30/01/2009 by info.

Both Richard Branson and Warren Buffett have said that their gut reaction to a whether they should be buying a business is more important to them than carrying out months of due diligence. In fact Buffett has been quoted as saying “The deal should be so obvious to you. If you have to carry the calculation out to five decimal places, like pi, it can’t be a good deal”.

Perhaps its easy for Buffett a multi billionaire to make such statements. Maybe he might feel differently if he was investing everything he had into one project.

But it does follow the pattern I often notice that the larger the business and the larger the asking price often the easier the sale. The reason is that these buyers are used to dealing with such large figures and because they have make decisions involving larger amounts of money before and made profits they have confidence in their decision.

Buffett and Branson made their money by taking decisions - you never make money by saying no to an opportunity.

Often the most difficult size of business to sell is the one marketed for £5,000 - £10,000 as the person who is interested in buying that business might be investing all of his money and this is the only decision involving £10,000 that they have ever made.

These buyers often ask for more and more information, looking for the skeleton in the cupboard that isn’t there, and scare themselves out of buying the business.

Now I’m not suggesting that a buyer should carry out due diligence Buffett style but perhaps the most important question you should use in any decision you make in life is does this feel right? What is your gut reaction?

As research undertaken but the University of Texas shows that your gut reaction knows a lie when you hear one.

So maybe Buffett is right after all, make a quick decision and stand by it.

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23/01/2009 by info.

So the UK is now technically and officially in a recession, this is not news to thousands of people in the UK who already felt that this was happening. But how bad is it really?

The economy fell by 1.5% in the last 3 months however this recession is not so far as deep or sharp as it has been within living memory.

At the end of 1980 the UK’s recession fell by 4.1% in the last quarter of the year, this is nearly 3 times as sharp as the recession now. (This was a deliberate recession caused by Thatcherism and Monetarist policy)

So why do we think that it is currently bad?

Well for some it isn’t bad, there are sectors of the economy that are still doing very well, the supermarkets for example who are still going ahead with expansion.

The businesses that are doing badly are the businesses that are the the areas of discretionary spending. An example of this is the new car market where sales are perhaps down 50% on previous years figures. Here people and businesses are just delaying their purchases, not buying a car now but perhaps doing it next year when they know how bad things are going to be for them.

So the recession is in part a self fulfilling prophecy. But there is a saying if someone has to eat someone has to sell, so sooner or later, car dealers will start to sell vehicles again.

The real reason why it seems so bad is the number of redundancies and closures of larger businesses. However if you look at the UK statistics, the UK had continued growth for the best part of 15 years. So what is happening? These larger businesses HAD geared up for this continued growth and now they are simply adjusting their plans. The ones that ARE in difficulty are the ones that previously financed their growth via debt and are not lean.

What is happening therefore is that these businesses are adjusting their activities so that they will survive.

Statistics also show that recent recessions have only lasted 3 or so quarters, perhaps the next 3 months WILL show the worst results and decline, reflecting what is happening now, however I fully expect a stabilisation in the second half of the year. ( I am not Chancellor Darling!)

So if your business can survive the next 6 months you will be in a position to take advantage of these delayed purchases.

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20/01/2009 by info.

Let me first discuss what a distressed sale is? It is basically the sale of a business where for whatever reason the seller wishes to dispose of their business quickly, and are willing to do it for a “cheap” price.

So are they a bargain?

Well it really all depends on the reason for the sale. If the reason for the sale is due to the fact that the seller was involved in an accident which means that they are unable to run the business the same way, then perhaps as a buyer you should be looking at that business in more detail.

Sometimes though the reason for sale is negative, and this is not a good sign.

Business Owners sometimes contact a business agent/broker to sell their business and have the attitude that if they don’t sell their business then they will simply close it down. Under these circumstances the business is not worth anything, because why would you simply throw away an asset worth £20,000 if it really was worth £20,000.

Other businesses that seemingly look cheap may have fundamental flaws in one aspect. Examples of this are retail or leisure based businesses where the major asset is their location. For a retail unit it has been said time and time again that the three most important things to consider is location, location and location.

So if you are considering purchasing a retail shop that was priced at £50,000 and is now priced at £10,000 this may not be a bargain at all. Simply for the reason that the location is such that it would be very difficult for you to make a profit at all. Here you would simply be throwing away this investment.

Often, you see a shop open and soon afterwards they close. Why is this? Simply because the business owner started the business without carrying out the slightest market research at all.

So perhaps another red flag is when a seller wants to sell a business soon after buying or establishing that business.

In conclusion then is a distressed sale a bargain?

The answer is it depends on the reason for sale, if the reason is due to the misfortune of the seller due to unforseeable personal circumstances then perhaps yes.

But so many or the cheaper businesses on the market if they don’t sell, will simply close down due to a fundamental flaw. Here is it best to not touch it with a barge pole, as the owners are just looking for someone who is just as big fool as they to take over the business and bail them out from their bad mistake.

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13/01/2009 by info.

It is a tough environment for retailers however perhaps there are now opportunities for the smaller retailer to take back market share. Here is the reason:

Why have larger chains of retailers such as Adams the children’s clothes failed?

Firstly a number of these chains that have gone into administration, had recently being bought by the current owners and already had large debts, which they could not cover. They were also trading from prime positions in town centres where the rents and rates are huge.

The main reason however is that a small percentage drop in turnover means a large difference in their profitability in pounds.

Using Adams as an example their turnover was approximately £150 million. So a 5% drop in turnover means a £7.5 million fall in turnover, perhaps £4 million drop in profits.

Compare this with your independent corner shop childrenswear retailer, where rents are lower, perhaps they do not have debts and were a 5% drop in turnover from £200,000 may mean a £5,000 fall in profitability.

The owner of the independent store can quite easily adjust their personal or business expenditure to meet this falling short-term profits but the larger chain cannot.

Lets now assume that the administrator closes the local Adams shop to this independent retailer; perhaps there is £1 million worth of customers looking for an outlet. This independent retailer may easily pick up more than £10,000 of this business.

So the good independent retailer might actually welcome this retailing downturn because the longer the recession continues the possibility is that they might be able to pick up business from these fallen retail giants and actually become MORE profitable.

So if a business closes down don’t necessarily look at it with doom and gloom, look at it as a good thing for your business.

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08/01/2009 by info.

As an agent which party do I find most infuriating to deal with – is it the buyer or the seller?

Well the truth is that it depends on the individual as I am sure that you are aware in life there are great people to deal with in life and others who simply are a pain in the neck.

No - the category of person I find most infuriating to deal with is neither the buyer nor the seller but often the landlord.

If you want to buy or sell a business operating from leasehold premises you need to have the landlord’s agreement to assign the lease to a new party. However, landlords I find can often operate in a totally unreasonable manner.

Firstly greed rears it ugly head. We are in a recession or are we in a depression, and retail businesses especially are finding it very hard to survive yet landlords think that they should not take a cut in rents despite the reduction in the capital value of the property as “they only have upward revisions in rent” in their lease agreement.

Sales of businesses are collapsing because the landlord still expect these increases in rent – I am aware of a landlord who expected a 25% increase in the shops rent on assignment - during a recession! What is the result of this? Well the buyer withdrew and the business owner is now closing his business as the landlord has reduced the value of the business. I wonder whether that landlord, as a result of his greed, will now suffer a long void period?

Secondly, there is fear. A business may have been trading from premises for years easily being able to pay the rent, however when the landlord receives a request that the owner wishes him to assign the lease to another then the landlord often wants more security. They will ask for a years rent deposit for example, what is the result of this, the sale collapses as the buyer doesn’t have the funds or they will decide that they would not want this person as their landlord.

So if you are a landlord, perhaps you should be thinking more long term when making decisions in a recession, if you are stopping someone from selling their business you will be the one who will ultimately lose out in the end.

Is it not better to have a 4% return on capital rather than a 0% return?

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