PIEDMONT ACTION
BUSINESS BROKERAGE
TIPS&HINTS
Piedmont Action’s Business Brokerage has been a leading player in the Perth market for two and a half decades.
At present we hold instructions to sell some 200 businesses. These range in price from $50,000.00 to $5 million and above and comprise of retail, food, hospitality, service, manufacturing and so on.
Whilst most businesses are conducted from leasehold premises, some freehold opportunities are also available.
If you are interested in buying a business in W.A, or indeed Australia, please contact us as we may have just what you want.
1) Business Brokerage Glossary of terms
Like any other industry, Business Brokerage, takes on terms whose meanings are at times ambiguous.
The following are brief descriptions or explanations of terms often issued within the Business Brokerage industry.
a) P.S. (Plus Stock)
b) P.S.A.V. (Plus Stock at Valuation)
c) Trial Period
d) Restraint of Trade
e) Addbacks
f) Profit
g) Option
h) V/O's (Variable Outgoings)
i) Depreciation/W.D.V. (Written Down Value)
a)P.S. (Plus Stock)
The level of stock in most businesses will fluctuate from day to day. Because of this, when an Agreement to Purchase a Business is drafted, values are shown for each category of asset being sold (plant, licences, goodwill etc.), but the value of the stock at the date of takeover will be unknown.
The agreement will therefore be written at a certain price P.S. On the date of takeover, stock takers will be called upon to value the stock.
b)P.S.A.V. (Plus Stock At Valuation
Same as P.S. See Above.
c)Trial Period
A time between the date of agreement and before settlement when the intending purchaser will spend time in the business in order to verify certain representations made by the vendor. This is mostly used to verify takings. The purpose of the trial period is strictly in accordance with the agreed conditions.
If, for example, the condition is to verify takings, the purchasers’ only involvement is in satisfying themselves that takings are as represented. They are not there to be trained (usually a separate condition) or for unpaid labour.
d) Restraint of Trade
A covenant in the Agreement to Purchase a Business where the purchaser seeks some protection to prevent the vendor from competing against him/her. This is usually determined by Time (x months, years) and space (a radius of kms). This time and space must be reasonable in light of what is being paid for intangible assets and must not be seen as excessive and disadvantage the public. Such restraints must be “reasonable” or risk being a restriction on competition thereby contravening the Trade Practices Act.
e) Addbacks
Items which are shown under Expenses in the Profit and Loss account, but which are either ownership benefits or owners financing requirements. These are added back to the book profit to arrive at arms’ length profit.
The rationale behind this practice is to arrive at comparability between similar businesses. The owners’ financial needs are netted out of the equation because whether a purchaser pays cash for the business, or requires finance in order to purchase it, the business itself is the same.
f) Profit
As you can see from the above use of addbacks ,when Business Brokers talk of profit, they speak of a very different amount to that which is used by accountants, the tax department and so on. As explained above, this arises out of the need to isolate the business performance from manipulations by the owner, or by the vendor’s financial position, in order to ascertain its comparability with other similar business and its value.
The owners' debt/equity ratio will greatly affect the business' profit for accounting and tax purposes. Similarly, an owner is free to pay himself a large wage or a smaller one. As such, Business Brokers will generally add back interest costs and the owners’ wages to establish the profitability of the subject business.
g) Option
Most leases are structured in a manner whereby an option to extend the lease is available to the lessee. The lease specified the length by which the lease may be extended and how the option may be exercised. These extensions are generally exercisable at the Lessee's "option".
h) V/O's (Variable Outgoings)
Most tenancies are structured whereby the Lessee pays rent plus V/O's. These refer to costs such as water rates, council rates, strata levies, promotional levies and so on. Rent is therefore generally quoted as the amount payable to the Landlord net of V/O's.
The Retail Tenancies Act will at times affect what may or may not be included in variable outgoings.
i) Depreciation/W.D.V. (Written Down Value)
It is clearly understood that as soon as you buy a certain item it is worth less than what you paid for it. The difference between its purchase price and its present value is depreciation.
The tax department allows a certain percentage of the item's value as the rate for depreciation. The value at which the item is listed in the "Depreciation Schedule" is referred to as its W.D.V. or written down value.
A problem arises because W.D.V. and actual value are often not the same. A certain item of equipment depreciated (straight line) 20% p.a. will have no W.D.V. after 5 years, yet that item may still be in use. As such, most Business Brokers deal with replacement value as the most accurate reflection of real worth.
Oftentimes, depreciation is added back because it is a non-cash item (i.e. the owner does not actually write out a cheque for this amount).
2) Why do people sell their businesses?
As Business Brokers we are often asked why the owner is selling. Surely if they have a good business they would not be selling it. It must be losing money. Most people believe this to be the case.
Whilst people whose business is performing poorly may wish to off-load their business, they are generally not the sorts of businesses with which we are likely to be involved in selling. Generally, we are paid on the successful completion of the sale of a business. Failed businesses are unlikely to sell, or will sell for a price which will make our involvement uneconomic. Consequently it makes little sense to be involved in the sale of businesses that are unlikely to sell.
Instead, we have found quite a variety of motivations for a business owner to sell their business.
The main reasons people sell are as follows:
a) Taking time off
b) Retirement or Life Cycle Issues
c) Partnership Difficulties
d) Divorce
e) Favorable Environment
f) Illness/death of Partner
g) Other opportunities
a) Taking time off
Odd as this may seem, taking a break is a major reason for small businesses being sold. Delegation is not often a strong point with small business owners. Some small business owners are at the wheel all times the business is in operation. As such, the time comes when the only way they can have a break is by selling their business.
We in the industry often deal with the same clients who have sold through us and , after some time, are ready to re-enter the market.
b) Retirement or Life Cycle Issues
Few businesses are passed on from one generation to the next. The owners' offspring may have neither the interest nor expertise to continue in his/her parents business. When the principal business manager is ready to retire, the business is sold
c) Partnership Difficulties
Whilst partnerships are useful arrangements in sharing work, risk, and responsibility, some businesses can place special pressures on the relationship between two or more owners. If the partnership fails, the business must be sold.
d) Divorce
Much the same way as above. When a marriage fails the business is sold in order to divide the couple's assets.
e) Favorable Environment
Demand for individual businesses vary over time. Certain types of business gain favor or fall out of favor over time. There is no better time to sell a business than when demand, for that type of business, is high. We as business brokers canvas stock in those businesses we believe to be in demand and will encourage their sale.
f) Illness or death of a partner
As explained above, delegation and succession are shortfalls in small business competence. Serious illness or even death results in the sale of the business.
g) Other opportunities
Whilst operating a business, the owners may be exposed to other business opportunities. If these opportunities are better than those offered by their present business, the business will be sold. As the saying goes the grass is always greener…
