04/12/2009 by info.

One of the most frustrating aspects of any sale is perceived and unnecessary delay after solicitors have been instructed.

I am sure that many of you who have not sold a business but have been though the process in the sale of a residential property can recognise this feeling.

But if there is any fault whose it is?

There may be a number of reasons for a delay and the simplest one is that either a buyer or a seller is deliberately slowing down the sale process for personal reasons. Perhaps buyers are not ready to buy because they are waiting for a sale of their own to complete or the seller wishes to take advantage of seasonal profitability.

There may be issues that arise that neither party was aware about or one side wishes to try to hide and hoped that due diligence would not uncover the truth.

Sometimes the parties are at fault by instructing the wrong solicitor for the job. A solicitor without significant experience in business transfers can often stress and want answers to unimportant issues in the sale.

If a lease is being transferred the fault can lay with the landlord or landlords solicitor who have no incentive to hurry the process along. Often for them it is the better the devil you know.

Most of the time it is the fault of the buyer, seller or both for not managing their solicitor allowing them to sit on and not deal with paperwork when they receive it; the solicitor as a result with deal with matters when they have the time, so if you want a speedy conclusion you should be more proactive.

So is it ever the agent’s fault?

Well there are a good number of private sales where the seller and buyer conduct a good proportion of sales negotiations directly so an agent never gets involved in the process at all.

If an agent is involved they should provide comprehensive head terms for each sides solicitors and apply for references on behalf of the buyer, however when solicitors are instructed the agents job, that of finding a buyer, is technically over.

An agent may act as a go-between to communicate to both sides who is at fault in slowing the process down. But finding a buyer is what an agent is paid to do, not to try to hurry along professionals whom they have no power over.

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21/08/2009 by info.

It is thought that less than half of all start ups have any formal business plan, so it begs the question if they have no business plan, how do they know how much money they will need to run that business?

The fact is that they don’t! People starting business often overestimate their income and turnover and underestimate the amount of capital that is required to continue trading. This under capitalisation leads to business failures due to the owner not being able to invest money into that business.

How many times have you noticed new restaurants or retail shops open, only to close within a year, you can be almost certain that the owner fell into the category of not having a formal plan and being unjustly optimistic about their working capital needs.

The same scenario often happens with business purchases, often a business is sold on the basis that there is potential if only the owner could afford to invest, the buyer thinking they have a bargain underestimates the businesses working capital needs with the result that the new owner rather than the seller is the one who fails.

Maybe a business buyer should be staying clear of businesses sold “with potential in the right hands”, yes the owner could be incompetent without any business acumen and he might be a blithering fool. However the market (his potential customers) has already had experience of dealing with that business and has decided that they will NEVER return. So it might need a lot of money to turn this business around and persuade the market that things are now different.

So why not take this money you will need to invest turning around a business with potential and simply buy a more expensive business one that is generating profits and needs minimal investment.

If you don’t have the funds to do so, conceivably this is an indicator that you are under capitalised and will get into financial difficulties buying that business with potential.

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06/08/2009 by info.

Many business owners try to sell their business using smoke and mirrors. Hiding the fact that their business during the recession is not doing as well as it has done in the past. They claim a certain turnover but cannot provide any documentary evidence to back up these claims.

Business owner may present historical financial accounts to show that the business is capable of obtaining a certain level of trading; these historic figures are no guarantee of future performance.

But how accurate are these accounts?

One thing to remember is that an accountant will simply prepare accounts based on the information provided to them so there is no guarantee that they are accurate. Perhaps the best way of assessing how accurate they are is to ask to look at the books, if the books are kept well the chances are that the accounts will be “honest”.

I trained as an Accountant in the late 1980’s and prepared plenty of accounts, most of the small business accounts I prepared were from incomplete records. Often these accounts cannot have been 100% accurate as the information and explanations from the client may not have been accurate.

Also on one occasion when selling a business, an owner presented to me accounts showing an immediate jump in turnover of some 20% from the previous year, the business was sold on this basis. The new owner made a comment to me later when he wanted to sell the business that there was no way that these accounts were accurate, and that he had been “stitched up like a kipper”.

Cash takings are involved with many businesses and also the financial accounts will include “one-offs” or discretionary expenses that are not strictly necessary for the production of income. Often the profit stated in these accounts can be understated and if taken at face value can lead to many great businesses being turned down.

And from the sellers point of view the fact that they have tried to reduce their tax liability by introducing private expenditure into their business account, or by understating their turnover may have backfired.

Accounts unless they have been audited, (and that only applied to medium and larger sized businesses); often need to be looked at with a pinch of salt. They are an important part of the due diligence process but not the be all and end all of any buying decision.

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11/06/2009 by info.

The character Captain Mainwaring in Dad’s Army showed how bank managers were once upon a time a respected authority; everyone believed what he said (even though most of the time he was wrong). This created farcical outcomes we enjoyed laughing along with.

Banks however are not the Cassandra’s of this world and do make mistakes, which has lead to a great loss of authority, almost bankrupting the country. There is however one area where a banks authority is still regarded as being paramount and that is the bank status report.

There are two aspects to buying a leasehold business, the first one is to reach an agreement with the owner of the business, and the second is to persuade the landlord of the property that you are able to continue to pay the rent. So a bank status report and trade references are required to prove that you are likely to be a good tenant.

The most important of these is the banks opinion on whether the buyer can meet the rent payment, now this opinion could be totally wrong, but is an overriding make or break piece of paper for a buyers plans.

This is where a first time buyer often becomes unstuck, as they have not informed their bank about their plans. So when the status report is returned often the bank reports that “ they cannot speak for your figures”. Such a report of course is unacceptable to a landlord.

A seasoned business owner with a track record with the bank should never fall foul of banks lack of knowledge of them. A first time buyer should realise that regardless of whether they think they need the support of their bank manager to buy a leasehold business, they have to accept that they need his blessing.

Whether of not you make friends with your bank still has a bearing on your goals and dreams.

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04/06/2009 by info.

I was told a story last week about a Company Director who was hosting a dinner party/business meeting in a plush and upmarket apartment in Central London. He was asked whether he owned the freehold of the apartment (worth millions)…. he said he did. His business contact then reminded him that for £3 he could find out whether he was telling the truth, he didn’t back down. The truth is that he doesn’t own it, but he lost all credibility because this person knew that he was a liar and perhaps couldn’t be trusted.

Jump forward to The Apprentice and Yasmina Siadatan’s interview in the Semi Final where she claimed that her restaurant trading under the name of MYP UK Limited was turning approx £8,000 per week and had a gross (sic) profit of 4.5% this would mean that the net profit would have been in the region of £19,000 per annum. (Actual turnover for the company is apparently approx £290,000 per annum with a net profit of around £8,000)

She was, for a Finance Director, naïve enough not to realise that Alan Sugar, you or I could obtain the annual accounts. The programme suggested that she was not telling the truth but it actually showed that she was a very poor accountant. As the restaurant had only been trading for 9 months pro rata she maybe WAS telling the truth, but the lack of technical knowledge meant that she was unable to explain herself.

These two people were both naïve, one simply wanted other people to think that he were doing better than he really was and the other didn’t want to admit her own weaknesses. Even though she was a Finance Director Yasmina Siadatan knew nothing about finance.

But when you have something to lose such as when negotiating with buyers of your business, honesty is not the best policy, but is the only way forward. At best you can lose face when found out, at worst you can be sued for damages should someone rely on your representations in buying your business.

If you know something isnt true dont lie about it, if you are not sure about the answer, dont be afraid to admit that you need to ask advice before answering.

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04/06/2009 by info.

The recession has hit many sectors, industries and businesses. Some businesses have deliberately contracted cutting their operations and costs in order to survive with a related reduction in turnover; others have had this forced on them by the market.

Many business owners are holding off selling their business until they return to previous levels of profitability, and perhaps they are right in doing that. When you are selling a business, profit and the size of the business is everything. A small business where the owner is simply making a wage could be worth nothing, or at most two times its profit. The larger the business becomes, the multiples someone is willing to pay increases.

So if you own a business and find yourself in this situation of wanting to sell but not believing that you business is worth enough what could you do?

You could accept the lower price, or trade your way out of it of course; another alternative would be if you wanted to sell your business for a good price is to buy a business.

You can buy competitor, and incorporate their turnover into your business, but because you are using your existing infrastructure a good proportion of the costs will disappear increasing your profitability.

Or buy a business or two in slightly different locations and create a chain, re-branding those businesses.

In other words you speculate to accumulate, a £40,000 investment now, could result in a much larger return a matter of a few months later. One time when 1 +1 = 3

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11/05/2009 by info.

Almost unnoticed the FSE100 the share price index of the UK’s largest companies has increased by nearly a third since mid March 2009.

What does this mean in layman’s language, well it means that the value of these companies has increased by nearly a third in a couple of months. Great news if you or your financial advisor recognised the bottom of the market, this however indicates that the worst of the recession is over for these companies.

An increase in the share price means an increase in the value of the company, which indicates that the profitability of that company is increasing.

I would doubt whether the value of these companies were actually that low as markets tend to overshoot as the masses overreact to circumstances.

At the first sign of swine flu the share price of British Airways fell by 20%, I tweeted at the time that surely the value of the company has not decreased by that figure, what has happened? Well the share price has recovered to its previous level after the fear fell away.

The property market in the UK is about at its long-term real house price trend value; however expect the value of property to fall further as the market overshoots due to continued fear. By Winter 2009 you will see real property bargains.

For the prospective small business owner what does it mean? Well now is your chance to make money by buying a business before the masses recognise that the bottom of the recession has been reached as in the few months time by the time that your purchase has completed the recession will be over and you will be best placed to start making money.

The purpose of this is to show that you can take advantage of other people’s overreaction or as Warren Buffett has been quoted as saying, “Be fearful when others are greedy and greedy when others are fearful”

Perhaps now is the best time to be greedy before others do.

Posted in Buyers, The Economy, General | No Comments »

24/04/2009 by info.

That of course is the alternative that people have.

Many budding entrepreneurs try to establish a business, a quick search on google suggests that anything up to 90% of new businesses fail in their first year. Now that may overstate the figures, however the number of failures is quite high.

A study in Ohio State University tracked new restaurants opening from 1996-1999.

The survival rates were as follows:

• First year: 85%
• Second: 70%
• Third: 62%
• Fourth: 55%
• Fifth: 50%
• Sixth: 47%
• Seventh: 44%
• Eighth: 41%
• Ninth: 38%
• Tenth: 35%

Once you’ve hit five years, your odds of survival go way up.

What does this show?

Well firstly that new business owners often underestimate what is needed to start a restaurant, they are often undercapitalised and simply don’t have the skills needed to be successful.

Almost as importantly it shows that buying a business is not as risky. If you buy a restaurant that has been trading for 5 years, the chances of you being unsuccessful are significantly reduced.

Why is this? It is to do with location, location, and location.

There are plenty of empty shops and premises as a result of the recession but these will be the locations where previously businesses have failed, other restaurants, takeaways, cafes, pubs etc.

Often it doesn’t matter how good a chef or manager you may be, the most important criteria for being successful is having the right location, so it is better to buy someone out from a primary location than try to establish yourself in a secondary position.

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20/04/2009 by info.

In the last week I had a client selling their business tell me that they wanted to increase the asking price of their business as a result of investment they had made in the business.

In the same week an interested buyer rejected the business at the old asking price after a viewing because they were not happy that the business had been built on solid foundations.

If the business was really worth more as a result of this investment surely it was a bargain and the buyer should have jumped at the chance of buying it?

You could argue that the seller was not able to convey how strong their business was but I personally think that what happened was that the seller and buyer had different perceptions of the value of the business. Often the seller aware of what effort they have made in building up the business think that the business is worth more. For the buyer this is irrelevant.

The seller has an emotional attachment to that business, in the same way that they have an emotional attachment to a photograph of their own family.

Where you would pay for a photograph of your family, I would not give you a penny for that same photograph. In the same way I as a buyer am not willing to give you extra money for the emotional investment you have made in your business.

However the person who decides how much a business is worth is the buyer. 99% of the time that seller has to detach himself from the emotional effort they placed in their business so that their perception of value matches that of the buyer and are able to recognise themselves the true market value of that business.

If they cannot do that they will not be able to sell their business.

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03/04/2009 by info.

An inspirational book I love reading is “How to think like a millionaire” by Charles-Albert Poissant and Christian Godefrey, its probably out of print now as it was first published in 1989.

Basically it contains mini biographies of millionaires who make money despite have no money, failing in business etc. For example, Ray Kroc founder of McDonald’s started building the McDonald’s franchise chain at the age of 52 after spending most of his life as a jobbing salesman. He then amassed a $500 million fortune by 1984.

One of the most important messages of the book is that people become successful because they do what successful people do.

The phrase “What would Jesus do?” (often abbreviated to WWJD) became popular in the 1990s as a personal motto for thousands of Christians who used the phrase as a reminder of their belief that Jesus is the example to be followed in daily life.

You can increase the chances that you will be successful by using this approach. Simply think of a successful businessman who inspires you and ask the question “What would Richard Branson Do?” “What would Kroc Do?”

Ray Kroc was not an extraordinary person, he became one because when a great opportunity presented itself to him he did not say no.

So how many times have you looked at buying a business and though perhaps you might fail in it? If you had asked WWBD, you will probably find that Richard Branson would simply get on with it and not have any self doubts that their decision will mean failure.

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