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GST And The Sale Of A Business

July 28, 2009 by John Denton Leave a Comment

I was asked today the very good question “Does the sale price of a business include GST and is GST payable?”

(For the non Australian readers, GST is our Goods and Services Tax (10%) collectable by the vendor or service provider on most things – there are exceptions but not worth going in to here.)

The answers are “No” and “No” – if the business is sold as a “going concern.”

The sale of a business as a going concern is GST free if:

everything for the business’ continued operation is supplied to the buyer
the seller carries on the business until the day it is sold
the buyer is registered or required to be registered for GST
the sale is for payment
before the sale, the buyer and seller agree in writing that the sale is of a going concern.

Example: Selling a business

You are registered for GST and you sell your florist business. The sale includes the shop, delivery vehicle, stock, equipment and all the other things necessary to continue operating the business. You continue to operate the business until the buyer takes over, the buyer is registered for GST, and you and the buyer have agreed in writing that the sale is of a going concern. This is a GST-free sale.
Always consult your accountant for a definite ruling on the sale of your specific business!

Learn about this and a lot more at my next half day workshop CLICK HERE for details.

Regards

John Denton
Committed to helping business owners realise their life’s goals through buying and selling businesses

everything for the business’ continued operation is supplied to the buyer
the seller carries on the business until the day it is sold
the buyer is registered or required to be registered for GST
the sale is for payment
before the sale, the buyer and seller agree in writing that the sale is of a going concern.

Example: Selling a business

If I Could Get OUT For What It Cost Me To Get IN, I’d Be Happy!

July 23, 2009 by John Denton Leave a Comment

It happened again today! I was talking to a franchisee about her chances of selling her franchise business and she came out with the statement I hear so often from franchisees – “If I could just get out of it for what it cost me to get in to it, then I would be happy”.

I hear this so often from franchisees struggling to make a profit in their business. Usually they are in a retail situation in a shopping centre. After a few years they realise that the only people making any money are the shopping centre owners and the franchisors. In effect, the franchisee is working to keep the shopping centre owners and franchisors in the lifestyle they have come to expect!

Unfortunately, once you are IN and have invested the money, it can be very difficult to get out and recover your costs. And if the lease is in the franchisees name then they are stuck with that as well.

The first piece of advice I give anyone considering buying a franchise is “Find out how are you going to get out of it?” They normally laugh and ignore my advice.

If you really must buy a retail franchise business in a shopping centre then do your homework first. In Australia we have such a strict Code of Conduct for Franchisors – as part of the Trade Practices Act – there is no excuse for a prospective franchisee NOT doing their homework before signing up. At least speak to existing franchisees and see how they are going, and if possible, franchisees who have left the franchise. Under the Act the franchisor must provide details in their disclosure document for you to do this.

To view the Code of Conduct for franchisors CLICK HERE and I recommend page 29 onwards.

Regards
John
“Committed to helping business owners realise their life’s dreams through buying and selling businesses!”
Thinking of buying or selling a business? Then attend my workshop on the 6th August – click on WORKSHOPS tab above.

Do You Treat Your Business Like A Farm or a School?

May 8, 2009 by John Denton Leave a Comment

Well, come on, honestly, do you treat you business like a farm or a school?

Well known author, stephen Covey, develops an excellent metaphor around “cramming” (school) and “farming” (farm). He says that for long term benefit or to give things longevity then they need to be treated like a farm. For example, business relationships or relationships of any kind, need to be treated like farming if you want them to be successful over time. By farming he means you need to be working on them all the time. Nurturing, developing and looking after them – long term.

On the other end of the scale you have what happens in schools and particular colleges and universities where students often leave everything until the last minute
and then cram for an exam. This gets he student a certificate but NOT an education, according to Covey. To become educated takes time – in otherwords, it’s farming.

What does this have to do with business, you ask? No, I’m not geting in to selling farms and schools!

To build a business “ready for sale” requires farming! It is a long term exercise if you want to sell for the best possible price and quickly and easily. Many aspects of a business which affect its value and saleability need to have a track record of consistency over a longish period of time. Usually a minimum of three years. A good track record of growth and profitability over a period of time are paramount – just to mention one aspect.

As I am committed to helping business owners realise their dreams through buying and selling businesses I am running some half day workshops on “The 7 Key Steps To Preparing A Business Ready Sale”. If you are interested in attending a workshop, or know someone who would like to attend just CLICK HERE for the details. If there isn’t a workshop in your area, just use the CONTACT US tab on the web site to request one! When there is enough demand I’m willing to go anywhere (well almost!).

Until the next time – remember, treat your business like “farming” and not a “school” – and like a well run farm it wil sustain you for a very long time.

Until the next post!

Regards
John

Sleepless In Perth – Franchises

April 1, 2009 by John Denton 5 Comments

I have been having a sleepless night! Why? Because I know that in the morning I have to deliver some disappointing news to a prospective client. You see, I’ve been asked to do an appraisal on a business ahead of selling that business for the owners.

So what’s the problem?

The problem is that the business is a franchise business in a shopping centre.

So why is that a problem?

Generally in these cases the owners have invested an enormous amount of money to buy the franchise and pay for the fit out of the premises. Often this can be as much as $450,000 or $500,000. Just to get started in the business! Then, every month they are paying royalty fees to the franchisor of typically 7% to 9% and possibly a marketing fee on top of that. Then there are the very high lease costs for the premises to be in a ‘quality’ shopping centre where there are no options to renew on the lease and very little room for negotiation. Then of course the business needs stock as well. Depending upon the type of business the stock value can be anything up to $250,000 and more. I have seen these levels of stock in such businesses.

So the owners work long hours – often 7 days a week – to scrape together meagre profit of $80,000 to $100,000 per year. Great looking business but a long time to get the investment back. In some cases you are looking at 5 to 7 years just to get your investment back.

So after 4 or 5 years the owners are tired and working long hours and decide to call it a day and cash in their business – sell! They go to their accountant who, in most cases, sets an unrealistically high figure on what the business is worth. You see, the accountant looks at what was put in to the business and says, OK, you have a written down value of $250,000 on the fit out of the premises, plus $20,000 plant and equipment, plus $200,000 of stock and you make $100,000 per year net profit. That makes your business worth – $250,000 plus $20,000 plus $200,000 plus $100,000. A total of $570,000.

Wrong! When selling a business as a ‘going concern’ the normal valuation method, in the vast majority of cases, is based upon the maintainable net profit after add-backs and adjustments multiplied by an ROI factor.

So in the case of my current prospective client they have a maintainable net profit in the region of $80,000 and the business type will attract at VERY BEST a maximum of 40% ROI. That is a multiplier of 2 1/2 times. In other words $200,000 tops! And that is inclusive of stock and plant and equipment and everything else. Not a lot of reward for 5 years of effort. And on top of all of that, the franchisor wants the new owner to upgrade the fit-out (cost of $25,000) and there is only two years left on the lease with no guarantees of a renewal. Would YOU buy that business?

So you see why I am sleepless in Perth. By the way, this is a very typical scenario for a retail franchise business in a shopping centre! Remember, franchising is having a license to operate a business – not necessarily owning a business.

Why We Do The Hard Work Upfront

March 30, 2009 by John Denton Leave a Comment

Hi Readers,

Last week I was reminded why at PBS we do all the hard work with the business seller “up front”. You see
I had a conversation with a young man who came to me as a ‘buyer’. I, and some of my colleagues,
showed him a number of businesses. Then, as sometimes happens, it all went quiet and no purchase was
made.

Some weeks later I received a call from someone wanting me to sell their business for them. It turned out
the young man I had been helping had referred this person to me as a reputable broker he should use.
When I rang the young man (buyer) to thank him I asked how he had gone with buying a business.

It turns out he had gone to a different business broking firm and had put an offer in on one of their business
for sale. After spending time and ’emotion’ going through the purchase, it all fell apart in due diligence
because of problems in the financials. The young man put in another offer through that same broking
company only to have this second deal fall through as well.

What this highlighted for me was the strength of our process at PBS and how it protects both the buyer
and seller and minimises the chance of the deal falling through. We get the seller to provide us a lot of information about their business, including finalised accounts, UP FRONT before we do the appraisal. If
things don’t stack up, we don’t take the listing. If we do take the listing, then the next step is the business report and this is such a strict process that all strengths and weaknesses of the business are uncovered
and documented.

By doing the hard work upfront we make it a more successful, lower risk and less stressful process for
both parties.

I thank that young man for reminding why we do the things we do.
Bye for now!

Whoooosh – What was that?

November 28, 2008 by John Denton 1 Comment

Whooooosh

Me: “Hell, what was that?”

The Universe: “That was your life!”

Me: “Bugger! That went quick. Can I have another one?”

The Universe: “Sorry. No. That’s all you get!”

Do you ever feel like life is rushing away from you? Well me too. I can’t believe that 2008 is almost over already. Things have changed so much since I last posted to this blog. Some notable changes in the business sales environment.

The values of most businesses are falling.
Business owners have inflated views of what their businesses are worth. They haven’t kept up with what’s going on.
Vendor finance of buyers is becoming increasingly common as credit to buy businesses becomes harder to get.
It’s a buyer’s market and they are negotiating harder and taking longer to make a decision
Most of the businesses coming on to the market are ‘unsaleable’.
Not many good businesses are coming on to the market
There are more buyers out there than sellers

So what should you do if you want to sell your business?

Get a reputable broker or registered valuer to tell you what the market value of your business is. Then get help to work on your business and prepare it for sale. Watch the economy and external factors and time your run to the market carefully. More soon….

If you want help with anything to do with putting a value on your business to preparing your business ready for sale, just contact us via the Contact Us tab on this web site! Alternatively, post a comment to this blog post. You WILL get a reply.

Regards

John

Investor Buyers

May 3, 2008 by John Denton Leave a Comment

There are a lot of people with a lot of money at the moment (in Australia anyway) and they are looking for
low risk high return investments (aren’t we all?). A good small or medium size business can offer what
they are looking for.

Think about it. A business with a track record of turning in a maintainable net profit of $250,000 per annum
for say, 3 years or more – and being offered for $625,000 – will potentially give the purchaser a return on investment (ROI) in 2 1/2 years. After 3 years the buyer has got his money back and can sell the business
for what he paid for it (or more if they have grown the business). They’ve doubled their money in 3 years!
What other kind of investment gets that sort of return.

To attract an investor buyer, your business will need to have a good track record, clean and detailed
financials, and be in a market that is low risk and likely to return the same maintainable net profit. The risk
to the maintainable net profit will affect the price the business will sell for. The lower the risk, the higher the
value. A business running well under management will be even more valuable to an investor buyer.

Would your business be attractive to an investor buyer?

What To Do About It

February 11, 2008 by John Denton Leave a Comment

Hi Again (so soon!),

See previous post. This is exactly why we, Denton & Associates, are committed to help business
owners prepare their businesses for sale and achieve the best possible price in the shortest time with the highest degree of confidentiality. All businesses sell at some point – many involuntarily. Only the
best prepared businesses will sell easily and at the best possible price. Contact us to get a Business Appraisal and find out where your business stands. CLICK HERE to contact us about an appraisal.

Regards
John

Who Will Buy My Business

September 12, 2007 by John Denton Leave a Comment

I am often ask “How do I find a buyer for my business?” It’s an obvious question that I get when I tell business owners that we build businesses for sale and lifestyle.

Think about what it is that people are buying when they buy a business. There are three types of buyer;

(1) Investor buyer
(2) Lifestyle buyer
(3) Strategic buyer

An investor buyer generally buys a business with a “guaranteed” maintainable profitable cash flow with an opportunity to grow the business and sell later on at a profit.

A lifestyle buyer will buy a business to achieve a “sea change” in lifestyle. In other words they are often buying themselves a job (mowing lawns, cleaning cars, serving coffees, fitness trainer etc). They just want to be their own boss and enjoy what they are doing.

A strategic buyer will buy a business as part of a longer term plan – it’s strategic. It could be to gain market share, remove a competitor, asset strip the business, to get access to a product service or IP.

How you prepare your business for sale will depend upon what type of buyer you are trying to attract. Most business owners never consider the “type” of potential buyer – this is mistake. Who would be attracted to buy your business? Think about it and in future posts we will consider the buying motives of the different types of buyers.

Stay tuned! Sign up for the email notifications of a post.

« Previous Page

GST And The Sale Of A Business

If I Could Get OUT For What It Cost Me To Get IN, I’d Be Happy!

Do You Treat Your Business Like A Farm or a School?

Sleepless In Perth – Franchises

Why We Do The Hard Work Upfront

Whoooosh – What was that?

Investor Buyers

What To Do About It

Who Will Buy My Business

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