Brindabella Business Brokers

The Australian Institute of Business Brokers (AIBB), the peak industry body representing Business Brokers, has received confirmation from the office of the Queensland Department of Justice and Attorney-General regarding its complaint against Macquarie Commercial and Business Sales Pty Ltd (Macquarie) for an alleged conflict of interest between Macquarie Commercial & Business Sales Pty Ltd and HP Media (HPM), publisher of a Business For Sale magazine promoted by Macquarie.

The Department investigated if a conflict of interest existed between Macquarie and Mt Timothy Abberton a Director of both Macquarie and HP Media under section 14 of the Property Agents and Motor Dealers Act (Real Estate Code of Conduct) Regulation 2001 (Fraudulent and Misleading Conduct).

The AIBB has been advised that the investigation supported the Institute’s allegation and that enforcement action against Macquarie concerning a contravention of the above Act has been taken by the Office Of Fair Trading.

This comes on the back of the Institute’s complaint to the ACCC of fraudulent misrepresentation against Macquarie in 2011 and subsequent advice from the ACCC that its complaint had been dealt with by the Commission and the misleading and deceptive publication has been withdrawn by Macquarie.

In that instance the AIBB complaint related to a leaflet distributed widely by Macquarie to business owners throughout Australia specifying (amongst other things) that Macquarie had a 96% successful sales record and 90% achieved expected sales. Given industry averages, these representations appeared to be grossly exaggerated and could not be substantiated by Macquarie.

The AIBB has been concerned for many years that many Australians are being deceived by operators who are known in the industry as ‘marketeers’. Such operators, purporting to be licensed Business Brokers, are taking business owners for a ride by convincing them to part with a substantial upfront payment for advertising (often $6,000 to $20,000 or more) to sell their business without any follow through with professional services.

The advertising is charged at rates considerably higher than comparable advertising and is placed with a publisher in which the operator has a relationship or financial interest. With a substantial financial gain made from the advertisement, the operator has little incentive to then vigorously pursue the sale of the business. The business owner often suffers the resulting loss of money, time and opportunity.

With many of Australia’s estimated 2.7 million SME’s expected to change hands over the next 10 years as the baby boomers transition into retirement, industry practices and the conduct of people engaged in business sales must be beyond reproach, otherwise, many of these retirees may fall victim to marketeers engaging in deceptive and unprofessional conduct.

In New South Wales, the decision of the Consumer, Trader and Tenancy Tribunal against a company – Chase Manhattan Business Brokers – highlights the modus operandi of such operators

Often, the company will make initial contact by direct mail advertisement and require the business owner to sign and fax back an expression of interest. The company’s access to a large pool of overseas buyers will be promoted along with the suggestion that these buyers will pay a premium to buy the business in order to qualify to migrate to Australia.

After an unrealistic expectation is given as to the value of their business, the business owner is told that in order to attract these overseas buyers, it is essential to advertise in a particular magazine (in the case of Chase Manhattan Business Brokers, the Business Investment and Lifestyle Sales publication). If this is done, the suggested price will be achieved and the business sold within a matter of weeks.

The business owner is then asked to sign on the spot and pay the advertising cost as the publication is just about to go to print, otherwise they will miss out.

Unfortunately, once the money is paid things usually get worse. There is often little if no enquiry, attempts to contact the company are unsuccessful and any expression of dissatisfaction with the service are ignored.

This is not to say that there are not genuine overseas buyers or that advertising does not have its place in selling a business, after all, you can’t sell a secret. The right advertising at the right price may expedite a sale. However, the problem arises when the advertising is being placed with a related publisher at an inflated price in the hope of snaring an elusive buyer.

As stated by the Tribunal: “the [marketeer] created a scheme whereby a substantial payment could be obtained in advance, independent of the sale and at a time when the prospective vendors were being subject to a high pressure sales pitch by the [marketeer's] sales consultant.”

The Tribunal went on to state: “If the [marketeer] did not benefit from the payment made by the [business owners], it would be expected to have pursued a sale of the property vigorously in order to earn a commission. In other words, once the marketeer has your advertising money, they don’t care if they sell your business.”

As the peak industry body representing professional Business Brokers in Australia the AIBB is committed to eliminating conduct of this nature from the industry and through representations to government regulators such as the ACCC and Offices of Fair Trading in each State, we intend to send a clear message to marketeers and business agents engaging in misleading and deceptive conduct to carefully consider the consequences of their actions.

This entry was posted in AIBB News, Press Release on April 28 2014 by admin.

You have decided to sell your business and found a potential buyer but there is one large hurdle you need to get over – obtain the landlords approval for your buyer.

Many business owners forget your landlord is in the business of collecting rent on their investment with the least amount of risk and effort as possible.  So any buyers you put forward will have a risk assessment conducted on them.

Examples of the risk assessment will be as follows:

• Vendors rental payment history to date – if payments have been late or had trouble paying, is the business viable to continue to pay rent under a new owner.
• Assets and liabilities of new owner – after they purchase of the business and payment of the bond, how liquid is the buyer.  A new owner needs to be able to weather trouble times and pay their rent no matter what.
• Experience of operator – have they run a business before, experience in the industry, vendor involvement in the business going forward (hand over period).
• Fit outs – if the business requires a fit out in the near term, can the new buyer meet this cost?
• Background on new owner – has this buyer had financial troubles in the past, not paid rent, owns other businesses not travelling well etc

As you can understand the landlord reports to a bank manager like you and wants to ensure repayments are on time, the payments continue to be received and the property is looked after.

So you need to keep in mind that even though you have found a buyer for your business, put yourself in the landlord’s shoes to see if you would approve this person if the property was your own.  Before talking with your landlord it is best to understand the points above first about your buyer so you can address any concerns the landlord may have.

If you are buying your first business it can be daunting not knowing what information you should receive, questions you need to ask and how you get to the end game of buying the business. Brindabella Business Brokers deals with many first time business buyers and whilst we act for the seller, we know the business sale will not occur unless we provide as much guidance as possible to the buyer stepping through the buying process.

Brindabella Business Brokers encourages our clients who are selling to provide as much information up front in our information packages. This allows business buyers to gain a good understanding of the business and make a decision if they want to proceed forward. For buyers to see this information, Step 1 – a confidentiality agreement is completed.

It might be obvious but a confidentiality agreement is a legal contract. By entering into it you are agreeing to keep the information provided secret. To protect yourself, if you have business partners, friends or other business associates who you want to discuss the business with, it is best they also complete a confidentiality agreement.

This first step demonstrates to the broker you are taking the process seriously and do have an interest in buying a business. From time to time we receive contact from potential buyers who just want the name of the business or further details without completing the confidentiality agreement. If a confidentiality agreement is not completed, no further information can be provided and demonstrates to us the potential buyer is not serious about buying the business.

It is a big decision for a business seller to disclose personal information about their business and their livelihood. The confidentiality agreement helps the business seller feel more comfortable in providing the details to the business buyer and taking this first step starts the buying process on a healthy footing. Both parties demonstrate their seriousness in selling and buying the business and both give and take in order to do this. Although the first time buying and selling a business can be daunting, it can be made much easier using a qualified, experienced business broker.

You have been looking for 6 to 12 months now and you have found the business you want to take the next step and make an offer on.  However, before you can make an offer you need to ensure you can borrow the funds to acquire the business.  This is when time cannot move quick enough for you, as in your mind you are ready to make the offer, but without finance you are no closer than when you first started looking to buy a business.

It is important business buyers are aware that when an offer is made on a business it is never subject to finance.  The main reason for this is obtaining business finance is much more difficult  than residential finance and can take some time to be approved.  As a business broker, I have seen some buyers take up to 2 months to obtain business finance. They never got to make an offer on the business as it was sold before they could even get finance approved.

So why does it take so long for business finance?  Part of the reason, in simple terms, is a two step process.  Step 1 is looking at you as a business buyer and understanding what you own, your current debt situation, your commitments going forward and income streams.  Step 2 is looking at the business you are going to buy.

If you are serious about buying a business and while you are looking, why not begin at Step 1?  Items like residential valuations, applications completed, meeting with your bank, obtaining and supplying supporting documentation all take some time to be prepared and reviewed.

Obtaining the finance can be a stressful part to the process of buying a business so if you want to make it easier on you and your bank, start the conversation now rather than when the opportunity appears.

When Brindabella Business Brokers sells a client’s business, the one comment we always receive is why do we need to provide so much information upfront.  Some of the items we ask for are 5 years of financials, leases, plant and equipment inventories, staff rosters, further capital requirements, franchise agreements, add backs, items not accounted for etc.

Due to the level of information required, some businesses may take a month before we list them on the open market.  Whilst it might seem onerous at the time, this level of information delivers confidence to the buyer to proceed forward in discussing the business further.

This level of commitment upfront from the business seller creates a two way street with the buyer.  A lot of information has been handed over so for the buyer to obtain more information, they have to be just as forthcoming.  As a business broker/business seller some of the questions we require further information to are:

• do you have the finance to buy the business?
• have you approached the bank to start the process of obtaining approval?
• do you own your house or what assets you have?
• what experience do you have in the industry?
• do you already own a business?

If the buyer does not want to be upfront, than they may not be that committed to buying the business or after talking with them they may not appear the right buyer for this business.

As a business broker we realise it might be the buyer’s first business purchase.  Therefore we are there to help guide them through the correct steps in buying a business.  Similarly, we have many first time business sellers.  I can say, along with my sellers and buyers, that the process can be quite involved. A good broker works to ensure both the seller and buyer overcome any roadblocks so both achieve their main goal – to buy and sell a business.

One of Warren Buffet’s sayings is “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

A good example of this is when you go to the supermarket to buy some steak.  The budget steak is $10/kg and the good steak is $35/kg.  You buy the budget steak, cook it up and it is hard to chew, has plenty of fat on it and you start to question was it really worth saving $25/kg.  However the big question is, did you actually save $25 or did you pay for what you received.  This is the same for businesses, from a seller’s and buyer’s perspective.

Good strong businesses will always sell for good prices.  These are businesses with strong financials for a number of years; a strong lease; well trained staff; fit out/assets in good condition and the business showing strong signs that it will continue to trade strong into the future.

Let’s use the example of two cafes for sale.  One cafe is run under management- consistent coffee sales each week, new strong lease, fit out in good condition and financials show excellent profits.  The second cafe is run by two owners- the fit out is tired and financials show losses.

Obviously the prices for each of these will differ significantly, but from a buyer’s perspective it makes sense you would pay a fair price for the strong cafe.  You know that after you buy it you will be making good money and you will have a strong asset if you were to sell in the future.  The second cafe will also sell but it needs to be to a buyer who has a strong business formula to insert and is confident it will work.

As a broker we receive good interest for the example of a strong cafe but buyers often expect it will come at a wonderful price instead of a fair price.  They are trying to pay $10/kg for a steak that is worth $35/kg.  Just as you would not go into your butcher and say you want to buy the $35/kg steak but will only pay $10/kg, it is the same with businesses.

If you are a buyer, these wonderful businesses are not as common as you may think.  If one comes up for sale, move quickly! And part of moving quickly is securing the sale of the business with a fair price.

When you are looking at buying a business, financials only tell 50% of the business story.  It is important you are giving attention to all the other factors that will influence you buying decision.

Financials are straight forward, but like any game of sport, you are only as good as your last game.  Therefore buyers want to see how the business is currently trading and use financials from the past to gauge where you are now when compared to prior years.  If the profitability of the business has been increasing then little explanation is required, but if turnover and profit are down, as a buyer you will want to understand why they are down.

However it is important to give just as much attention to the other areas of the business.  Some of the areas you need to consider further are:

• Strength of the lease, the landlord you will be dealing with and likelihood of receiving a new lease once the current one expires.
• Growth areas for the business and more importantly the likelihood of growth going forward.
• Expenditure required in the next 2 to 3 years – is a minor or major fit out required? the condition of the machinery used in the business, what needs to be spent on the business to take it to the next level?
• Owner’s role and staff roles in the business.  If you take over the business can the owner be replaced an impact on the business once these changes occur.
• Market going forward – are there new laws to be introduced, developments in the area, technology changes, location of the business with its customers?
• Why is the owner selling – are the owners tired, not suitable for the business, can see changes that will impact the business, ready for retirement, change in lifestyle?

Let’s use the example of a 5 day cafe.  You obtain the past three financial years and the profitability is not great for the business hence the reason for sale.  You present the financials to your accountant and advice will be easy on this one – do not buy if you plan to run the cafe in the same manner.  So financials in the case help you understand what not to do but give you some of the likely running costs.  This is when you need to concentrate harder to understand why the cafe has not been profitable and how you can put in a formula for how you can run the business going forward.

In summary if you are buying a business what the business did 10 years ago helps you to understand the business you are buying now – but where will the business be again in 10 years time?  What is the potential for the business going forward after you acquire it?  This is what you also need to consider when you acquire a business.

When you are selling your business, the more sets of financial statements your business has prepared by an accountant, the better.  It will help demonstrate how strong your business has traded and if there have been difficult years – providing you can explain it and how the difficult years were addressed, buyers will be confident your business is profitable and viable.

When a business buyer is looking at a business, they want to know:

• How your business has traded up until now, and most importantly;
• How your business will trade into the future.

Hence why the Global Financial Crisis (GFC) was an important event for all businesses, as it was a reality check. It showed:

• Some businesses were unaffected by the GFC;
• Some businesses were affected but have since recovered and are strong businesses again; and
• Some businesses never recovered from the GFC and the businesses may never produce profits similar to pre GFC.

So whilst the financials up to now are important and provide buyers with a picture of how the business has traded, more importantly is how the business will trade into the future.  If a business is making $200,000 profit for the past 5 years, buyers need to understand whether this profit can continue going forward.

Some of the areas business buyers will want to understand further to determine future viability of the business are:

1. Owner(s) involvement in the business;
2. Impact of the current owner(s) leaving the business;
3. Spread of clients and impact of key clients leaving;
4. Economy the business trades in;
5. Technology and impact on trade;
6. Developments in the area;
7. Future competition;
8. Equipment condition to generate sales; and
9. Current employee performance, staff retention and recruitment.

So whilst the past helps buyers come to the table, it is the future viability of the business going forward that will help the business sell.  Business buyers appreciate you have made excellent profits in past years, but they also want certainty this will continue for them into the future.

Any business buyer who is looking at buying a business needs to understand what the owner currently does in the business.  The business buyer wants to know the hours they work and what functions they perform.

An easy example is a chef in a restaurant.  If the chef is the owner of the restaurant, the business buyer needs to understand what days they work, how many hours they work (day and night), if they do the food preparation, ordering, book work and once the owner leaves, can another chef replicate what the current owner prepares for customers.

All this is important as it impacts the sale price that can be asked for the business.  When a profit and loss is reviewed it needs to include all costs and this includes the true cost for the hours and functions the owner undertakes in the business.

Using the example of the restaurant and the owner is the chef, if the profit and loss only shows a wage to the owner/chef of $30,000 for working an 80 hour week – the profit and loss does not represent the true cost of running the business.  The profit and loss needs to be adjusted to show how much it would cost to employ 1, 2 or 3 people to do what the owner currently does.

Once you know the true profit of the business, you can begin to understand what the value of the business.  Further, you begin to understand what areas you need to address if you buy the business.

So in essence we are trying to get the adjusted profit and loss back to if the business was run under management so it includes all costs.

This does not necessarily mean businesses need to be run under management – a lot of business buyers want to buy a business so they can work in it.  However business buyers are not going to pay much for a business that in essence is a job.  Therefore if after including the true cost for the owner’s time in the profit and loss results in small bottom line i.e. the business only makes enough to pay the owners wage, what you have is a business that is actually a job.

Once the business buyer knows the adjusted profit and loss for owner’s involvement, they can look at the business for what it is and decide if they want to proceed further.

When you are selling your business, the more sets of financial statements your business has prepared by an accountant, the better.  It will help demonstrate how strong your business has traded and if there have been difficult years – providing you can explain it and how the difficult years were addressed, buyers will be confident your business is profitable and viable.

When a business buyer is looking at a business, they want to know:

• How your business has traded up until now and most importantly;
• How your business will trade into the future.

Hence why the GFC was an important event for all businesses as it was a reality check and it showed:

• Some businesses were unaffected by the GFC;
• Some businesses were affected but have since recovered and are strong businesses again; and
• Some businesses never recovered from the GFC and the business may ever produce profits similar to pre GFC.

So whilst the financials up to now are important and provide buyers with a picture of how the business has traded, more importantly is how the business will trade into the future.  If a business is making $200,000 profit for the past 5 years, buyers need to understand whether this profit can continue going forward.

Some of the areas business buyers will want to understand further to determine future viability of the business are:

1. Owner(s) involvement in the business;
2. Impact of the current owner leaving the business;
3. Spread of clients and impact of key clients leaving;
4. Economy the business trades in;
5. Technology and impact on trade;
6. Developments in the area;
7. Future competition;
8. Equipment condition to generate sales; and
9. Current employee performance, staff retention and recruitment.

So whilst the past helps buyers come to the table, it is the future viability of the business going forward that will help the business sell.  Business buyers appreciate you have made excellent profits in past years, but they also want certainty this will continue for them into the future.