26/02/2009 by info.

There are many fallacies about valuing businesses one such fallacy is that businesses are valued on multiplies of turnover - for example three times sales.

Well if that were true it would be simple to increase the value of your business by cutting your prices and increasing your turnover. However you would not be making any money by selling at close to cost. No, the main criteria for valuing a business is based on a multiple of profits.

There is a number often quoted for shares on the stock exchange and that is the P/E ratio. This is the profit earned per share issued. In essence, the P/E tells us how much an investor is willing to pay for £1 of a company’s earnings.

Now P/E ratio’s on the stock market have fallen significantly over the last year, both Vodafone’s and Next’s P/E ratio is now 8 times. So if you wanted to buy Vodafone the value would be technically 8 times their profits.

Some business transfer agents including many that have gone into administration had been working on P/E ratio’s of 4 times for even the smallest business, which was always totally unworkable, hence they didn’t sell those businesses.

Most reputable agents who had been selling businesses had been working on P/E ratio’s of 1 to 2.5 times profits for the small business, however if for the largest businesses that multiple has halved, perhaps there should be a new realism amongst the small business owner?

What might keep the values constant? As I have mentioned before it might be new buyers being made redundant without an alternative but to buy a business, start a business or go on the dole.

In a way business transfer agency businesses are recession proof as often it is these new buyers that keep the market ticking over and mean that businesses are still sold at a reasonable price even during a recession.

Posted in Selling Your Business, Business transfer agents, General | No Comments »

24/02/2009 by info.

Everyone who starts a business or buys a business should have in the back of their mind their exit strategy.

Unfortunately, most business owners don’t have an exit strategy, an exit strategy if you think about it is a goal, and if you talk to business coaches you will find that a large proportion of business owners run their business without any goals whatsoever.

There is a category of business owners who tend to respond to some event in their lives in their decision to place a business on the market. Such as a new business opportunity or job offer, feeling a lacking motivation that day, cash flow problems, so that when a leaflet dropped through their door asking whether they wanted to sell they called the agent an obtain a valuation.

In other words they acted on impulse.

However, many of these sellers found that buyers don’t buy on impulse, and didn’t get the quick sale they wanted, so the event that lead to them instructing their agent passed. So they simply withdrew their instruction to sell.

From January 2009, this category of seller has disappeared where businesses are linked to property, as when such a business is offered for sale, an Energy Performance Certificate is required.

So now what happens is that I get initial enquiries from potential clients about selling their business, I mention that they may have to invest £500 or so upfront and they decide that they will not sell their business after all.

At least the business transfer agent will now know that the new client is serious about selling, rather than having business owners who are not really serious about selling putting their business on the market just to see what might happen.

So the agent will not be wasting time and money trying to sell a business for the impulse seller and will be able to concentrate on selling businesses for the seller who planned to sell.

Posted in Selling Your Business, Business transfer agents | No Comments »

17/02/2009 by info.

You may not be aware of Penman and Sommerlad investigative reporters from the Daily Mirror, but they have recently become aware of the way that some of the business transfer agents in the UK have been operating.

Daily Mirror Article 1

Daily Mirror Article 2

Other business transfer agents have been aware of the way that certain agents have been operating for quite a while now. What is not noted on these complaints is that these agents habitually overvalue businesses in the hope that their potential clients sign an agreement with them. The RTA valuers were also on commission, being given a proportion of any upfront fees they brought in which they had to do to achieve their On Target Earnings.

Let me say firstly that I think that some contribution from clients via upfront fees is reasonable but this must reflect the amount of marketing activity an agent undertakes.

I have however always said that if I took £1,000 in unfront fees from each instruction and fees of £7,000 if I FAILED to sell a business I would not need to sell any businesses.

The market for selling businesses has become much tougher in the last year, and business owners looking for a business transfer agent to instruct have looked for value for money and have not wanted to pay large upfront fees.

Perhaps it is now the beginning of the end for these agents, on 9 February 2009 Bag A Business went into Administration. In fact Bag A Business only traded for 9 months, they bought their assets from SBS Commercial who also went into Administration. The directors of SBS simply started a new Ltd Co and started trading again using the same model.

I have also always said that the worst businesses are the ones that fail in a recession and the business transfer agency market is no different, you make money by selling businesses and if you dont sell any businesses you go out of business. Just as the Dipford Group, owners of Redwoods Dowling Kerr, Kings Business Transfer and Bruce & Co. Ltd did last year. (They are now owned by the owners of Knightsbridge plc)

There is another saying, you can fool some of the people some of the time, but not all of the people all of the time. These agents unfortunately have made business sellers wary about instructing business transfer agents and given it a bad reputation, however hopefully in the next year it will be only the good agents who will survive the recession and these “bad” agents who will go out of business.

Posted in Business transfer agents, General | 3 Comments »

12/02/2009 by info.

I will make a number of predictions with the risk of appearing a doom monger.

1. Some larger companies will be desperately trying to sell smaller subsidiaries, or they will be looking for buyers themselves in the next month.

2. There will be a number of well-documented failures of businesses in the next two months.

Why is this?

Well it’s because the quarter day rent payment will be due for payment on 25 March, and these companies will be well aware that they don’t have the money to pay their commitments. Especially given the weather over the last month or so, which will have affected these businesses cash flow.

So you now know this is going to happen we can all get on with our lives. But for the vast majority of people it will scare them and it will change their behaviour in the short term.

I have noticed over the last few years that when bad news is reported the number of enquiries for people wanting to buy businesses either stops or slows down, as people get fearful and worried about their person circumstances. A few days or weeks later enquiries pick up again.

The news media will report these events and report historical statistics and it will probably affect your business in the short term as well.

We have however already lived through these events and survived; your business is still trading and orders are still coming in, but still psychologically we get scared and delay long term planning issues.

Which is why the reporting of bad news is a self-fulfilling prophecy, it is a primeval response to impending danger, and if you stop running your business due to potential threats the chances are that it will affect your profitability.

The reporting of good news therefore is important, as the more good news stories people hear the more they will be inclined to make that large investment in the knowledge that they will not lose money.

Posted in The Economy, General | No Comments »

10/02/2009 by info.

What is the second biggest mistake a business owner can make when selling a business?

Well it is that business owners do not put their business on the market early enough to enable a business agent to find that buyer who is willing to pay a good price for their business.

You see businesses can take a long time to sell, months or even years depending on the price, location, industry, or condition of the business. Business owners often make the mistake of setting an unreasonably short fixed deadline to sell the business, thinking that it will sell in a matter of weeks then panic or blame the business agent or someone else when it doesn’t sell in that timeframe.

Often these timeframes are set by the next thing that a business owner has already committed to move on to, such as another business opportunity elsewhere, a job offer, or an emigration application.

As the deadline approaches for this new commitment, their desperation to sell increases, and with it the pressure they apply to their business agent to find a buyer.

Often they instruct a second and third agent to sell their business, however this purely shows to the buyer the sellers desperation. Why? Because all the agents advertise in just about the same places, and the buyer sees 3 or 4 adverts for the same business - the alarm bells ring. “There must be something wrong with the business”, the buyer thinks so they look elsewhere.

At the same time, the price becomes increasingly negotiable and the owner can potentially cost themselves a lot of money by selling at a much lower price in order to meet their next commitment.

What happens then is that they will sell at any price, and often dump the agent so that they don’t have to pay any commission and sell to one of their business contacts for a fraction of the businesses value.

I’ve seen it time after time after time.

So if you think you will want to sell your business in the next three years don’t wait until the last minute to instruct an agent, because if time is of the essence you simply will have to be incredibly lucky to obtain a good price.

Posted in Selling Your Business | No Comments »

09/02/2009 by info.

So there has been once again a recent spate of sackings in Footballs Premier League in England, this leads to the old debate is it a good thing to sack your manager? And secondly is it actually the managers fault?

Perhaps it’s not standing by your manager that makes you successful; it’s being successful that makes you (more likely to) stand by your manager.

Manchester United don’t keep winning because they’ve stuck by their manager; they’ve stuck by their manager because they keep on winning.

No, the most important thing is not whether to sack or not to sack but to choose the right manager in the first place and give him the right resources to be successful. By for example providing him with a large transfer budget, the best coaches and giving him time to carry out the task he has been appointed to achieve. Maybe therefore it is the Directors of the football club who are to blame if things don’t go right.

So why am I telling you this, after all this blog is not about football.

Well, there are business owners who instruct agent after agent after agent hoping that the new agent is able to sell their business. Then they sack their agent an appoint another one, blaming the agent for the lack of the sale.

But is it really the agents fault?

Yes there are bad agents, but the agent is simply doing his best with the resources that the business seller has provided to him.

If your agent is telling you that he has received feedback from buyers that they need recent financial accounts, that the business premises are run down, that the price is too high maybe you should not be blaming your agent but be looking at yourself.

The business owner should, if a lesson is to be learned from football, simply choose the right agent stick by him and make sure that he has all the resources to sell the business.

Posted in Selling Your Business, Business transfer agents | 1 Comment »

04/02/2009 by info.

There are plenty of examples of famous people being misquoted, resulting in them being known for quotes they actually didn’t say.

In politics examples of this are Jim Callaghan’s “Crisis What Crisis” and more recently Gordon Brown’s “British Jobs for British Workers”. What Brown actually said was “It is time to train British workers for British jobs that will be available over the coming few years”.

But that of course doesn’t matter now. British Jobs for British Workers has now become a mantra for protectionism.

We all know that a lot of larger companies in the UK are not owned by British shareholders, O2, P&O, Pilkington, and Rolls Royce may be a few that you might not be aware about.

Perhaps what is not fully appreciated is the number of Non British people who are buying small businesses in the UK. Increasing as a Business Agent I find myself communicating with people who do not speak with a British accent, who will eventually buy a business.

Is it a good thing for the British economy? I wonder what would happen to these small businesses if it weren’t for these buyers. Well, the market value of these businesses would reduce, and perhaps many more of them would close. The wealth would simply disappear.

Plus another consideration is that many of these businesses employ British born people, where would these people be if it weren’t for the foreign-born people buying businesses. A case of “British Jobs with Foreign Ownership”

With the relative weakness in the pound there are bargains out there for foreign investors buying businesses in the UK. If British born people are too fearful to buy a business in the UK at least we still have the foreign born entrepreneur who might be willing to create wealth for all of us.

Posted in Selling Your Business, Buyers, The Economy, General | No Comments »

03/02/2009 by info.

A business associate recently sent me a ten-point list on the suggested Accountants’ strategy for selling a business against the clock. I sent an email back to him with my list that read:

1. Contact a Business Transfer Agent
2. End

This might have been slightly tongue in cheek, but it does indicate that accountants often get involved in business transfers when they have no specialist knowledge.

Accountants you see have very, very strange ideas about how much a small to medium sized business is worth, as their experience of valuation businesses is based around valuations of stock market or AIM listed businesses. So they apply the same “rules” to the valuation of smaller businesses.

You should for example ignore the valuation figures produced by this ready rekoner, as this overvalues a business by a much as two to three times.

The problem is that this particular accountant is not alone in overvaluing the small businesses, the number of times I have heard the sentence “But my accountants tells me…” I simply ask, “Is he a specialist in business valuations?”

The role of the accountant in business transfers should be to number crunch, not in the area of valuing businesses, as they have absolutely no experience in the field and moreover often get it badly wrong.

If your accountant is trying to sell your business, you probably will not be successful as it is likely to be overpriced. However, if you take advice from your accountant on how much you should pay for a business, you just might be paying way over the odds.

Posted in Selling Your Business, Buyers, Business transfer agents | No Comments »