May 18th, 2010
There are still other risks involved in buying a business. These include the following:
Retaining key personnel and management, retaining key customers and suppliers, non-complying use of premises and other environmental issues could all be seen as a part of the risk involved in the business’s ability to make profits and its ability to grow its profits in the future.
Businesses face political risk (such as terrorism), and risks that legislation affecting the circumstances under which they trade can change. Naturally, this will affect future business values and they should be taken into account when valuing a business, especially large ones. However, it is difficult in the private business sector to construct a valuation methodology to satisfactorily take account of these factors.
Tags: income, international markets, merger, money issues, revenue, shareholders, shares
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April 16th, 2010
The risk of maintaining income (and achieving a reasonable return) is not the only risk in purchasing a business. Another is the risk in getting one’s money back (as has been mentioned above with the high street bank or the gold mining venture). This risk also arises when you contemplate what might happen to your investment if the subject business closes down.
Where a business has strong tangible assets, such as real property or modern plant and equipment, there is a greater chance of a recovery of capital on close down and disposal than when a business has very few tangible assets. Consequently, (all other things being equal) the capitalisation rate used to value an asset-rich business is usually higher than for an asset-poor business.
Tags: business competition, cash reserves, EO, loans guide, money guide, pricing policy
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March 17th, 2010
A retention of part of the purchase price usually arises where there is a concern by the buyer that he will not retain certain key clients or customers (or not retain an agreed overall annual sales value of clients) and that this will, consequently, reduce the business’s profitability.
For example, the purchaser could agree to buy the business subject to a retention of a part of the purchase price for a minimum of twelve months, with the funds to be held in trust by his solicitor for this period. These monies would be released to the seller if sales (or turnover) targets are achieved, or released pro rata if they are only partly achieved.
Deferred payment, or payment on terms, could be advantageous for the seller for all sorts of reasons, although it is likely that taxation will be the main reason why a seller could consider it. The potential taxation advantages of being paid over time need to be compared with the risk of not being paid in full; the pros and cons could be very similar to those for vendor finance. You would need expert advice as to how your payments are likely to be treated by the taxation authorities (for example, as income or capital?) before you make any firm decisions in this area.
Loan notes are a way of delaying the receipt of consideration. The issues you need to consider are the date of redemption, whether the payment is guaranteed (and the strength of the guarantee) and the rate and frequency of interest payments. This is a complex area and you should obtain expert taxation advice before agreeing to receive any payment in this way.
Tags: business competition, CEO, income, international markets, merger, money issues, pricing policy, revenue, shareholders, shares
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March 16th, 2010
The reason for this difference in business value is because of the difference in the risk involved in maintaining the cash flow (or profits) of the respective businesses. When calculating their respective values you would use a lower multiple (or capitalisation rate) of profit for the mobile phone shop than for the news agency. The buyer of the news agency
believes he is more likely to maintain profits and for a longer period than if he had bought the phone shop, and is, therefore, prepared to pay a larger capital sum for the news agency.
This brings us to key building blocks in approaching private business valuations, which are:
a) the higher the risk, the lower the multiple, and the lower the price;
b) the lower the risk, the higher the multiple and the higher the price.
(Note: The multiple used to calculate value can also be viewed as indicating the probability (or risk) of future profit growth in the subject company. Should the probability of growth be strong, a higher multiple of current profits will be used. This is similar, but not identical to the approach used in risk/return analysis discussed above.)
Tags: bad debt, business objectives, debt consolidation, debt settlement, investment opportunities, refinancing
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March 3rd, 2010
In a trade sale of a smaller business in particular, the seller’s willingness to lend the purchaser part of the purchase price can be an extremely useful way to ensure that the seller achieves the price he is looking for. Owners often do not adopt this strategy, largely because they are concerned about not getting paid, or because they need the full proceeds of the sale for some other business purpose, or to retire.
Vendor finance can be particularly useful where the potential buyer shows strong interest in the business and says he would pay the full asking price if he could raise the money, but is short by a specified amount (say £100 000). If the seller does not urgently require the cash, there is a strong argument for considering offering these terms.
In most MBOs, funding is a central issue. Even where MBOs are supported by outside investors (as most of them are) it is my experience that the amount that can be borrowed from banks and financial institutions often falls short of what is required to complete the purchase. Again, the willingness of the vendor to provide funds on terms could be the difference between a deal being completed or not.
Tags: business objectives, cash reserves, debt consolidation, investment opportunities, loans guide, money guide, refinancing
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February 17th, 2010
The handover period is not just to provide information to the buyer, because during this time both buyer and seller are trying to achieve other things. These could include:
Reassuring management and employees about the future of the business and their role in it.
Providing comfort to customers or clients that they will continue to receive personal service from the new owner (whom they have now met).
Establishing buyer relationships with key suppliers.
Demonstrating to clients and customers that the retiring owner cares about personal relationships, thus helping to preserve client goodwill for the buyer.
Enabling the seller to leave the business with his relationships and reputation intact, which is especially important in small communities.
Providing the springboard for the buyer to develop new business opportunities with clients and customers. The disposal transaction will vary depending on the exit route you have chosen. Some aspects, such as due diligence will, however, be more or less the same. In all transactions there will be some form of sales contract. In trade sales, for example, sales contracts are broadly of two kinds, namely: a) in smaller businesses, those drawn up by the owners or their accountants b) in most other cases, contracts drawn up by solicitors.
In a trade sale, we believe that it is necessary to use a solicitor to draw up most contracts, except in the case of very small businesses. In other transactions, such as an MBO, it is essential that expert solicitors be used.
Where funding is required, lenders or VCs will usually use documentation drawn up by their own solicitors.
Tags: bad debt, car loans, compare credit, currency trading, debt settlement, forex, funds, home equity, portfolio
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February 17th, 2010
Most investment valuations rely partly on estimates of future returns (or future profits). The risk that future returns will not materialise will be greater with some investments than in others. For example, amongst the less risky investments is a cash deposit in a high street bank with a fixed interest return for a set period (and with an undertaking to receive the capital back in full at the end of the period). At the other end of the spectrum, you could invest in shares in a speculative gold mining business, where there is no certainty that you will receive any dividend or income (or, indeed, get your capital back).
The former investment will offer to provide a lower rate of return because it provides a relatively risk-free opportunity both in terms of income and capital. The latter has to offer you a much higher possible rate of return to compensate you for (or, if you like, to tempt you with) the much higher risk involved in both its income earning potential and certainty of a capital return.
Applying this theory to private businesses, it is obvious that some are more risky than others. For example, compare the purchase of a mobile phone shop on a high street (that has a month-to-month lease, and where competitors can open at any time and where technology is changing rapidly), with purchasing an old-established news agency (that is the only one on the high street and has a long lease). Assuming that both businesses have the same current annual profit and the same tangible net asset value, typically the value of the mobile phone shop would be less than the value of the news agency.
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February 3rd, 2010
A handover can be substantially completed before a business sale is finalised. This could happen when the potential buyer has made a final offer, subject only to knowing more about the inner workings and operations of the business. This requirement may not be satisfied by the buyer’s formal due diligence process, because this focuses on accounting, legal and compliance issues, rather than operational and managerial issues.
This pre-sale handover provides a difficult challenge to business vendors, because many find it difficult to know just how much they should be telling a potential but, as yet, legally uncommitted buyer about their business. There is, unfortunately, no easy answer to this dilemma, which relies on a judgement by the seller of the genuineness of the purchaser. The decision you need to make is whether you are involved in a handover of information to a genuine purchaser, or satisfying the curiosity of a potential competitor. If you are in any doubt you should hold back on sensitive information until you have a signed contract, even if it is conditional.
Tags: annuitant, Annuities, banking, banks, Bearish Patterns, Budgeting, cash, company costs, currency cycles, debt
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January 12th, 2010
In this era of entrepreneurship, competitions within, as well as among organizations have become important aspects of business. This creates an unprecedented market for the consumer as well as industrial products, where customers are offered choices and the entrepreneurs/organizations are able to maximize their business. However, everybody does not benefit equally from this process and some are ahead of the others. The latest ranking of the top 500 Indian companies (Economic Times Survey, 2006) clearly shows that only around 18 per cent of the companies existed in the ranking even after 10 years but it is diffi cult to present here the reason for what happened to the other 80 per cent companies. What emerges from this is that to be successful in the field of entrepreneurship, one has to know and learn how to explore and utilize business opportunities.
Entrepreneurship is the alertness to new opportunities and also the actions following its discovery, which involves all kinds of learning processes.
Tags: Annuities, banking, banks, Bearish Patterns, Budgeting, cash, company costs, currency cycles, debt
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January 11th, 2010
In the past, opportunities that we find today did exist and were available across the globe but these were neither thought of or imagined, nor were they visualized then. This simply means that organizations have to have people, who are capable of applying their innovation and identifying what needs to be done where. Some are already able to progress in this direction while others are looking at opportunities in the times to come from the environment around them. Organizations have seen the era and the outcomes of bureaucracy, participative management and quality management. Only innovative and entrepreneurial organizations will survive in this competitive environment. Hence, the future belongs to innovation that leads to entrepreneurship.
Literature examines the merits of entrepreneurial organizations and strategies that facilitate developing entrepreneurial management. Many issues obtained space in literature but I have restricted myself to the scope of people management contributing towards the entrepreneurship development of a system. It requires different approach in terms of looking at the environment (market) for identifying initiatives to be undertaken, people to be deputed for the projects, projects to be undertaken, teams to be selected, strategy to be applied, cooperation and coordination of competitors to be understood, assessing the strength of the organization and its health, and fi nally, preparing organizations to be entrepreneurial.
The thesis is that any organization, irrespective of its nature, size and sector, has the potentiality to be an entrepreneurial one if it is able to face the challenges arising out of the following common issues raised. The successful ones face them innovatively and those that are unable to do it fail, which is not uncommon. The desire of learning from failures could change the status again.
Tags: business objectives, cash reserves, debt consolidation, debt settlement, investment opportunities, loans guide, money guide, refinancing
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