Hope this post finds you well; you are inside out of the elements. It has been cold in Auckland, I am sure I read somewhere that we have a sub-tropical climate now. Could have fooled me, less rain is good though!
My last couple of posts have been more information rather than opinion based, and I hope those people who have read them now either have a better understanding of the business sale process, or have reference point to return to, should they need clarification in future dealings.
This week I am really interested in talking about the “Business Brokerage” industry as a whole and if possible have you comment on your experiences either as a buyer, seller, financier or a professional about your dealing with brokers and brokerages.
There is no consistency in the methodology brokers or brokerages use to set a value to market the businesses they have listed. I looked with interest at one company’s offerings last week and there were a number of opportunities that were positioned at a multiple over 4.5. These were for businesses under $2million enterprise value. A 4.5 multiple implies a growth business with extremely robust and sustainable cashflow, in the worst recession since the 1930s. Can a business of this size be immune to market forces? Seems irrational to me, has the broker just asked the owner what he/she wanted for the business and then made the numbers fit? Listing a business for a premium price above the markets’ expectation and then either hope someone would be willing to pay that premium, or you can wear the vendor down during the process and come to a more realistic level is fraught with danger. This can be a very expensive exercise in both time and money; I know I have made this mistake before. I took a business to the market at a number over $10m, I thought it was worth $10m but was convinced by the owner to try it at the higher value with the expectation that if the market pointed to the lower value we would adjust our expectations. It did, and 6 months later we had a number of offers in and around $10m and the owner decided to hold out for his number. We had 2 Due Diligence investigations, and 3 months later all parties withdrew. The mistake was mine, I should have backed my experience and risked losing the listing, and it was an expensive exercise for me, the purchasers and the vendor, because he still owns the business. You get one chance to sell your business in a market as small as New Zealand.
As a blogger I always read other blogs throughout the world that comment on our industry. I have been reading Richard Parker’s BizQuest’s Business for Sale Blog with interest. This week’s seen here.
His insights are excellent and anybody interested in buying a business should look at the resources he has available to help in your quest, especially if you are a new buyer wondering if business ownership is for you. This week’s post about Business Buyers and Brokers having different views makes me realise that the frustration felt by the majority of the parties we talk to, is not a New Zealand only problem, but a worldwide industry concern.
It tackles one of the major issues we as brokers face every day when dealing with buyers on behalf of our client, the seller. A number of buyers are not prepared for the process, some aren’t even sure business ownership is for them, and/or they carry baggage from dealing with inexperienced brokers before and bring that frustration to the party.
How do we standardise our industry when we are under the control of the REINZ? Now this is not bag the REINZ time, (I can leave that to the government and the media) more just pointing out the REINZ main interest is Commercial and Domestic Real Estate not Business Sales. Any party that has passed a Real Estate Salesperson certificate and that certificate is held by a MREINZ office, is legally able to sell a business. Does this give Business owners any confidence in our industry? A RE sales person could be doing open homes in the weekend, get offered a business to sell and away he/she goes. He or she might be an excellent residential RE sales person but what experience would be brought to the transaction and what back up could be provided by the licensee? Most commission based sales people struggle to say no to any opportunity. The transaction gets handled badly; both vendor and purchasers tar all brokers and brokerages with the same brush.
Australia is an even weirder mix; The Real Estate Institute of Australia (REIA) is covered by the same Property Agents and Motor Dealers Act (PAMD) as the Australian Car Dealers. Real Estate and Car Dealers, what a mix!
In December 2009, the control in NZ is being taken from the REINZ and will now be passed to a Government Department whose main interest will again be Commercial and Domestic Real Estate, and ironing out that industries’ well publicised governance issues, not adding any value to the Business sales arena.
Business brokers in Australia are now looking to get out from under this ACT and become members of the International Business Brokers Association (IBBA). To me this seems to be a rational idea, and maybe we should look to do the same here.
Our industry operates under the “Cone of Silence” which is understandable in such a competitive, success fee based industry, but day to day though, how do we make it easier for vendors to exit their business and purchasers to purchase that business? How do we get standardisation of the methodology used to position businesses for sale so apples can be compared to apples? Bizstats (Brokers submit business sales data) is a good start, but does everybody contribute? And as importantly, do brokers even use the historical numbers with Vendors who universally think their business is worth more than it is and risk losing the listing? How do we educate new buyers entering the market so they have an understanding of the process or whether they should even look at purchasing a business at all? (Richard Parker’s website is a good starting point, and I also talked to a business consultant this week who is looking to offer a similar service here in NZ, I will keep you up to date with his progress) In Richard’s blog, he points to only 20% of business listed with brokers in the US leading to successful transactions, and I doubt the statistics here would be much better. There would be a number of reasons for this, faults would be on all sides of the transaction but dealing with an experienced business broker with a proven transactional track record would be a good start. Don’t settle for the cheapest or the easiest or you can put your name down as one of the 80% of businesses that don’t sell.
Please comment on your experiences or leave your thoughts below, good or bad!