Biggest Business Broker Myths
We’ve been in this business for a while and we’ve seen and heard a lot of things. We’ve put together a list of myths that you should be aware of.
- Migration buyers will pay silly money for businesses. WRONG!
Sellers need to realise that most migration buyers were experienced business owners in their own country; they have cash but are cautious in spending it. There are historically a few examples of wealthy migration buyers who pay over market value for a business, however, these are very rare in the current economic climate.
- Businesses that do not show a profit are still worth a multiple of turnover. WRONG!
Who is going to buy a business and not want a decent return on their investment? Business making no profit will normally be valued at asset value as an ongoing concern or as a closing down asset sale. No profit = No goodwill.
- Banks will always lend against the business. WRONG!
Banks prefer real estate as security. Currently only the very best businesses with strong taxable financials are able to be borrowed against. Banks are much tighter on business loans in the current market, especially following the Royal Commission on Banking/Financials services.
- This business is 100% fully managed. WRONG!
There are few businesses that can be left alone for prolonged periods of time. There is usually some sort of overseeing or consultancy role played by the vendor/owner. A ship without a captain eventually runs aground.
- My backers will give me the money when I find the right business OR We can find the money when we find the right business. WRONG!
These pretenders or “ROCKSTARS” generally don’t have any money and usually have a problem providing details of their own financial status to verify themselves as qualified potential buyers. Dreamers V’s Genuine Buyers are quickly identified by the JBB team and treated accordingly. Only verified buyers are provided with financial details for any of JBB listings.
- Assets alone can make a business more valuable. WRONG!
Often the opposite is true. Generally excess assets are a handicap when selling a business. Who wants to pay millions for a business only to earn a very small ROI because that’s the value of the plant & equipment? We advise “high asset” businesses to sell off some of their unnecessary assets prior to going to market so the business offers the buyer a better return on their investment, so it is therefore more saleable in the current marketplace. Yes, Banks do like tangible assets but there also has to be a balance with profits, to allow for loans to be repaid.
- Undeclared cash earnings are taken into account when valuing a business. WRONG!
Cash taken out of the business has a negative effect on the value of a business. The benefit of taking cash out is the saving on tax to the current vendor. The benefit of leaving the cash in is that the value will increase between 2-3 x the net profit. Some “cash” businesses can be trialled to prove true earning performance. However, vendors are leaving themselves open to blackmail, from unscrupulous Buyers, who may threaten to report the vendors undeclared cash earnings to the ATO, if they don’t sell at the Buyer’s offer.
If you have any further questions on buying or selling a business contact us on 0409 965 540 or firstname.lastname@example.org to set up a FREE consultation today.