Brindabella Business Brokers

Recently I have been in discussions with potential buyers who are looking at two restaurants I have for sale.  As buyers are aware, Brindabella Business Brokers provides enough financial information and detail about the business to allow them to make an informed decision on whether they want to enquire further.  However there seems to be a very strong focus on turnover without understanding the other aspects of the business.  The focus has been so strong around turnover that buyers are not interested in anything else about the business and simply say – business is too expensive based on turnover.

Today I am going to discuss one of the other aspects buyers need to consider – the age of the refurbishment.

Let’s use an example of two businesses for sale.  They prepare similar food, have similar turnovers, similar rents and the area they are located in is also similar.  However Business A is selling for $140k whilst Business B is selling for $250k.

If you base your purchase decision solely on turnover you would go for Business A as it cost $110k less.  Therefore how do you justify the $110k difference for Business B?

Business A has been open for 10 years and requires a refurbishment.  The ovens are 10 years old, exhaust system is 10 years old, the cash register 10 years old, tables 10 years old – you get the picture.  Therefore whoever buys this business needs to understand more money is required to be spent on this business and it may be required to shut the doors  to do this work.

Business B had a refurbishment 3 years ago that cost $300k.  They put in new ovens, benches, bar area, tables, cool room etc.  They have noticed an increase in the number of customers coming through the doors as the decor is more inviting.  Also they are quicker at getting the orders out as the new kitchen is purpose built and the staff enjoy working with the equipment as it makes their life easier.

Business B may cost $110k more however you in fact are saving yourself $190k ($300k – $110k) as the refurbishment has already been completed.  Business A will need to go through this same process of undertaking a refurbishment. It may not cost $300k, however $110k difference between the two businesses will not go far if you are buying new ovens, benches etc.  Also you need to factor in planning approvals, builders, plumbers, electricians and lost revenue from being closed.

What the above demonstrates to buyers is if focus strongly on turnover you may think you have saved yourself $110k, but in fact it may cost you more in the long run.  Business B is now ready to undertake the next step in growth whilst Business A will be held back by using equipment that is 10 years old.

Do not get me wrong, turnover is very important.  However turnover is only one item you need to consider and there are a number of other items you must look at before you make the decision – will I buy Business A or Business B?

It still amazes me that businesses are still reluctant to spend money on technology for their business.  After visiting numerous businesses when undertaking an appraisal of its value, the first thing I notice is the lack of spending on hardware.  This lack of spending only brings down the value of the business as buyers want a competitive business not a business still operating as if it 1980.

Big corporations continually update hardware and software on a scheduled basis, however small businesses see this as an expense they can save on.  Small business owners nearly wait (or wait until it is too late) until their computers are dead and then decide to update it.  Do not get me wrong, I am not saying that as soon as new computer comes out you need to purchase it, however it is a business owner’s responsibility to ensure their business is successful and part of this is achieved by having strong infrastructure being their computers and software.

You will see that I am not referring to computers as a capital investment.  This is accounting terminology.  This is how we recognise it in the balance sheet.  From a small business owners view the computer should be seen as the hub that joins all the other parts of the business together to work efficiently.

So why are business owners so reluctant to purchase computers and software?  It appears it can be put down to two reasons.  The first is the computers are seen as an item that works in the background.  99 times out of 100 we turn it on and it does what we want it to do.  It requires little maintenance and does not show wear and tear.

If you compare this to your motor vehicle – it requires regular maintenance and attention.  If you do not maintain the vehicle it will have a short life.  It also shows signs of wear with fading paint; dents and scratches and requires tyres.  Then there is the repayments due each month and usually once the repayments are all made, it is time to replace the vehicle.

When we look at the vehicle and compare it to the computer – which one produces more for your business?  Without the vehicle you can not get to appointments.  Without the computer, you can not prepare the reports or bill the client.  The vehicle lets employees deliver products.  The computer makes sure the employee is going to the right place, at the right time and with the right product.

It is obvious you need both however the service the computer provides to your business pays back in excess of the vehicle when you compare their costs.  Overall computers make the business more efficient and effective in how it is managed.

The second reason why owners do not spend on computers and software is they do not put the cost into prospective.  Using the example of an employee paid $50,000 a year or $250 per day.  So a computer costs around 6 days of an employee.  If your employee is unproductive or slowed down – there cost to the business will exceed the purchase price of a computer.

Therefore it only makes sense that a computer is critical to the success of your business and its overall cost is minor.  Over three years, the computer only costs approximately $2 per day and it works 24 hours a day – 7 days a week.

Big corporate know the pool of staff available is decreasing and the cost of staff is increasing.  If you are trying to run a successful business you must maintain and regularly update one of your most critical assets – your computers and software.  If you are trying to extend the life of computers and software each year by delaying their updates, you are probably wasting more in salary than actually replacing them.

In summary – do not skimp on one of the most important tools for your business.  Use the technology to generate efficiencies in your business and its pay back period will be very quickly recovered.

When you are asked what you like most about owning your business, the majority of business owners put “freedom” at the top of the list.  You might describe it in a number of ways – working for myself, being my own boss, making my own hours, but it all leads to the same outcome – freedom.

When you are asked what you dislike most about owning your business, the answer is usually about workload or the weight of responsibility, long hours, too much risk, too many tasks, an inability to balance work with personal life and too much stress.

So how do these dislikes lead to freedom?  Are you contradicting yourself?  Is the vision that by living in your business you are actually free?  What does freedom mean then to a business owner?

Your employees will never understand or fully appreciate you and your business.  When you are ready to sell your business, non business owners will often say “I have sold my house, it must be just like that?”

Hardly!!  Unless you built your house one room at a time over many years – it is nothing like selling a house.  To compare a house to a business would mean you designed the house yourself, dug the foundations, poured the concrete, grew the trees to make the wood for the frame, cut the wood, erected the frame etc.

Undertaking all these tasks is what it is like to build a business.  If you started it from scratch , you would have worked hard to get your first customers; designed the products and services you would offer; hired the employees; made all the decisions on the direction of the business; been responsible for the polices….nearly everything has been attended to personally by you and has your stamp on it.

Therefore business owners do not equate freedom with the high level of work required.  If anything you believe it is your right to work as hard as you want.  When you were in a job, it meant a lack of freedom, as someone else controlled your level of work and limited your earning potential.

Many businesses reach the their ultimate goal by starting the business from the family table at home to no longer being required in the business as it manages itself.  But when a business owner reaches this level, you know what they usually do – start another business and work hard again.

Therefore freedom in business is not defined by how hard you work.  Each business owner has made the decision to trade in their job of security and normality for this type of freedom.

Freedom to a business owner is to act.  To act is to do something, take action, take steps, proceed, be active, perform, operate, work, discharge duty and accomplish.  To accomplish your goal for your business is freedom to you and all the hard work makes it worth the effort to achieve it.

Attached below is an interesting article I found in CPA Australia magazine “In the Black”.  The article discusses the sale of Mitchell Communications Group to Aegis Group for $363 million. 

This article shows the importance that the seller and the buyer must both conclude there is a benefit to each other in completing the sale.

Harold Mitchell suggests in the article to avoid selfishness during negotiations, because if price becomes a major sticking point it won’t be much of a deal.  “Propose an offer the other party can accept”. 

To help sweeten the deal to gain a premium sale price, Harold converted the sale proceeds for stock in Aegis Group to demonstrate his confidence in the deal for Aegis.  He also committed himself to stay on and work for Aegis for a period of time.

Small businesses may not be able to do the same with regard to stock, but if the seller was to stay on in the business may demonstrate to the buyer you are there to ensure they are going to operate this business successfully.

I highly recommend you read this article as it clarifies that the sales price achieved is due to the buyer and seller being able to deal with each other and come to agreement that each are comfortable with and benefit from.

Harold Mitchell Page 1

Harold Mitchell Page 2

Reduce the Exposure of Risk to the Buyer

One of the main factors that influences the length of time to sell a business and the price achieved is how easy is it to buy the business.  We are not talking about financing the business but instead the exposure or risk the buyer is opening themselves up to purchasing the business.

When a buyer is evaluating the risk in buying a business, they concentrate on 3 aspects:

•  What issues will I have to deal with if I purchase this business?
• What are the inherent risks in buying this business?
• To achieve my objectives for the business – what costs, delays, problems and stresses will I have to deal with?

If you are selling your business and you know buyers are going to concentrate on these 3 main areas of risk, then the seller must try to anticipate what the buyer will look for and try to reduce, mitigate or eliminate those risks.  The seller will not be able to anticipate all the risks, however the less road blocks the seller has, the increased chances the seller has of selling the business in the shortest period of time and achieving a higher price possible.

So what is risk to the buyer?  It is anything which will cause delays in exploiting the business potential or opportunity.  This includes anything that creates costs to the buyer to take advantage of buying the business.  Detailed below are areas of risk a buyer will consider when determining if they will buy a business:

1. Lack of financial records
2. Staff knowledge
3. Systems for knowledge transfer
4. Client records
5. How clean the business is
6. Reputation of the business
7. Plant and equipment age and condition
8. Payroll information up to date
9. Supplier contracts signed and current
10. Harsh lease conditions
11. Poor quality products
12. Is performance being tracked – is it on track to achieving targets
13. Business reliance on the owner if no longer there
14. Competition
15. Can this business grow or is it in decline

Understanding potential risks to the buyer and resolving them prior to putting the business on the market is the best way of preparing a business for sale.  As the buyer does not know the seller, every single step of the listing and negotiating process is being judged by the buyer to assess the level of risk.  The higher the risk to the buyer, the less likely the business is to sell and achieve a high price.