The July 1 race is on!
As you know from our last market update, we anticipated a big race to the Holy Grail of settlement days (1st July), and the starting gun has truly fired for a number of our clients.
Offers have flooded in throughout April as expected. Currently, we have $7.3M worth of business assets under offer across 8 businesses, 6 of which were received in April.
Normally we see some skepticism in the market around election time, however, this year seems to be different. We think this is due to the broader sense that in any economy people are always looking for a return on their investments.
With such low cash rates, another impending interest rate downgrade and the property market continuing to pull back, businesses are starting to look a lot more viable as the chosen investment vehicle.
Of course, the risk is much higher with a business, because you must back your own ability to run it. However, the returns are generally 20 - 50% net (after tax and fees) as appose to a measly 2% parked at the bank.
Needless to say, if you are looking to buy, tread with caution if:
You love the business but it does not have the financial records to justify its returns.
You love the business and believe you could make it work but do not have the experience to run/operate it.
The business is in distress or appears to be a bargain. Often these can be great value buys but only for experienced turn around operators, not first or second timers. They are extremely high risk and often require a lot more capital than just the asking price.
Here are some principles that we recommend following:
Look for businesses where the owner genuinely is working 20 hours OR LESS in the business. This shows you can probably add value by being more involved if you need to.
Look for a business with few and simple products. (we’ve got a great one just listed below).
Make sure that the owner’s wage is factored into your assessments, tax liabilities and interpretation of your net position after tax. Sometimes owners work full time in the business, however, they don’t draw a wage for doing so. This will artificially make the profit look higher.
Ideally try and make sure there is at least 200k (after the owner’s wage) net profit before tax in the business. If it means increasing your budget, it is better to pay a little more for a stronger, more established business with less risk; as the business has a better chance of weathering a change of ownership.
If you are selling:
Buyers are generally able to borrow less from the bank in today's lending conditions. The preparation of your financial information can make all the difference.
Make sure you are factoring in a reasonable market rate for your wage that is relevant to the hours you are doing in the business. Even if you don’t operate your financials like this for tax reasons, it is always better to present your business with this factored in.
Document, document, document your IP. Recipes, processes, procedures, and ideas; these are all non-tangible assets that often go unvalued.
Here’s a quick video that every business owner should think about when it comes to IP.
In summary, whether you are buying or selling try and take the emotion out of your decision making, do your best to work with the fundamentals. Think of the business from an ROI perspective first and foremost. Remember, whilst businesses are valued and sold on a pre-tax basis, always know your post-tax net position.
Daniel Kogan & Dan Levitus
April Market Analysis
We have wrapped up April without any sales during the month. Why aren’t we worried? – we’ll get to that. Unfortunately for all, two businesses which were scheduled to settle in April have carried over to May. Yes indeed, both businesses have run into brick walls along the way that we have been working hard to overcome.
There are thousands of reasons why a business sale can fall over after an offer is accepted. Keeping the sale on track is a primary function of a Broker and in most cases – after an offer is accepted is the phase in the process where a Broker will really earn their fees!
Often, Parties (and Brokers) can only see how they would have treated situations differently with hindsight, it is important that all concerned reflect and learn the underlying lessons.
The main reason we are not concerned is because of the spike in confidentiality agreements. The huge pipeline of businesses already under offer helps too. The spike in confidentiality agreements is a big one for us because this gives us a sense of buyer sentiment.
*Conversions of enquiries to confidentially agreements
Comparing the stats, confidentiality agreements were up a whopping 79% while enquiries grew just 13%. If this is an indication of the quality of the current market – the outlook is very positive!
April ✓ Businesses for Sale: 19 ✓ Buyers Enquires: 118 ✓ Confidentiality Agreements: 88 ✓ Offers Received: 9 ✓ Offers Accepted: 6 ✓ Settlements: 0 ✓ New Listings for April: 2
March ✓ Businesses for Sale: 16 ✓ Buyers Enquires: 104 ✓ Confidentiality Agreements: 49 ✓ Offers Received: 7 ✓ Offers Accepted: 2 ✓ Settlements: 2 ✓ New Listings for April: 3
On the contrary, we also see that 6 offers were accepted with just 9 offers made. Compared to March which was 7 and 2 respectively. This was not as a result of buyers paying less or sellers commanding more – we are putting these down to simply a fluke month!
However, we do feel it is important for buyers and sellers of retail businesses to align their prices accordingly, and typically retail businesses are still down around 10-15% from this time last year.
What's in Store for Buyers in May?
This is one of our favorite new listings – perhaps one of the best growth businesses we have seen this year – there is so much unpicked hanging fruit. Whilst we admit a small amount of this growth has been factored into the price – we think this is still a huge value play. Plus, it sells only 1 major product with just 3 ingredients. We think this is suitable for a range of different skill levels of buyers.
Another new listing for our advanced buyers is an extremely rare find, nationwide restaurant group. With over 15+ stores across Australia, a rich history and promising future. It’s likely to sell at around 4x 2019FY earnings, however, in the right hands, these can be incredible investment vehicles and provide consistent returns for years or decades to come.
Our VBA Pipeline
We’ve also listed some opportunities below that are currently in our pipeline. The reality is we will probably convert 40% of these into listings in the next 3 months.
If you would be interested in any of these, let us know because this really helps motivate Vendors and it also creates a rare buying opportunity for you before the business hits the open market.
You would be surprised what can be achieved off-market, we always are!
✔ Coffee Roaster including freehold circa $2M -$2.2M
✔ Coffee Roaster circa $6M - $6.4M
✔ Civil Contractor circa $3M – $3.5M
$0 - $1,000,000
✔ IT Partnership Deal (partial sale) circa $200 (currently in early negotiations off market)
If any of these wet your appetite, call Dan on 0450 326 146 or Daniel on 0410 620 918.
Our mission is to transcend the standards of the business broker industry, and this means so much more than just selling businesses.
We would love for you to be part of our community.
From all of us at Vision Broker and Advisors, we really look forward to working with you.
Good luck, and make sure you have a look at our business for sale.