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Survey Results 1/7/2012

What Xcllusive Says:


Zoran Sarabaca, Pricipal
“This survey has shown a lot of uncertainty on the market, with buyers either equally divided about the possibility of finding a good business or uncertain. One thing that most of the buyers seem to agree on is the availability of finance for SMEs being either very hard or at best, difficult to attain. Because of this market state, it is a frequent occurrence that sellers will provide some form of vendor finance in order to secure the sale.Uncertainty in the market always increases perceived risk from the buyers’ point of view. This, together with hard to obtain finance has definitely created a buyers’ market. When the market is in this state, owners of good businesses are generally discouraged from selling, creating a shortage of quality businesses for sale. Ironically, this in turn makes good businesses easier to sell due to a lack of competition, though, still with prices lower than pre-GFC. From what we can see in this market, it doesn’t look like this trend is going to change any time soon.”

- Zoran Sarabaca

The Results

Xcllusive survey results

This month’s survey has seen neutral or low results for all questions asked. Question one, which indicates the likelihood of buyers finding a business that suits their requirements in the current market, returned a fairly even spread of results. 37.5% of respondents returned a positive response, 31.5% reported that they were unsure, and 30.9% of respondents returned a negative response.

Question three, which asked respondents whether they would be more likely to purchase a business now or in six months, returned a similar spread of results with 38.5% responding negatively, 27.7% reporting that there will be no change and 33.7% saying that they believe that now is a good time to purchase a business.

Question two, which compared the current business sales industry to how it was six months ago, returned a more definitive result with 46.3% of respondents reporting that there has been no change in the industry from that time.

Of the four questions, the most significant result was from question four which indicates the ease at which finance for a business purchase can be accessed, with a massive 73.2% of respondents reporting that finance is either difficult or very hard to obtain, and only 6% of respondents returning a positive response.

The sum of these results has indicated that the overall sentiment from business buyers is low, sitting just below neutral.

By Zoran Sarabaca

Xcllusive Business Sales
Sell your business with Certainty

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Survey 10: With buyer sentiment remaining relatively neutral, how did one business cause business buyer enquiries to jump by 17%?

With business-buyers’ positivity seemingly cemented to only slightly higher or lower than neutral, one would expect that the enquiry rate from that same group would mirror that sentiment. In contrast, this survey period, Xcllusive has seen an unexpectedly large jump in enquiries from business buyers. New buyer enquiries rose by over 9% this period and business enquiries overall rose by approximately 17%. In fact, May’s new buyer enquiries were the highest they’ve been in over 8 months. Which begs the question, when buyer sentiment is so neutral, why was there a surge in enquiries? Truthfully, we didn’t have to look far to find the answer:

One little accounting practice for sale.

Over the course of the business’s first week on the market it received four offers and more than double the enquiries that most businesses will get over the course of three months. A response rate this high is so rare that the last time we saw it was six months ago during the first week of marketing for the last accounting practice Xcllusive worked with.

This is what it is like to sell a business in an in-demand market. Which begs the question, what are the factors that are making accounting practices so attractive at the moment, and how can sellers in other industries mimic that?

Factors that make accounting practices attractive in the current market:

  • Security of income
  • Easy to incorporate into an existing business
  • Repeat business
  • Easy for existing accountants to operate
  • High necessity service
  • Easy to finance – NAB will finance 60% – 80% of total annual revenue
  • Low supply, high demand

Realistically, it will be difficult, if not impossible, for other industries to tick all of these boxes. For example, not all businesses can be incorporated into an existing business, nor is business finance easy to obtain for most businesses for sale. This too has been reflected in this month’s survey, with respondents returning the lowest result in 12 months in regards to their ability to obtain finance.

Not all businesses offer a high necessity service either, leaving us with only a handful of factors that can be addressed to bring a business up in the business sales market. Here’s a brief overview of how business sellers might do this for their business based on the key factors listed above:

Security of Income
This can be established by having a solid set of financials for at least the three most recent years. Generally though, the longer the business has been established with either consistent or growing profits, the better.

Repeat Business
Most businesses do have some form of repeat business, but rarely is this recorded. Take steps to firstly establish what portion of your business is built through repeat business, and secondly, establish a method to ensure maximum retention of this group when a new vendor takes over.

Ease of Operation
All businesses have their own idiosyncrasies in the way that they are run. To a buyer though, these idiosyncrasies will be perceived as elements of operation that will make running the business difficult. To allay this concern, offer to your buyers a training period in which they can learn the ropes. A buyer will feel comfortable buying a business once they know that they will be able to maintain and grow it.

The results of this month’s survey have indicated that confidence in the current buyers market is still low, meaning that business sellers must take steps to boost confidence in their own business rather than simply waiting for a confident buyer. Accounting practices naturally do this, the result of which is that the buyer response is higher than the average buyer response even before the global financial crisis. In this market, this kind of response is difficult for sellers in other industries to aspire to; but aspire they must. By taking the right steps and the right preparation, and most importantly, helping a buyer see the value in his or her business, a business seller can find the right buyer and most importantly, get them across the line.

Survey Results:

By Zoran Sarabaca

Xcllusive Business Sales
Sell your business with Certainty

* Disclaimer: This survey was distributed to over 2,150 people through the Xcllusive database. The information generated is from a series of questions asked in that survey. All of the results can be found on the Xcllusive website www.xcllusive.com.au. Please note Xcllusive does not guarantee the findings are free from errors and that this survey is not to be considered as business advice.

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Survey 9: Are the difficulties in obtaining finance negatively affecting perceptions of pricing and availability?

This survey period saw a substantial non-consecutive dip in buyer positivity. The biggest drop in positivity occurred in the pricing and availability of businesses for sale on the market in which positivity dropped by a massive 13.1%. Alarming though this drop is, business pricing is almost always the primary barrier to reconcile between buyer and seller and can be affected by any number of factors. A business may in fact be overpriced, but it may also be the case that buyers’ perceptions of value and/or attainability may also be down.

For example, buyers’ perceptions of attainability will almost certainly be affected by their ability to obtain finance, thus making the purchase more achievable. With business loans in Australia still being stifled by the European credit crisis, some major banks have announced fresh rate hikes for business loans. Under these circumstances it’s not in the least bit surprising that with business buyers getting hit on both sides of the finance hurdle, positivity in this area has dropped by 7.7% this survey cycle. That said, despite this sudden drop, it appears that we are still better off than we were a year ago.

The final notable drops came from buyers’ positivity towards the likelihood of buying a business and their positivity towards buyer a business in the current market. These saw a 7.35% and a 4.23% drop respectively. The good news is that despite these drops, perceptions of these fields still remain in the positive.

Overall, it was not a good month for buyer positivity, with dips in all areas. One thing that can be taken away from this is that despite a generally negative market, businesses are still being bought and sold, and where deals are being made there is always opportunity.

By Zoran Sarabaca

Xcllusive Business Sales
Sell your business with Certainty

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The Survey- What’s being asked and what’s being said. Period 10.

Click here to be taken straight to the survey!

There are five questions being asked of each entrant. Response was given as a number between one and ten, ‘one’ being a negative response, and ‘ten’ being a positive response.

The questions addressed the following areas:

Question 1: Addresses how likely it is that buyers feel they are going to find a business for sale that suits them in the next six months.

Question 2: Addresses how positive buyers feel about buying a business.

Question 3: Addresses how buyers see the current economic and business climate changing over the next 6 months

Question 4: Addresses how easy buyers feel it would be to finance a business purchase in the current climate

Questions 5: Addresses how buyers feel about the current supply of businesses on the market.

The current results are as follows

 

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How rising unemployment may affect the business sales market and the saleability of your business

Three months ago I was at my local hotel and noticed a new member of the bar staff. He looked out of place amongst the others behind the bar so I struck up a conversation. Turns out, he used to be a financial analyst with one of Australia’s biggest financial institutions.

These are strange times we live in.

With many major corporations and financial institutions announcing mass layoffs over the past few weeks, a new wave of negativity has been injected into the market. Despite this, recent survey results have actually showed an increase in both a buyer’s likelihood of buying a business (6.9%+) and positivity towards buying a business today (3.1%+)

Given the doom and gloom being reported at the moment, these results may seem incongruous with current events, however they actually tie in quite closely with the motivations that spur business buyers. The motivation for buying a business changes with the economic climate. In positive times the business buyer pool is largely populated with securely employed individuals looking to take a risk by leaving their jobs with the intention of making higher profits than their jobs can provide. In uncertain times however, this motivation couldn’t be farther from their minds.

In September of last year we sold a business to an individual who was leaving their middle management job because they weren’t certain that the job was going to remain secure. This person’s motivations are a perfect example of why many people are buying businesses today: to take control of their financial future and secure their income through investment. With the recent layoffs in middle management, it is expected that this motivation will be the driving force behind many business sales in the months to come.

With this motivation also comes a change in the criteria that most attracts buyers. In times of more certainty, buyers are willing to take more risks in exchange for potential high profits. Though the motivation for high profits still remains, the stability of the business is becoming increasingly more important than it already was for this new pool of buyers. High-profit, high-risk businesses are becoming significantly harder to find buyers for at premium prices, and the reason is this: at the moment buyers are more concerned with financial security than increasing their wealth. It is for this reason that the profit multiplier used to value businesses is dropping.

So how will this affect your business? The more protected your business is, the more likely it is to sell. The factors that are most important to buyers today are as follows-

  • Length of operation
  • Even spread of suppliers
  • Even spread of clients
  • Good lease length with options
  • Solid and thorough financials
  • Limited competition with reasonable barriers to entry

This is not to say that buyers weren’t concerned with these things in the past, but more to say that in the past these factors could be more easily offset by high profits. In contrast, in today’s market they affect the business’s ability to sell or even receive enquiries unless the price is dropped dramatically.

The main point to be taken away from this is that there is a new wave of cautious buyers entering the market. These buyers are in a position where buying a business is increasingly becoming a necessity, but as they are coming from otherwise stable jobs they will be looking for equal stability in their investment. Businesses with higher risk factors will still sell, but it is vital that the risk is offset in the price for which it is marketed. Having more buyers is always a good thing, but the game is changing, and how you play it will determine your success.

By Zoran Sarabaca

Xcllusive Business Sales
Sell your business with Certainty

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Survey 7: With buyer confidence in the pricing and availability of businesses for sale dipping, could this be an opportunity or an indication of things to come?

The past six months worth of results had begun to show some very clear trends, all of which have been completely inverted this survey period, making this one of the biggest turnaround periods we’ve had. Some of these dips may seem alarming, however when it comes to business sales, every cloud has its silver lining.

One of the larger turnarounds came from the ability-to-finance-a-business-purchase question (4), in which confidence had been climbing steadily since June. This survey, confidence in this field dropped almost 8%.  The unique property of this question is that lending restrictions in Australia, set by the larger lenders, haven’t changed much at all in the past two years. This would suggest that responses to this question are often one of sentiment rather than practice. Perhaps the regular media coverage of the worsening financial situation in Europe is affecting perceptions here in Australia; we’ll just have to wait and see.

Questions (1) and (2) which pertain to the likelihood-of-buying-a-business and the positivity-of-buying-a-business-today followed their usual trend of moving in tandem, only this month their upward trend took a small downwards turn. The good news is that though confidence in these areas has dropped, they were only small drops and though it’s only by a hair-width, they remain in the positive.

Confidence in business pricing and availability (5) dropped over 6% this survey period heralding its first drop in 12 months. The results to this question have always been a point of interest for us as it is widely accepted that it is a buyer’s market in the business sales industry. (see AIBB’s Australian Businesses for Sale – Market Indicator) Businesses that used to sell for four and five times profit are now selling for two and three times. The fact is, there are some very well priced businesses out there, with a handful of confident buyers taking advantage of them. Five years ago you were paying as much as twice as what you’re paying for businesses now, meaning that if you can finance your purchase, now may be one of the better times to buy low. Though this is not assured, we can assume that once confidence returns, it is likely that business prices will begin to rise again. Which brings us to the final question.

The big surprise came from the question relating to buyer positivity towards the business and economic climate over the next six months (3), which saw its first serious rise since the survey started over 12 months ago. Jumping almost 9% in positivity, buyers’ perceptions of the changing market have moved swiftly back into the neutral after a year of increasing negativity. It could just be a one off result, but it could also be an indication of things to come.

So, is ‘now’ a good time to buy? Realistically, it could go either way and it’s anybody’s guess until we see economic stability return. That said, the fact still remains that businesses are selling for less than they were five years ago, but as to whether you should buy now; that’s up to you.


As usual, we are happy to bring you an analysis of these bi-monthly results as they come in, but we can’t do it without the results. If you have an interest in the outcomes of these figures please take the time to fill in the survey. It’s just five quick questions and it should take you under 60 seconds.  Your ongoing assistance in gathering this information is extremely important to us in that it enables us to present up-to-date and relevant information to you. Thanks again in advance for your time. Click here to take the survey.

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Survey Month 6: It looks like the upward trend is continuing!

This most recent survey draws to a close the first year of testing and remarkably, has returned to most positive results yet.

The biggest surprise comes from the ability-to-finance-a-business-purchase question (4) in which respondents reported that it would be 4.6% easier to purchase a business than it was two months ago. This rise may not sound like much, but considering that as little as six months ago the finance question was returning steadily falling results, this rebound is extremely positive.

In the business related questions, the question pertaining to business pricing and availability (5) returned a 4.7% increase on the last survey, and the likelihood-of-buying-a-business question (1) jumped 4.8%. The smallest increase came from the positivity-of-buying-a-business-today question (2), returning only a 2.1% increase. That said, question (2) is still returning the highest results of all other fields

The only question to continue returning declining results is the question relating to buyer positivity towards the business and economic climate over the next six months (3). This decline is interesting considering that all other fields are on the rise. It remains to be seen whether the expectation will follow the trend, or the trend, the expectation.

It should be noted that despite all of these increases, the results, though improving, are still only returning average, or slightly above average results. The exciting thing is that if these results continue on their current trend we could be seeing some very serious improvements within the next few months. The reason we can predict this is that in all the results returned, we are starting to see some very clear trends, and the most part, all of those trends are on the up.

The next survey will see the first results returned that would allow us to compare the current market directly with the results a year ago. Once again, we can’t do this without your help so if you’ve got a minute, we’d love to hear from you.

Click here to go to the survey
(just five quick questions)

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Survey Month Five – The Results are looking up!

The end of our tenth month of survey results has seen the upward trend in buyer confidence continue- even after the US stock market crash. The big surprise came from the finance related question. Buyers’ positivity towards their ability to obtain finance for a business purchase increased by a surprising 8.45%, easily the biggest increase yet in any field. Though this still leaves it at around 50% positivity we’re quietly hoping that this is the beginning of a new trend, as an increased ability to obtain finance would reduce the strain on both business buyers and business sellers alike.

Unsurprisingly, of all the fields asked, the only one to trend negatively was the question pertaining to how buyers see the economic and business climate changing over the next six months. This saw almost a 3% drop.

All other fields (likely hood of finding a business, positivity towards buying a business, impressions of the current supply of businesses) saw, on average, an increase of positivity of 3.17% leaving them not quite as good as they were ten months ago but certainly better than six months ago.

So what could this mean for you? As buyer positivity increases we may begin to see more sellers taking advantage of the opportunity of finding a buyer in a positive market. This could mean more good businesses on the market but only time will tell.

We’re really interested in how you feel the market is progressing and would love to get your opinion on it. If you’ve got 30 seconds and would like to go into this year’s final draw to win one of SIX iPod shuffles (that’s right, one more this time) click here to take part in the survey!

Click here to take part in the 2012 survey.

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How can you agree on a price in a market where it’s almost impossible to agree on a price? Part 2.

Last featured article we covered a range of different approaches to designing a handover method in order to aid negotiations using terms of sale. If you missed that article click here for Part 1. This week we’ll be looking at some of the more complicated ways of pushing business sales through. A word of caution though; these next options if mismanaged, can be riskier to the seller, though as with last week’s article, if a price cannot be agreed upon they should be worth considering if the alternative is losing the sale.

2. Vendor Finance

It’s almost common knowledge now that bank finance for businesses is becoming increasingly difficult to obtain. The result of this is that many business sales that should have gone through are now failing because the buyer cannot fund the purchase. One possible solution for this is vendor finance whereby the business seller can provide finance to the buyer with a repayment plan. Usually this is no more than 30% of the business price. Though the seller will often remain a part owner of the business, they generally will not be participating in the profits.

The big advantage of this approach is that it removes the financial hurdle for prospective business buyers. By taking it out of the equation, the seller effectively widen their pool of buyers considerably by making it easier to buy. In a have now, pay later society it sets you apart from the rest. The downside is that it is riskier to the seller, can take a long time finalise, and if the contracts aren’t prepared properly can leave either party open to legal issues. Because of this the seller will charge an interest rate of 2% higher than the current commercial interest and wherever possible, the lent money should ideally be floated against the equipment value in the event that the business takes a downturn.

This solution can be used for businesses of any size, though it should only be considered when absolutely necessary. If you’ve found yourself in a position where vendor finance might have to be used it is absolutely vital that both buyers and sellers have their solicitors construct an airtight contract.

3. Earn-outs

Earn-outs are generally reserved for businesses of bigger consideration. Though earn-outs have their similarities to vendor finance they are not necessarily designed to circumvent the issues with raising finance. More so, they are designed with two things in mind.

a)    To reduce the risk to the purchaser by redistributing it both purchaser and seller

b)   To allow the vendor to maximise the business sales price by carrying some of the risk themselves

So how does it work? In instances where there is high uncertainty regarding the businesses future performance, business owner and buyer agree upon a discounted sales price under the proviso that the amount discounted be settled when certain conditions are met. These conditions are usually related to contracts or profits. Under these circumstances a risky element to the business that would have otherwise lost the sale or resulted in a substantial drop in asking price can now be used as a bargaining chip.

For example, a business makes a $200,000 profit from a yearly contract but this contract is never assured. A buyer perceives this risk and asks for an equal reduction in the asking price. The owner knows that this contract will be renewed, refuses to drop the price and we have a stalemate. Generally, when a business is sold, all risks associated with the business are sold along with it. An earn-out dictates that the seller maintains some degree of risk after the sale. So in this instance the seller could agree to a $100,000 reduction in the asking price on the provision that when the contract is renewed the remaining $100,000 be paid out by the buyer. So rather than force the buyer to swallow a $200,000 risk, both parties now share the risk equally.

This example is just one of many ways that a business earn-out can be structured, meaning that it can cater to a businesses individual needs and situation. The downside to an earn-out is that though the seller does not retain a share in the businesses, they are inevitably tied to the success or non-success of the business. The situation proposed by an earn-out is also ripe for breeding distrust and can often result in relations going sour between buyer and seller. As with vendor finance it is absolutely essential that both parties involved have their solicitors design an airtight contract with all bases and outcomes covered. Earn-outs are complicated and time consuming, but if managed correctly can allow the buyer to alleviate risk, and the seller to maximise the selling value over an extended period of time.

As we covered at the beginning, not all of these approaches may be applicable to your business. For the most part, a well-designed handover could be all that you need to get your business over the line and in many cases, the difficulties involved in a vendor finance or earn-out situation make them more trouble than they are worth. In today’s climate however as the distance between the seller’s lowest price and the buyer’s top price becomes harder to reconcile they are more frequently being utilised as solutions to otherwise unsolvable problems.

The main thing that should be taken from all of these solutions is that there is always a way to get a business across the line. Negotiations should therefore be approached with a problem-solving and positive attitude. It’s a little extra time at the end, but in the scheme of things, if having the business change hands for the best price possible is the goal, it will definitely be worth it.

- By Zoran Sarabaca
Principal Xcllusive Business Sales
Sell your business with Certainty


Disclaimer: All information in this article is for information purposes only. It should not be taken as financial, legal or any other advice. Individual circumstances of businesses and business owners may vary and have not been taken into consideration in this article. Always seek independent legal and financial advice for any matters regarding business sales.

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