door to get the next step in place. You know you signed the document. Somehow the landlord always signs last. They called you later, or more likely you had to make several calls yourself. They told you the agreement had been countersigned. In the excitement of moving in, you never received a copy of the agreement. This holds true for a great many business owners I see. Whatever the circumstances, make sure you have a copy of the lease agreement, and place it in your file. Make a scanned copy and save it to your PYBFS desktop folder.

Lease reductions = higher value

While we’re on the subject of lease agreements: You should take any opportunity to lower your rental. You would be well advised to do so in the tough economic conditions we’re currently wading through. You can renegotiate at the end of a lease term. If you’re a very persuasive character, you may be able to negotiate a lower rental cost midterm.
Every Rand lower your rental, your profit will rise by the same amount. This much is obvious. The value of your business will rise by some multiple of each Rand saved. That extra value will go to your pension fund for its own growth, and so on.

So, how can you persuade your landlord to drop your rent to last year’s amount? Or can you persuade him to forego the annual increase this year? Keep in mind the effect on valuations, and you may find yourself negotiating with a bit more vigour!

Depending on your industry, you may think about negotiating a new lease in advance of selling the business. For instance, a retail store without a lease is no longer a business worth selling. Retail landlords know the value of the lease to their tenants. The landlord must commit to the new owner with a lease on the same terms and conditions as those currently enjoyed by the owner.

Most factories can be moved, albeit with some difficulty, and the move shouldn’t trouble the customers too much. Of course in boom times, suitable factory space can be difficult to find. But then again; are we in boom times?

Pitch Deck 03 Products and services

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PYBFS020

When a potential business investor looks at what he’s buying, he wants to know exactly how the business derives its income.

What do you do?

Businesses receive money in exchange for one of two things; the sale of goods or the delivery of a service. Perhaps there is a combination of the two. Sellers are often complacent in describing the activity or product. It is easy for this to happen because they are au fait with what they do. Their conversations run away with details of plans and opportunities.
Slow it down a bit. Describe from first principles the background need for your product or service. Where does your business fit into the supply chain of an end product? Where does the final product benefit the end consumer?
It is important to give your prospect a bit of a background to the products or services. If you place the story in context he will find his bearings sooner. He is less likely to shift his interest to an easier to understand business.

Pressure in the minority

You will do well to remember that yours is not the only business on the market. So make it as easy as possible for the buyer to understand things. You want lots of interest. The negotiating power of the seller goes up with the number of interested buyers.

Vaguelly specific

Do not create problems for yourself in the supply chain, or in the market. Avoid using brand names unless you have sole or proprietary rights to a product. If you have a clear competitive edge in a very full market, then the exposure may help the sale. But be careful about letting suppliers know that you ever intend to sell. Suppliers pulling back credit limits can damage your sale prospects.

Non-disclosure agreements are a good start, but they are not foolproof. A drunken braai saturated yob, who looks like the kingpin Monday to Friday, can do you a lot of unintended damage on a Saturday afternoon with his like-minded friends.

Get your AFS into gear

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Jim’s business was jalapeño hot. He told me all about it in about 30 seconds of polished elevator pitch over a poor cell phone line. It got me into my car on the way to Springs within half an hour.


PrepareYourBusinessForSale™ is all about getting exactly that done. But in going the PYBFS route, you also get to add value to your business. Here is why.


Early engagements

I walked into an old house. It had been kitted out for the administration of a business designed to churn out products in volume. We had a good natter. He told me some stories. I told him a few of my own. We drank his very nice coffee, and a few hours went by as I went through my interview process.

The house was one the owner had inherited from his mother. It was more than adequate for what it housed.
The growth curve of the business had been steepening. Jim felt that he needed to get an equity partner into the operation to help fund the continuing growth. The only thing that did not flow in the day, was the financial information. There were some issues. “But I will get onto my auditors as soon as you leave, and I will email the financials to you before the end of the week.”

Cape Town

The next day I had an appointment with another business owner who also wanted to sell his business. This time in Cape Town. He had arranged for me to see him as soon as got back from his trip to Italy. So I was up early, and onto a plane. I spent the better part of an afternoon with Mario as well. He also had nice coffee.

Mario has had his business valued by us every year for a long time. He had sent his latest financial statements to my office the previous day. My team picked them up and started putting them into our valuation model.

He also had a very nice business which had a similar problem with growth. He needed to buy some impressive machinery so that the business could continue to grow at the same rate. His financial advisor said it would be a better idea to sell some equity, rather than push the debt level higher. So that was what he intended to do. I am not a financial advisor. I just listen to those guys.

Network

We maintain a detailed mind map database of businesses, funders, and clients. It’s a veritable who owns whom, gleaned from discussions and web pages. It has now grown into a thing of beauty. A few years ago, it was more rudimentary than it is today.
So on the plane home, I went through the database mind map. I kind of killed two birds with the same stone, mid-flight, so to speak. I was looking for relationships between each of two clients and listed companies.

As it happened, Jim had more prospects for what we thought he wanted to do, than Mario did.

When I got back to Jozi, Mario’s financial inputs were complete. I was able to start the pitch analysis with a full deck of cards (and a search for a few more metaphors to throw into the mix). We still always start with an exercise to determine what the market would bear. We do this for every new client.

We stepped up our research of the agendas of the targets for both businesses. For targets, the easiest route to growth is often through acquisition. The intelligence gathering has always been very beneficial. And boy does our industry talk about who wants what. So keeping the database up to date is easy, albeit time-consuming.

It was going to be an interesting time, I thought. The weekend came, and so did Monday. As always.

I called Jim. He was still waiting for his auditor. There was another problem.

Processes

We collected the rest of Mario’s documents which would be necessary for the sale. His web person made some changes to his website which we thought would help. Jim made similar changes himself. He was very good at that sort of stuff.

Both provided company documents for interrogation during a due diligence. We quickly added debtor lists, supplier agreements, bank accounts and employment histories. They were all easily forthcoming from both. All was going well, three weeks into each respective engagement.

Except Jim’s financial statements were still not available.

I should explain at this point. We always ask new clients to supply five years of financial statements. We can build a very good story from that sort of history. Jim could give everything except the last two years. We had all Mario’s history on file.

Jim’s trial balances and draft income statements for the last two years showed great results. There was no reason to doubt them. But it is the financial statements which investors want. The ability to provide annual reports in good time tests the whole governance issue.

Mario goes to market

Six weeks into the Cape Town engagement, and we had prepared Mario to talk to investors. It did not take many, and he had something which made financial sense. His machinery would be ordered soon.

Jim, in the meantime, was struggling. But he was also getting pushy. He wanted to talk to investors as well. So, he sat down with one of them. It was a great meeting. They loved what they saw. He would have the financials to them next week Tuesday, he said.

Tuesday came. The investor called. It looked like it would take a few more days. “A really fine business”, said the potential investor.

A week later, and Jim wanted to see another investor. “Just to have a plan B”. But he was already screwing with Plan A. But he met with Plan B. Then with Plans C, D, and E. And still, the auditors (apparently) were dragging their feet.

All the prospective Plans A to E did not so much lose patience, as simply wander off elsewhere. As business owners, we have limited resources. Sometimes we need to appreciate that the attention span of professionals, faced with various options, only have so much bandwidth.

Jim gets his stuff together

Jim’s financials were published. The trial balance figures were largely confirmed.

Plan A came back from his trip. It was difficult to get hold of him. When Jim did, he did not have much time to talk. Another fantastic deal had presented itself, and he was going hell for leather after it. “You know, that price may have been a bit steep”, he suggested. “Let’s talk next month”.

When Plan B did not return calls, Jim worried. So when he spoke to PlanC, he had lost some of his form. By Plan D, the picture was not pretty. The closing price was always going to be lower than the original nibble.

And over to you now

As much as this is a fiction, it is only partly so. I have written this with a collection of similar experiences over more than 25 years of helping business owners to change their lives. When a business for sale cannot provide information quickly and accurately, the momentum in the deal is lost. Value suffers. Always. When the third prospect goes cold, the seller gets desperate to keep the others happy. Silly things happen.

So what about your financial statements? Don’t be like Jim. Be like Mario. Don’t let them stand in abeyance with your auditor or accounting officer for more than six months, at the outside. If you can get them into your filing cabinet within four months, you will have the edge.

Business valuations | Various applications and costs

Accurate business valuations empower you to make proper decisions.

Shareholder register

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Who owns your business?

Who are the owners of your business? I ask this because a surprising number of business owners do not know. Many have forgotten the history of the enterprise. It was once a very convenient relationship. Now it is a muddle. It is easier to get confused about this, and many people do. Here is a scenario:

Some of our clients started out in difficult circumstances. Today’s successful business was not always so calm. He may have founded the business from a position of desperation. A retrenched former employee needed to put food on his table, and clothe his kids.
Having been an employee for years, he ventured out into the small-business world. To call him naive would be accurate. (Yip; it wasn’t only you. And if you weren’t naive, I’m sure you know somebody) The business ran into trouble. Creditors liquidated it. Then his bank sequestrated him. He was not a disciple of Peter Carruthers.

Wiser, and desperate to survive, he started out again. Only this time, he did so from home, without the expense of a landlord. But the second time around there was a small complication in that he had several judgments to his name. We can be so unforgiving of those brave souls who step to the fore. They give effect to the politicians’ platitudes. You know; about small businesses being the cornerstone of our economies.

Our less naive, and now more resourceful entrepreneur, had to make a plan. He approached a friend to stand as a silent partner. That friend would also be the legal frontman of the business.
People do this.

White people fronted for entrepreneurial black people under the old corrupt mob. You know, before the current corrupt mob. Brave or greedy, these white people saw an opportunity. It was an economic reality. Race-based fronting is not new. It was illegal then too.

Some businesses which thrive today, still have the original owners on paper. The friends of the actual businessmen. Owners who never go near the businesses. Owners who have no idea that they own businesses.
This can get tricky at the time of selling the business. And you know, all businesses get sold if they can keep their heads above water long enough. Have I mentioned before that businesses are very valuable retirement assets? Your business might be gold.

Divorce

  • There are many reasons for, and examples of, legacy shareholders still owning businesses.
  • Husband and wife start out in business together and then get divorced.
  • Siblings take over the business from their parents, without defining duties and expectations.
  • Seed capital partners who themselves have diluted or merged.

This is not an issue for most readers. But you do not know until you look at your share register. Your eventual new owner of the business will want to see it.

Go get it out. And give it some thought.

Consider this

It once was preferable to sell your business out of the company or cc. The asset deal was the safest option for the seller and the buyer. For a developing set of circumstances, it is now better to sell your shares. The equity deal could save about 60% of the tax bill on the transaction in the entrepreneur’s hands. Tax calculations have changed to benefit the shareholder as an individual.

Shareholder agreements may have participation and preemptive requirements. The memorandum of incorporation of your business will define these requirements. If your fellow shareholders are not who you assume them to be, then this could get interesting.

It is better to deal with this stuff now than when you are staring down the boardroom table of a due diligence. Do so before you are dead, dismembered, or comatose. Your heirs will thank you for taking action on this advice. They will write songs about you.

Restraint agreements

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PYBFS018

Sometimes you need to look at the end effect of what you’re trying to achieve, at the start of, rather than during the process. So, let’s jump ahead to a time when you actually sell your business, or (as I like to remind you) have it sold for you.

He said, she said

There will be an agreement of sale, which should be in writing. Even though verbal agreements are binding, my experience is that verbal agreements are worth the paper they are written on. There is too much of the “he said, I said” for verbal agreements to make sense.

At the time of reaching that agreement, the question of restraints will be raised twice.

In the first instance, and most obviously, you will be restrained from competing against the purchaser and your old business for a period, in a region. Give some thought to the consequences and start planning accordingly. Think about what you are or not prepared to accept, and if there are a whole lot of reasonable conditions you are not prepared to accept, ask yourself why you are selling this business in the first place.

It is reasonable for a purchaser of a business to expect to not have to compete with the guy who knows all his customers really well. Allowing the seller to market himself to these same customers could put any new owner out of business really quickly.

What have you been up to?

The second, less obvious instance of restraints, refers to the restraints that your business itself may be subject to. Many buyers’ attorneys ignore this very important element for some reason, I suppose because it is not so obvious.

But can you imagine the problems which would precipitate out of this situation: A buyer, makes a careful study of the target business and is satisfied with the cash flow issues discussed with a seller, and decides to buy. He then satisfies himself that together with his plan to acquire the rights to several other lines, the value of this investment warrants him taking out a second bond on his home, and borrowing some money from his elderly parents. Six months after the deal has been consummated, his biggest and most important supplier pulls the plug because the seller never told the buyer that this major supplier had only agreed to supply him on condition that he did not represent the supplier’s biggest competitor, which the buyer now does, albeit without being aware that he has breached an agreement.

When Suitegum is involved in the transfer of a business it does so, generally on behalf of the seller, but in good faith for the purchaser as well. One of the elements which we interrogate through our valuation process is the integrity of, and the exposure to suppliers.

So…

Think about what restraints you will be prepared to subject yourself to, once the business is sold, and have another think about what promises you have made to suppliers with respect to giving them special prominence in your business. The latter should be listed in your PYBFS files, both electronic and hardcopy.

Valuation indicators: Shareholder agreement

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PYBFS017

If there are more than just you as a shareholder in your business, chances are that you have not put in place one of the most fundamental building blocks for the creation of value in your business:

The shareholders’ agreement

Let me explain. (Oh, and even if you are the sole shareholder in your business, you should pay heed.)

The shareholder’s agreement is more than a document governing the number of shares or percentage of shares held by each person (or entity). It helps deal with the other shareholders’ family in a time of crisis. It provides you all with a negotiated plan of action in the event you are incapacitated on a Sunday evening. It is something which can possibly stop your bank accounts being put under stress by the wife, girlfriend or children of your now dead partner.

The shareholders agreement will dictate how shares, or even the whole business will be sold or otherwise dealt with in the case of a fallout of shareholders. When you guys got together you never considered that one day there would be a divorce. The state forces us to contract for this eventuality in our personal lives, or face the whim of the courts. But in our business lives, which usually get started some time after our marriages, we are reluctant to take the same steps.

The shareholder’s agreement will help to protect minority shareholders in the case of a sale of the business. If you own less than a portion of the total equity, you are at risk of arriving at work tomorrow morning to find that in place of your shares, you have a cheque for the proceeds of the sale, which you knew nothing about.

A shareholder’s agreement can insure that all shareholders have a preemptive right of first refusal on the sale of any of the other shareholders’ shares. That can be very valuable in five years time when Big Larry wants to take off with his mistress.

A shareholder’s agreement can regulate the manner in which new shares are issued, and give you some say in the manner in which new issues are taken up, and by whom.

What happens if one of the other shareholders is a company, and that shareholder’s shareholding changes? Concentrate here. The control of your biggest shareholder changes to that of your competitor, or your ex wife’s new boyfriend… You don’t want to find that your electronic key no longer works on the first of next month.

What have you agreed to in the event one of your shareholders is sequestrated or liquidated?

How, or on what basis will you value the shares of the company in the event one of the shareholders wants to sell his shares to the other shareholders?

How will the shareholders’ loan accounts be handled in any of the above circumstances? And how will funding be sourced and repaid?

What is your agreed dividend policy; or do you simply have an argument at the end of each year? Wouldn’t you prefer to have left some of that money in the account after the last financial year end?

Many businesses actually fail because this very important document is not in place to regulate the way shareholders direct the directors, who (let’s face it) in our realm, are usually the same people. Such a failure leads to all the shareholders losing all the value built up in the business from the start to the time of the failure.

But most important, one day when you decide to sell the business, and all has gone well, how will you agree on the method of sale, and the distribution of the proceeds?

If you are a one man shareholder, read the above again, and give it a think. What will you do when someone offers to buy a portion of your business one day. I know what you should do. Visit an attorney with all these questions, and a bunch of others I have not brought up.

But there is more…

The memorandum of incorporation (MOI). The government put this into place for us a few years ago. Of course we were given an opportunity to make it agree with what we intended in the shareholder agreement, but most of us didn’t bother. The problem is that if there is conflict between the MOI and the shareholder agreement, then the MOI will hold.

Really. It may really be time to spend some money with an attorney.

Very willing sellers

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Selling too high doesn’t happen often. But hey, if you can get it to happen without lying, cheating, defrauding and incurring financial or liberty liabilities, then why not?

Let’s be clear “selling too high” is not a seller problem. For the most part it is not a buyer problem either. Willing buyer – willing seller, and all that. Nobody buys a business the way one buys a house; you know, half an hour snoop, some estate agent pressure, a clumsy deed of sale, and the deal is done, save for the bond arrangements.

Selling businesses is an entirely different matter. Weeks and even months of investigating the business history and the likely future are condensed into a variety of different business plans and financial forecasts. Through that process, if any undue pressure is suggested by the seller, that bluff is called quite quickly, and usually with devastating consequences.

The best way of speeding the process up is to give the investor what he wants, and in an easily usable format. The investigation and due diligence process is a gruelling one. These guys are often tasked with other people’s money, which demands a return. If it goes wrong, then their round bits are on cubed things.

In a forest of poorly prepared businesses with high asking prices, a well prepared business and owner has a better chance at hitting the jackpot.

I was involved in the sale of a business about ten years ago where a plan came together quite beautifully. It all happened like this:

About a year before the sellers placing their business on the market, they had spoken to me. I’m a “call a spade a spade” kinda guy. They hadn’t liked the message I gave them. So they went off somewhere else for more comfortable sale story. It did not take long to get an offer. Sort of in mid reality check, a mutual friend suggested that they run it by us for another opinion before accepting.

That took some doing, but we all put our big girl panties on, and had a look. Frankly, the deal in offer was such a waste for the sellers. They were selling too low, on lousy terms. I told them as much. Well not exactly.

What happened after that, taught us all some valuable lessons in being prepaired for sale – the gentle art of identifying a bunch of potential future owners of a business, and pre pairing for future benefit to all.

Valuation indicators Type of business (part2)

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PYBFS016

In PBFS015 we ruffled a few feathers in the retail industry. I suggested that the value of retail businesses is very volatile. You will remember I said that retailers are at risk and are exposed to the effects of interest rate changes, government policies and global crises.

So what about other sectors – the rest?

Obviously these businesses are also at risk of the external factors pressing down on their full over draft bladders. But I would venture to say that on the whole, the effect on them is much less dire, with some exceptions.

Some consultants and “luxury” suppliers are perhaps almost as volatile as retailers. The so called corporate gifts businesses lose their finger nails on a slippery slope of cut backs by their customers in hard times. Their biggest exposure is often the fact that they are single parent stores with only a few customers. If one large customer pulls back on ordering, the entire net profit of the business may suffer.

The saving grace of the corporate gifts business is that most of them operate from home, and unlike their retail cousins do not have huge rental bills waiting for them at month end. They are more likely to remain in business during tough times; and like retailers, their multipliers fall precipitously.

Wholesalers to the retail industry are perhaps even more volatile. At the first whiff of trouble, their customers, having ridden the crest of a very profitable wave are quick to “destock”, driving their store room volumes down. Not only will a wholesaler’s customers purchase less, but they will actively actually not buy at all and cancel orders, leaving the wholesaler with an over stocked business, and all the risks that entails. In tough times they tend to shed customers while surviving customers purchase less. It seems though that their biggest customers survive the tough times, and a boom happens as the retail sector wakes up in the upturn. There is a big shift in multipliers in the wholesale sector, from boom to bust times, although not as remarkable as in the retail sector.

Factories are much less reliant on the position of their premises than are retailers, and are able to move routinely, with the exception of a few for whom their buildings are purpose designed. Most factories though, have to relocate as they grow, in order to survive anyway. Moving premises is used as a marketing opportunity, rather than being regarded as a marketing catastrophe. Tough times for factories usually result in lower utilization of capacities, less money spent on overtime payments, lower raw materials costs and a sharpening of the pencils of salary negotiators. The biggest impediment to factory values in tough times is the access to credit for prospective purchasers, and there are therefore fewer of them. This naturally drives prices down, but not nearly as badly as for the retail sector.

Franchises are generally retail businesses, but not always. Somehow they are less volatile in their value than other retail operations, for reason only of the perception being that they are part of a stable operation, and have huge marketing budgets behind them. In difficult times their undercapitalised competitors go to the wall, reducing the number of slices the pie needs to be cut up into, even if it is a smaller pie.

There is another albatross following franchisees, viz. the franchisor and his debtors department. This is a sting in the tail of franchisees’ income statements, particularly where the franchisors do not reciprocate the royalty and marketing fund contributions with a strong brand, and even stronger marketing effort. The effect of this comes to the fore in tough times. When strong stand alone businesses are able to net less than 5% of their sales, outlets of weak franchise systems are contributing all of this to their overlords. So where strong franchise systems command good multiples, their weak counterparts do not.

We will unpack this some more, later in the series, but for now, I hope I have illustrated how foolhardy it is to compare notes with friends in other industries, using the multiples they achieved in the sale of their businesses which may have been in an entirely different industry, different geography, different economic cycle, different … etc.

Valuation indicators Type of business (part1)

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PYBFS015

For many years, the obvious question we would ask all our prospective buyers of businesses, is what business each would like to buy; that is, if they didn’t open the dialogue with a statement like “Hi, I’m looking for a small restaurant / coffee shop / factory / workshop” – the standard greeting from buyers in our industry!

Everyone has his favourite, and equally everyone has his pet hate:

  • Factory owners hate the idea of retail food outlets.
  • Retail food franchisees don’t see why they should have to work as hard as a factory owner. (Their perception, not mine)
  • Retailers tell me how they don’t want to call on their customers – “They must come to me”
  • Agents are happy to rent small offices, employ a few people, and move boxes. Preferably from home.

And it is this difference in favourites, coupled to an ever-changing macro-economic environment which contributes to the differences in values from one sector to another, from one time to another.

The old maxim of “if you have no shop, you have no business” is true for retailers, more so than it is for factories, for instance. Retailers in the small and medium size stratum are notoriously short sighted, in the opinion of almost everybody else. Most retailers are at the mercy of their landlords to start with, and are more often that not, abused by these wily foxes.

The big retailers can swing enough clout to turn the tables and have the landlords at their beck and call, while the small guy must simply take everything that is thrown at him from enforced opening and closing times to arbitrary rule changes, usually at the insistence of a much bigger retailer.

Of course, becoming a small retailer has enough of its own hurdles to overcome, that it’s a wonder that there are any of them in the bigger centres at all. Personal suretyships as well as bank guarantees often accompany the inflated rentals which subsidise the much lower rentals paid by their bigger colleagues in the anchor positions.

In difficult economic times, the small retailers are taken out quickly, and we were inundated with requests to sell “for almost anything” over night. So, retail values plummeted. As times improve though, the buyers of retail operations flood into the market to purchase the very few available businesses still operating after the squeeze. Demand drives prices up in a market being held dear by now cash flush owners.

Demand for retail businesses in good times is high, because most small operations are easy to run, and usually don’t require any specialist training. Entry level buyers from the ranks of the recently retired, retrenched or stressed are the fuel that feeds this machine.

During 2006 we saw a major shift in value from the factory environment to retail because of BBBEE initiatives being brought to bear on factory and wholesale businesses. White people unable to stomach the idea of sharing their businesses sold up and moved to retail where the same pressures did not exist. With the nexy round of codes of practice being released in 2007, this trend reversed with the perceived diminished BEE risk, and retailers suffered as the move to manufacture strengthened.

The fall in retail value was cushioned by the rise in consumer spending with the credit largess of that year and 2008. Big spending led to high profits, which attracted high rentals from more and more shopping centres and strip malls opening.

Came the end of 2008 and the so called “credit crisis”: many, many small and medium size retailers fell off the wagon and placed themselves on the market. A flood of supply of businesses attracting few buyers. None of those sellers had pre-approved credit facilities. The combination led to a general plummet in retail value.

So the first to feel the heat as the global credit crunch took hold were the retailers, with many of the buyers of 2007 and early 2008 now closing shop, unable to sell. That was first true for luxury item stores and fast food centres. One trendy night spot franchise in  particular, had as many as 38 of its franchisee operations for sale in 2009.

With a rise in supply and a fall in demand of any income producing entity, comes an associated fall in any of the multipliers which indicate its value. With a fall in profits, there is a magnified effect on the fall in values.

From all this it is easy to understand the high amplitude and frequency of value change in retail operations from extremely low profit multiples in poor times to frankly stupid multiples in good times. “Stupid”, because it is these new owners who will be taken out in the next downturn.

Prepaired

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In all my years of helping people to sell their businesses, the biggest frustration was not in finding buyers. There is never any shortage of people wanting to own good, profitable, well prepared businesses.

The real frustration always came in when the would-be owner had to find funding to enable the deal. The seller was faced with a choice:

  1. Look for alternative buyers while the one in hand seeks funding
  2. Wait for the current buyer to find his funding

I generally recommended the first option, in a low key, non threatening (to the buyer) manner. Problems arose if the buyer found out his deal was threatened, which often resulted in him losing motivation to carry through with the project. Similarly, funders insisted on exclusivity for a period while they conducted their due diligences. If, as often happened, the business passed muster, but the buyer did not, the deal failed. We were left looking for another buyer anyway, as if we had waited on option 2.

Taking the funding on offer from buyer 1’s bank often helped subsequent, more suitable buyers, if the seller stayed the course.

Cars

If you ever go into a car dealership to buy a car, as soon as you have got through all the salesman bluster, and shown your buy signal, and you have chosen your colour, seats, extras and so on, you will be ushered to the financing “department”.

Of course this is not a department of the dealership, necessarily. In reality, the “department” is an individual who is a bank clerk with a desk at a dealership. The bank has previously vetted the product and the dealership. Of principal interest to the dealership and the bank now is the viability of the customer – you.

White goods

Similarly for cars, the customer is shown a seat at the “finance desk” of the department store selling washing machines, TVs, laptops, smartphones, and so on. Things are a bit different for these goods because often the financing of the goods sold contributes significantly to the bottom line of the parent company, for reasons which have become abundantly clear over recent times.

Never the less, the metaphor(ish) holds: Goods and services stay sold if the funding is easy to come by. The funding is product approved in advance by the funder, subject only to a suitable buyer.

So why are business sales not pre-approved for funding?

Well they are, and they can be. It is not as simple as the process of a bank getting into bed with a car dealership group, but it can be done.

Our PrepareYourBusinessForSale™ initiative has been expanded into its obvious next step… being “PREPAIRED”. It is a process which takes time and is not easy to wedge into a fixed algorithm, given the complex differences between different businesses. But a guided and considered approach can achieve remarkably rewarding results.

Speak to possible funders of your exit plan well in advance, and get a feel for what they are going to require in

  • Your business
  • The new owner
  • The deal structure
  • The deal value

Keep in mind that you will have to work with your funder in placing the correct new owner, when the time comes.

“I am just so sick of the uncertainty. My business is really doing well, and it has some good years ahead of it, so it is time to get ‘Prepaired’”.