The Low-Down on Cash Businesses: How the cash economy impacts business value.

For decades our parents and grandparents were buying and selling businesses based on ‘gut feelings’. They bought on how many coffees sold, or kegs sold or packets of cigarettes sold. They valued based on turnover or rules of thumb. They valued based on cash.

Those days are well and truly behind us, and it’s important that you know what’s changed.

Since the Global Financial Crisis of 2007 we live in a very different world. The uncertainties, and in particular the business practices introduced to resolve those uncertainties, have become a part of the business sales market for good. The practice we’re pointing at in this blog is the now absolute necessity for good financials. Quite simply, if you want to get the value from selling your business that you are hoping for, you absolutely need clearly recorded and verifiable figures. This is to satisfy two primary needs.

  1. New consumer protection laws require that clearly recorded and verifiable figures are needed in order to obtain finance.
    As part of the National Consumer Credit Protection Act 2009, providers of credit services are required to meet a range of new ‘responsible lending obligations’. Amongst other things, lenders are required by law to make enquiries about a borrowers financial situation and to take reasonable steps to verify that situation. Technically this has always been the case; it’s just a lot stricter now. For business buyers that means that everything they provide must be verifiable, must be above board and absolutely cannot be based on unreported cash sales. That might sound like it’s their problem, but if you want them to buy your business, it’s your problem.
    (If you want to know more on this, check out the National Consumer Protection Act 2009, Chapter Three, Division Four. Be warned though- it’s not a page turner)
  2. Buyers are considerably more cautious than they used to be- It’s a Buyer’s Market.
    Though we may have weathered the financial storm of the GFC, there are few who can say that we were left unscathed. The biggest change that the business sales market saw was a change in where buyers see business value- and it’s an important distinction. In the past, buyers saw the value in a business as coming from how much money they could make from it. Now, they see value in a business as coming from how much they will make from it in the worst case scenario. In order for the buyer to determine this, they need verifiable historical figures.

What to do if you have a business with a lot of income that is not being banked:
If you want to sell a business with a lot of unrecorded income, there are two ways do it.

One: Start recording and banking immediately and wait a few more years so that you have some historical financials. For many people the thought of doing that 100% might be horrifying, but remember, though the current setup may be excellent for you personally it could render your business close to unsellable at its full asking price- no matter how much money it is actually making. If you don’t want to do this, the other options is…

Two: Reduce your asking price to a figure represented by your recorded income. Again, this may be horrifying to some people, but you have to remember that in selling a business, you are entering a market where un-recorded income is largely ignored. It that tastes a little sour, keep in mind that though you may achieve a lower return from the sale, you have still benefited from this un-recorded income for as long as the business has been running.

What if you have excellently recorded income?
If you own a traditionally cash operated business where you have a long history and everything is recorded and “on the books” then you are in a very good position to sell. Good figures in these industries helps your business stand out and you should sell quickly in the current market for a good price.

If you would like to talk to an agent today and would like to know how to sell a business with your current circumstances call Xcllusive Business Brokers on (02) 9817 3331. We look forward to talking to you about your situation.

By Zoran Sarabaca

Principal of Xcllusive Business Sales
Sell your business with Certainty

 

 

DISCLAIMER: The information contained in this blog is for information purposes only. It is not meant to be considered as business advice. The points of view expressed represent reactions to the current business market and it should be noted that the market may be subject to change in the future. Reader’s specific circumstances may be different and have not been taken into consideration. Always consult with your professional advisors for any business advice.

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Pricing Your Business: Why leaving room for negotiation can leave you out of pocket

As a broker I deal with this issue every day. I’ve seen it with every business type and size, so when I say this, you can know that I’m speaking only from experience: If you don’t price your business correctly it won’t sell.

Allow me to illustrate. You’re selling your business. Broker A performs a thorough valuation and values your business at $315,000. Broker B doesn’t perform a valuation and tells you they can sell it for $430,000. You look at these figures, and you remember all the hard work, money, time and effort you’ve put in and you think to yourself, “The buyers will probably talk me down anyway, but maybe there’s someone out there who’s willing to pay it.” You begin advertising your business at $430,000.

Meet Jim. Jim is looking for a business type just like your own around $300,000. Jim is the person who will buy your business; you will not find a more appropriate buyer. The problem is, that Jim never enquires about your business because it’s priced well out of his price range.

Meet Mark. Mark is looking for a business type just like your own around $400,000. Mark immediately enquires about your business because it’s priced exactly within his price range but straight away sees that it is over priced. He does not enquire further because a) he is not looking for a $315,000 business and b) because he is not comfortable making an offer so far below the asking price. Mark is not at all suited to buying your business, but he, and others like him, are the only people who will enquire because they are the only people that your price is advertising to.

After about four months you decide to drop the price to its valued price of $315,000 in the hopes to attract Jim again. Will it work? Unfortunately not. If Jim hasn’t already bought another business, he’ll have just seen the business drop in value by nearly 30% of its originally advertised price and he no longer sees it as a safe purchase.

After about six months, every applicable buyer, including Jim, will have seen your business advertised at least once, and will no longer be interested. The business is now suffering from what is called ‘the stale business effect’. So you do what most sellers in your position do; drop the price again to regain interest from the buyer pool.
Does this work? Yes, Jim finally enquires, but not about your $315,000 business, a price which he would have happily paid six months ago. Jim enquires about your $280,000 business that has dropped in value twice; a business that he knows you are desperate to sell. Thanks to the six months on the market, he can safely assume that there are no other interested buyers and as a result, can continue to push you down on the price without any sense of personal urgency.

Business sales is an industry in which one in three good businesses sell. So what puts that ‘one’ ahead of the other two? The price.

Anything can sell if it’s at the right price, and you have to remember that as a business seller, your business is worth more to you than anyone else. You have put in all the hard work, money, time and effort. So when someone tells you they can sell your business for 30% more than it was valued, your instinct will be to choose that price.

When it comes to price, logic must always take the place of instinct. So how can you avoid this outcome? Ask yourself, ‘would you pay the price that you are asking for your business?’. Knowing all that you do, if the answer is no, then you can’t expect someone else to.

If you would like to talk to us about valuing or selling your business don’t hesitate to call us on (02) 9817 3331.

- By Zoran Sarabaca

DISCLAIMER: The information contained in this blog is for information purposes only. It is not meant to be considered as business advice. The points of view expressed represent reactions to the current business market and it should be noted that the market may be subject to change in the future. Reader’s specific circumstances may be different and have not been taken into consideration. Always consult with your professional advisors for any business advice.

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Why are Today’s Business Owners Turning Down Their Best Offers?

‘Holding Out’ can be a very successful negotiating technique, but when it comes to business sales, if you’re not careful, it could cost you more than just your hottest leads.

Six Months ago, I was approached by a client who wanted to sell her business. After the necessary preparation, it was placed on the market for $160,000 and the first wave of offers, though good, came in at around twenty percent less than she had wanted. Against our best advice, the seller contacted the buyers directly and instructed them to look elsewhere, choosing instead to hold out for better offers. Four months later, her business went into liquidation and was sold for stock. What did she do wrong?

This problem stems from, what can only be described as a limited buyer pool, a great example of which can be observed in the advertising undertaken for the business.

The business in question had a three-week run in the classifieds. The first week it received seven enquiries. The second week: three enquiries. The last week it received only one enquiry. Though this is a perfect example of buyer interest dwindling, it’s not the best. The best example of diminishing buyer interest was observed when a revamped advertisement was run again, three months later. Over the course of the three-week run, it did not receive a single enquiry.

In six weeks of paid advertising there were more enquiries in the first week than the following five.

This phenomenon isn’t reserved solely for newspaper advertising. It’s exactly the same story for web advertising and direct mail also.

What can be drawn from this is that the pool of buyers looking for  certain business types is not unlimited. At any given time, there are as little as fifty viable buyers in the market and this group isn’t self-replenishing. If your business has been on the market for six months, the people looking at it are, nine times out of ten, the same people who saw it on the market when it was first placed. The first wave of offers is usually the best because by the time the second wave comes, the buyers making those offers have been watching your business not selling.

At this point it would fair to ask what to do when the first set of offers doesn’t meet expectations. Keep in mind that if you receive an offer that is lower than your asking price, the buyer making that offer is not out to insult or swindle you; it’s just part of the game. Furthermore, it is this first run of leads that give you an indication as to what the market sees your business to be worth. As a seller, it’s your job to present your business in such a way as to show the buyers why you feel your business is worth what you say it’s worth. Work with them, as opposed to against them and nine times out of ten, you will find a price that’s good for the buyer, and good for you.

- Zoran Sarabaca

Principal

Xcllusive Business Brokers

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