How to read business figures and value a business

POSTED IN Buy And Sell Business, Buying A Business, Selling A Business

Business Advisors Matt & Liz Raad, Mal Emery

A couple of weeks ago we presented onstage at Mal Emery’s event about buying, building and selling businesses (awesome workshop by the way!) and over the course of the weekend through speaking with the many various business owners there I was reminded of the importance of business owners being able to clearly interpret their own business figures and understand how to value a business.

This is the one area of business where we constantly see business owners make big and costly mistakes because they have no idea (or maybe they are burying their head in the sand?). If you can’t interpret your businesses figures in a practical way you will really struggle long term in your business and you will make wrong business planning decisions that will hamper your business growth.

What is particularly scary to us is that we see business owners rely on their financial advisors like accountants who don’t tell them until its too late that they are losing heaps of money. When I first became a business broker this constantly surprised me as I would often come across business owners asking for me to help them sell their businesses that were clearly going backwards rapidly to the point of being bankrupt. What actually amazed me the most is that you could see in their figures (that were prepared by an accountant) that the business had been struggling and in serious trouble for several years – why didn’t the accountant start giving them some serious warnings or business advice years ago rather than wait. Often the business owner had no idea until too late and yet if they knew how to read figures in a PRACTICAL WAY they would have been fine and could have made better business planning decisions.

If you are in business or thinking of buying a business, make sure you understand how to read business figures in a practical way and especially how to see any red flags in the figures and what you can do about it. This kind of business knowledge will definitely pay-off for you on your entrepreneurial journey and it’s actually not that difficult.

Why can I say this so confidently? Because ALL the successful business owners we know (and especially those that made millions from buying and selling businesses) could read, understand and interpret business figures and value a business. I was lucky that I got to work with these guys personally and see how they did it. Most had their own unique ways but basically at the end of the day I noticed that you should be able to value a business and work out what the business is doing “on the back of an envelope” as a first sweep and 9 times out of 10 this would turn out to be a reasonably accurate business valuation.

Liz and I are quite passionate on this topic to make sure business owners are empowered in their own businesses to be able to read and understand the figures themselves. So I am looking forward to this weekend teaching our high level coaching clients exactly how to do this at our upcoming inner circle mastermind and boot-camp.  I have decided that in addition to the usual mastermind I will run a special session on reading business figures. We are also going to hotseat some of clients figures because as a group I believe we can learn a lot better doing it as a hot seat as the actual owner is sitting in the room with us to explain what has happened in the business (rather than just trying to read off the figs).

Obviously, for the majority of you reading this article you are not going to be at our boot-camp, but I urge you to make the effort understand your figures in a practical way (not some “theoretical” way) and review your figures regularly so that you can make more accurate business planning decisions which will ultimately help you be more successful in your business growth.

 

Leasing A Business -An Alternative Exit Strategy

POSTED IN Buying A Business, Recommended Reading, Selling A Business

Leasing a business as part of your exit strategy can be a powerful alternative when it comes time to sell your business. Did you know that just like in real estate you can lease your business out to a potential business buyer? There are many reasons why this may be a great exit strategy for you as the seller of your business as opposed to offering vendor finance, and if you are looking to buy a business this is an excellent business strategy.

Why Lease a business when it's time to sell up?…

Here are some of the main reasons why you should consider leasing a business when you wish to sell your business:

  • The most important reason; your business may difficult for you to get out of or sell any other way and leasing your business is the easiest way (and sometimes the only way!) to physically exit your business.
  • There are instances where even if you offer vendor finance it can still be challenging to sell your business. Your best buyer may be trying to buy a business without a deposit and leasing your business to them can be a simple alternative to vendor finance.
  • Business buyers may not initially have the money or typically like to buy a business with as little money down as possible and if your business has the cash-flow it is quite easy to get a business buyer over the line by negotiating to lease the business to them.
  • Leasing a business can be combined with an option to buy at the end of the lease period ( just like real estate) which can be a very effective way to sell your business.
  • Leasing a business is quite a profitable business idea if the vendor wishes to retain ownership of the property or real estate the business operates from
  • You may want to keep the business and still enjoy some of the cash-flow from it i.e. leasing can be a  great strategy for getting you out of the day to day running of your business and creating passive income from your business

The following real live case study will demonstrate what we mean about the advantages of leasing a business and where it may be used very effectively as a  business exit strategy.

Leasing A Business as an exit strategy – Real live case study:

To illustrate what we mean lets take a look at a business we were involved in the sale of that ended up by being leased out to the buyer. This particular business was a sand mine that we were trying to sell right in the middle of the global financial crisis (GFC) melt down.

Selling The Business…

This was extremely challenging business to sell -how do you sell a sand mine in the middle of the GFC? It's a property with 'allegedly' three million tons of sand under the ground. Sand mines are highly valuable assets going forward into the future because sand is a diminishing and somewhat rare resource so we had plenty of interested business buyers.

The Problem:

BUT in the middle of GFC, it was virtually impossible to find someone to buy a business who would pay or come up with the money the vendor wanted especially with the banks clamping up so tightly on credit. This business had a very high asking price (in the multi-millions $) because of its valuable resource yet did not produce much cashflow/profit. It was generating a very low income compared to the massive asset it had sitting under the ground and this was the problem with the banks. There was no cash flow in this business to help fund any loan. It was all tied up in the assets sitting under the ground.

The Solution -Leasing A Business!

In the end the only way it could be sold was by leasing the business to the buyer. Heres how the deal was structured: The business buyer pays a minumum monthly lease to the vendor plus a small royalty based on the amount of sand that comes out of the ground from the site. On top of this, in several years time the buyer had the option of purchasing the business at the agreed price.

Both parties win here -the owner gets his most important required outcome -an exit from the day to day runnning of the business -he earns good money from the lease and sand royalties and even if the purchaser does not proceed with the option to buy, he (vendor) still owns a highly valuable asset that he can sell off.

The buyer is not locked into vendor finance and gets to make money from the sand he mines without having to pay over a huge lump sum upfront (no big upfront debt) until he is ready to exercise the option. In this case there was provsion for the option to be exercised early if agreeable to both parties.

Why Not Consider Leasing A Business as part of your Exit Strategy?

So if you are finding it hard to sell your business or just can't seem to make the deal work when it comes time to exit your business due to financing troubles or an unusual business situation, maybe consider this interesting alternative of leasing your business to a potential business buyer.

An Unusual Opportunity To Buy A Business For Next to Nothing!

POSTED IN Buy And Sell Business, Buying A Business

Here is an unusual opportunity t0 buy a business for next to nothing… I was just reading the Financial Review and the front page news is that the Australian Taxation Office (ATO) are having a big go at small businesses who are behind on their taxes. Now usually as business owners we cringe at these kind of stories, but this is creating a lot of opportunities in the market to buy a business that is underperforming, or preferably take over a business for nothing.

The Tax Department have been a bit lenient over the last couple of years because of the Global Financial Crisis, they have been providing tax relief in the form of interest-free payment plans and special tax breaks, but now they’re on the hunt to recover their overdue accounts and they’re handing out “director penalty notices” like candy.

What does that mean? Well, the companies that are issued with these notices have one of three options – pay up, appoint an administrator or wind up the company.

Faced with the imminent threat of personal liability, there are going to be a lot of business owners out there who know the penalty notice is on it’s way, and they need a fast exit strategy.

Now is the time to network with accountants and lawyers, and keep your eye on the business for sale sections – there are going to be some interesting opportunities on the market right now for those who want to buy a business.

Watch out though! -Your “Buying A Business Checklist”

You must remember that just because you may be able to acquire a business that is cheap or free, it is not necessarily a bargain nor necessarily a profitable business idea.

You’re on the lookout for good businessses with great potential that have got into financial trouble due to typical small business management mistakes. You’re not looking for crappy businesses that are going out backwards because there is no market for their products.

Make sure you use our 5 Golden Rules for buying a business checklist, and The Deal Profiler to make sure you don’t make the same small business management mistakes as they did! This will help ensure you minimise your risk if you use this unusual opportunity to buy a business.