John Denton on Getting Businesses Ready For Sale

A business that's 'ready for sale' is well worth keeping!

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Tips for Business Advisors, Business Coaches & Consultants

September 8, 2010 by John Denton 1 Comment

This is the first in a series of posts for business advisors and business buyers on what to look for when buying a business – over and above the financials. These posts are equally relevant for people selling their business as it indicates areas they may need to work on and areas that affect the value of their business!

There is a tendency for  business advisors and consultants (and business buyers themselves) to focus on just the financials of a business; however, there is a wealth of other business information which advisors should understand, in order to properly advise their clients….

I’m not sure how much advisors want to get involved in analysing business opportunities for their clients or how much detail they want to be involved in, so I have written these posts as a series of questions which a buyer needs to ask for himself or have an advisor ask for them.

I’ll begin by setting the context and start with a few definitions.

When I refer to a business I mean a profitable “going concern”. We typically sell “going concerns” in the price range of $200,000 to $10 million. Furthermore, around 99% of the sales we facilitate involve the transfer of assets from one legal entity to another and not the sale of the shares of an entity. This is generally seen as the cleanest and easiest way to do things in the majority of cases and the buyer knows there will be no overhanging lawsuits, tax problems, environmental issues etc. Most buyers want a clean start.

Occasionally, there are situations where it is more advantageous to one or both parties for the buyer to buy the company. Each case needs to be judged on its merit as it can affect tax, stamp duty, transfer of licenses and accreditations, and liabilities and risk. Both parties need to seek expert advice relating to their situation.

In a typical business sale, the assets which the buyer is buying are the plant & equipment, stock and goodwill. In effect, the buyer is buying some tangible assets and a profit stream based upon the past history of the business and the risk against that profit continuing in to the future. The value of the business, therefore, is based upon financial or tangible factors and non financial factors, many of them intangible (for example, goodwill).

In this series of posts, through necessity, I will be talking ‘generalisations’, whilst in the real world every case needs to be assessed on its own merit. There are far too many permutations to be covered in a post like this.

In the next post, we will look at how a business is appraised for sale and what a business is worth?

For details of my next workshop on buying and preparing businesses for sale, CLICK HERE

Regards

John Denton

Filed Under: Buying A Business Tagged With: business, coach, denton, 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.

Filed Under: Selling A Business, Franchise Businesses Tagged With: denton, franchise, john, perth, sell a business

Welcome to the DnA Of Business

July 30, 2007 by John Denton Leave a Comment

Dear Reader,

Welcome to Streetsmart Business Builders where we are building businesses for sale and lifestyle.

Someone asked recently “So what exactly do you do?” I replied “We work with business owners to help them build their businesses for sale and for lifestyle. You know, we train them to understand the essential building blocks that give a business life and make it a very successful business.”

When you build and develop a business “with the end in mind” (i.e. to sell the business) then you develop it to run without you being there. This enables the business owner (existing or potential) to have the lifestyle they want. So many business people build their business around themselves and create a JOB (Just Over Broke) rather han a business.

At this blog we will explore all the essential elements that make up a very successful and growing business. A business that has life WITHOUT the owner, so that the owner can cash out and sell at the best possible price, quickly, easily and any time they want to. Alternatively, they can keep the business under management and enjoy a great lifestyle whilst receiving an income from the business.

If you own, or are thinking of owning a business – bookmark this site and come back often. Sign up for the email notifications when a new post goes up. Feel free to make comments. Interact, learn and enjoy.

Filed Under: Business General Tagged With: denton, dna, john

Turn Your Business Into A Saleable Asset

John Denton on Preparing a Business For Sale

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