What’s your business worth in the current economic climate

In spite of reports that consumer spending is buoyant, governments around the world, at their highest levels, are not prepared to forecast a date for full recovery from the current Global Financial Crisis.  So, how is ‘near recession’ impacting on the worth of your business?

The economic situation has killed the market, When the bottom fell out of the US stock market in August, 2008, the global shockwave brought everything to a shuddering halt. When we tracked inquiries from buyers in our office we found that inquiries dropped 80 per cent last year.

This is good news for businesses surviving the current economic downtown. Businesses experiencing steady or increased profit margins could be worth even more than they were before the financial crisis.

It is true that the Global Financial Crisis (GFC) knocked the stuffing out of the share market when it hit in 2008. and it is true that there is no leading economist prepared to forecast an end to the current ‘near recession’. It is also true that the value of most business has declined. however, good businesses could still hold their price.

For businesses deciding to sell, the good news is that financial uncertainty always breeds investors and potential business owners who see tough times as a chance to get a good deal. And if your business is surviving these tough times, the news gets better.

As long as it is not going down and makes a sustaining income, the business is valuable and buyers will always have you on their radar. Purchasing any business during a financial slowdown is often motivated by the desire to realise a good profit when times get better. The downside is that when selling now you will have to be even more realistic about your price. This does not mean giving away your business to bargain hunters. It means truly satisfying yourself that you are getting what it’s worth.

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You will close the deal if you let the buyer see everything

Playing your cards close to your chest may be the way to go in business, but not if you are trying to sell it for the best price.

So you have a potential buyer for your business. Congratulations! Marketing or advertising your business has paid off…so far.

Only when a prospect is sure that your business is going to go on making money into the future will you be able to close the deal. So the mantra is: “Don’t look as if you are holding back. Give them everything.”

Getting people to look at the sale of your business more closely is admirable, but getting the deal across the line is a whole other ball game. It usually means full access to all paperwork. Be prepared to go into everything, so the purchaser of your business can see where the good supersedes the difficulty.

Transparency

Your business operations must be transparent. If it’s all too much homework, raises too many questions or just looks too har, the chances are you may lose your buyer.

If they don’t understand your business quickly they will lose confidence.

You can give a buyer “everything” without having to give away your best trade secrets if you focus on what’s in it for them. Brush up your track record. Lay out your business potential. Reveal hidden strategies and point out where further savings can be made.

Zoran Sarabaca

Principal

Xcllusive

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Cheap Coffee is Hurting Business Value

Today’s Coffee shops and restaurants are more popular and busier than ever. To see evidence of this just walk down any of the popular eating places in Sydney’s Inner west, Eastern Suburbs or any other popular eating area in Sydney and you will hardly be able to find a place without reservations. 

Both supply and demand for these types of businesses are high yet the prices they sell for are very disappointing for the owners that have put in many hard working years of their life building them. 

So why is this the case?  Because, the price of coffee and restaurant food hasn’t followed the inflation rate, increase in rents and labour cost. 

Over the last decade the rise in commercial property value has pushed commercial rents up, especially retail rents, not only in the shopping centres but also on the street. The increase in rents together with increase in labour cost has made margins for the small retailer much lower than a decade ago. 

Nowhere is this squeeze more obvious than in the family owned restaurants and coffee shops. Goodwill of these businesses is tightly connected to the location, which makes rent negotiation very hard for the tenant when the lease comes up for review. They are also highly labour intensive. 

The logical step to combat shrinking margins would be to increase the prices to compensate for the increasing costs. However, because of the personal connection felt between the business owner and their customers and the unfounded fear of losing them to the competition if the price of coffee is lifted by a few cents has made many owners absorb this cost over the years. 

To compensate, operators are working longer hours and increasing services that they are offering. Restaurants and coffee shops that in the past have never offered takeaway food or space for functions are doing so now. Establishments that have been operating with one or two days off during the week are now open seven days. Yet you still in Sydney can find coffee for the same price that you could ten years ago. So when the owner decides to sell their business, they receive a rude shock when they realise that their business is worth less than what it did when they bought it 10 years ago.

A decade ago they were working normal hours and making good money. Today they are burned out by the hard work and long hours and still making the same amount of money, except that the average wage is much higher today than what it was when they started so their good earnings then are not so good now. This directly affects the business sale price and pushes it downwards. 

So in order to achieve a good price for your food business, good margins must exist. Good margins will ensure that the owners work reasonable hours and achieve good financial reward for the hard work they put into running their business. It is inevitable that the price of food and coffee in restaurants and coffee lounges have to go up. Even if this may prompt the Australian Reserve Bank Chairman to raises the interest rates again to stop inflation from getting out of control.

Zoran Sarabaca

Principal

Xcllusive

Sydney Business Brokers

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Buying a Business – Fear and Desire

The business-buying-decision is heavily biased towards perception of risk as well as understanding the benefits of a business. This means that you must help buyers understand the real risks in your business – you must try to minimise their fear of the unknown. The more they understand the real business risks the easier it is for them to appreciate the benefits. 

The benefits for buyers are not only financial. Benefits may include personal success, independence, or self-fulfillment. They are looking for a particular type and size of business that fits their needs, skills and experience as well as their future plans. 

A buyer will be concerned about a range of issues. They may be concerned that goodwill and intellectual property are linked to the owner and won’t transfer after a sale – or perhaps the business has a bad reputation in the market. The buyer may perceive the cost of acquiring goodwill as too high. 

Then there are human resources issues: what if there is a large turnover in staff after the sale; what if the managers leave; what are the staff’s long service leave, superannuation and workers compensation liabilities. 

Xcllusive uses a model to explain how the two opposing thoughts compete. The overemphasis on risk due to the fear of the unknown creates mistrust. The feelings of mistrust dominate the buyers understanding of the business and their desire to achieve its benefits.

Over the sale period we seek to reduce the buyers’ mistrust and increase their understanding of the benefits. This should help them to make a balanced decision to buy your business.

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What is Due Diligence?

In contents of the business transaction, Due Diligence (DD) is a term used for an investigation or audit of a potential business that a purchaser is looking to invest in. 

Due diligence serves to confirm to a purchaser all material facts in regards to a business. Due Diligence is always done before entering in the agreement for the purchase of the business. Its purpose is to prevent unnecessary harm to all parties involved in the transaction, especially the purchaser. 

The facts verified during DD process will vary for different types of businesses. The most common areas of concern are financial, legal and compliance. It is common to use specialist outside adviser for each of specific areas of due diligence.

The cost and timing of DD will depend on the complexity and size of the business being investigated. If any anomalies or undisclosed facts are discovered through the DD process, the purchaser will ether attempt to re-negotiate the price or decide not to proceed with the business purchase.

Zoran Sarabaca

Principal

Xcllusive

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How long does it take to sell a business?

In a recently undertaken survey of 100 businesses that have been offered for sale by business owners 2 years prior to our survey, of those businesses participating in the survey that were sold, we have found that the average time  it took to sell the business was 8.6 months. The advertised price range of the businesses that sold was between 45K and 790K.The data collected has reviled that 47% of the businesses were sold within 6 months, another 35% between 6 months and 1 year and 18% of the businesses took over 1 year to secure the sale.

The following are points that you should pay attention to in order to reduce the time it takes to sell your business.

  • Make sure that your business is priced right and not overpriced
  • Present your business to buyers transparently
  • Have all paperwork and financial records ready for inspection
  • Address all issues and uncertainty prior to putting or your business on the market
  • Be co-operative and make it easy for buyers to inspect your business

A good business agency or a broker can make the business selling process not only shorter but also help you achieve a sale result that you will be happy with.

Zoran Sarabaca

Principal

Xcllusive

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Business Owner’s Greatest Mystery – How Much is My Business Really Worth?

It is as if the value of a business is the worlds biggest kept secret. Business owners can spend all their business life (in many cases decades) and not really know the real value of their business. By real value I don’t mean book value, but how much would somebody pay to own it.

Often the owner has a overly optimistic value of what the business could sell for due to anecdotal and inaccurate information they have heard from colleges and acquaintances, mostly not first hand but from somebody who has heard of someone who has sold a business. It is more rumour then the real information.

Another way that business owners guess the value of their business is by looking for businesses advertised in daily papers and on the Internet, searching for a business that is similar in size and in the same industry and then comparing those businesses with their own.

There are two reasons why this method wont give you good indication of your business value. The first is there are no two businesses alike. They all rely differently on their owners, have different customers and different risks associated with them, so you’re not comparing apples with apples. The second reason is that businesses often sell for a price quiet different for the one they are being advertised for or don’t sell at all.

So, how do you than gauge how much your business is worth at any given time of its life?

Like this, first detach yourself emotionally from the business then ask yourself the following question:”Knowing what I know now, about my business, it’s profits, advantages and disadvantages, all its benefits and drawbacks, comparing it to other businesses and investment opportunities that I could invest my money in, how much would I pay for it”

If you answer this question without emotional attachment and honestly, you will find the answer to the biggest mystery for any business owner… the answer to real value of your business.

Zoran Sarabaca

Principal

Xcllusive

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Should you or should you not, tell your employees that you’re selling your business?

Losing a crucial employee can be costly to any business. Losses from the business elements that the employee is crucial for together with cost of recruitment and training of the new team member, could be measured in tens of thousands of dollars if not more. Not to mention the difficulty in explaining to buyers the sudden drop in profits due to this event and decrease in their confidence in sustainability of the future business (If the loss of one employee can cost a business so much how much will a change of ownership will cost?)

So reading the above, one could argue that there is no case to be made for telling the employees about the business sale. But lets look at this from the employee’s point of view. What they want is a good environment and income security. It is not the possible change of ownership that makes them nervous but it is the possible LOSS of their JOB that makes them nervous. They will start looking for a new job if they feel that their job security is being threatened.

So if you can assure your employees that they are necessary for the running of the business for the new owner as much as they are to you, this will reduce the chances of the loss of crucial staff through the process and you will also make the whole process much easier.

If your employees know that you are selling the business, you wont have to meet potential buyers in secrecy, the due diligence process will be so much easier, buyers will be able to talk to your employees and form a better judgment of your business.

One more point to consider, very often businesses do sell to management or employees so you never know maybe your buyer is your current employee. The only way to find out is to ask.

Zoran Sarabaca

Principal

Xcllusive

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Overpricing while selling your business can cost you a lot of money

 

Selling a business can take time so you need to make sure you attract and negotiate with suitable buyers from the start. If you don’t the process could blow out to years and result in you receiving less than market price.

Many business owners find it takes several years to sell their businesses and when they do the price is a lot less than their expectation and often less than the market value. How does this happen?

The first few weeks of selling your business are critical. Most buyers are monitoring the market and waiting for suitable businesses to become available. Your best buyers are the ones that show interest as soon as the business goes on the market. They are seeking to invest in businesses with sustainable incomes, with definable risks and good returns. They will be either speculative buyers looking for a bargain or more conservative buyers looking for a secure investment. They are sophisticated and unlikely to pay more than the market value of a business.

If you overprice your business you will first attract buyers who are looking at larger scale businesses. They will not see value in your business. At the same time you will not attract buyers who can afford the true value of your business because of the high advertised price.

Inevitably the business stays on the market with little interest being shown. You therefore drop the price to the true value of the business. Now buyers who can afford it will notice the business but will perceive it to be flawed because it has been on the market for a long time. This will prejudice them against buying it.

With no alternative you drop the price to less than market value to encourage interest. The property is now snapped up by bargain hunters.

At Xcllusive we recommend that when selling your business you need to demonstrate the value of your business to a potential investor and price it accordingly. This ensures you attract the right buyers at the right time and receive the true value of your business.  

 

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