26 May 2015
Hansie Britz

How much should I pay for that Business?

 

           Buying a Business              Buying a Business 3               Buying a Business 2          Buying a Business 1

 

There  are two broad ways of going into business for oneself. You could either start from scratch or purchase an existing business. Starting from  scratch has the advantage of allowing you to shape the business exactly as you want it. Purchasing an existing business also has advantages, such as an existing location that is often hard to find, and ideally, a track record of proven performance.

Business Owners who start from scratch have to do many months of preparations to ensure that the business idea can indeed turn a profit. However, those who purchase an existing business should apply the same level of diligence to ensure that a fair price is paid and that no nasty surprises are hiding around the corner. Always a good idea to do a proper financial analysis by a professional consultant.

Calculating  the value of a business is a tricky exercise because there are so many variables that should be taken into account. The help of a professional is recommended. However, there are a few basic principles that prospective business owners can keep in mind to get the negotiations ball rolling.

CASH FLOW

Most people enter into business for themselves to fulfill a particular passion or to be their own boss, but although these are the main driving factors, everyone does so with the expectation that the business will pay them to do so. The easiest way to find out whether the business can afford its new owner is to look at its cash flow or do a proper financial analysis. This figure also makes a big contribution to the price the seller is going to ask.

Although businesses can generate cash flows from investments or by extending credit, the cash flow most pertinent to the health of the business is the operating cash flow. Operating Cash Flow is simply the money paid to the company by customers (its revenue or turnover) minus the money paid to suppliers. This is the money generated by the company’s core operations.

A company’s cash flow statement  is different from the income statement and balance sheet because it does not factor in cash that will be coming into or leaving the business in the future. While the balance sheet and income statement calculate the company’s net earnings, it is the revenue recorded on the cash flow statement that is all-important in determining the health of a business. A company might show huge net earnings without being able to pay its bills. If a company records high earnings growth but little growth in cash flow, it is usually because it has sold the product or service on credit, in other words, there are many people owing the company money. While debtors are good for business, they can be bad for cash flow. If these debts turn bad, the company could be in serious trouble.

The cash flow statement gives a good indication of future revenue through its recording of past performance. Therefore, if a person is looking to buy a business and renovate it, the ash flow statement gives a good indication if there will be enough money available to pay for any plans that the new owner may have.

FREE CASH FLOW

One of the disadvantages of only looking at cash flow to determine the sales price of a business is that it does not include capital outlay for fixed assets. Capital outlay is any expenditure on assets that is paid off over a term longer than a tax year. Capital outlays can vary dramatically from industry to industry. Compare, for instance, the heavy machinery that has to be purchased by manufacturing companies, with the rent of an office and an IT infrastructure for some service industry companies. The cash flow that is available after provision has been made for capital outlays is called free cash flow.

Increasingly, free cash flow is being factored in to determine the asking price of a business. Some companies that report massive cash flows have little free cash flow because of the expensive equipment used in manufacturing the product. When a company reports its earnings on its income statement, it is possible to prop up the final figure through clever accounting. This is much harder to do with free cash flow, which is why it is an effective tool to determine how much the company generates for its stakeholders.

EBIT

Another calculation often used to determine the business price is earnings before income and taxes –  (EBIT). This figure is the operating revenue plus the non-operating revenue, minus operating expenses. This calculation allows the owner to know how much money can be taken from the business as a personal salary. After the money that the owner wishes to take out of the business is subtracted from the EBIT, the money that is left should be around 25% of the asking price of the business. For instance, if the business generates R1 million a year and you or the manager requires a salary of R400 000 for the year, what is left of the earnings before interest and taxes for the company comes to R600 000. A good price for the business would therefore be R2,4 million, because R600 000 is 25% of this total.

The EBIT of a business is a broad tool and differs considerably in practice. In general, the higher the price of the business, the higher the percentage of EBIT left after subtracting the owner’s salary would be. The age of the business would also determine the EBIT, with more established businesses able to command a higher percentage. Businesses that operate in a riskier space should charge a lower percentage.

EBITDA

EBITDA is another ratio that is often used to valuate companies. It is the earnings before income and taxes, with depreciation and amortization added back to the figure. The figure shows the profitability of the company, regardless of the way its operations are financed, through credit or cash, for instance. This figure shows whether a company is able to service debt in the long run, and is therefore an especially popular valuation tool for companies that own expensive equipment that must be paid off over a long period. EBITDA is therefore a good indicator of the company’s profitability, but not its cash flow.

ASSETS

The value of the assets owned by a business plays a major role in determining the sale price of the business. Many business owners do not wish to part with every asset in the business when they move on. It is therefore important to receive a list of every item that forms part of the transaction and not to simply assume that all business assets are included in the price and will automatically be transferred to the new owner.

The aforementioned ratios are some of the ones used most often to arrive at a good selling price. There are many more than these available, and volumes have been written on how to determine business value, with intricate and confusing formulas being used by people with master’s degrees in economics. While these calculations can go a long way to provide a clear cut value, the human element should not be disregarded. A prospective business owner who is serious about making a success of the business about to be purchased should not be afraid to break a sweat when analyzing the value of the business. This means not only perusing the financial statements of the business, but to actually be familiar with every inch of the physical premises and the employees that will still be there when the owner departs.By visiting a company, one can get a feeling for the strengths and weaknesses of the business that may not be apparent from the financial statements alone. One gets to see the managers in action, as well as being able to gauge the demographic composition of the average clients.  

PREPARING YOUR BUSINESS FOR SALE

“Rick Grantham” of Quickberry gives the following guidelines for the sales process:-

Phase 1 –  Preparing for sale:

This is after you have made the decision to sell and before you actually take the business to the market. It involves documentation, business plans and researching potential acquirers to approach.

Phase 2 – Initial discussions with interested parties:

Run through what to say and what not to say, and develop tactics for each prospect. For example, how do you answer a question like: “How much do you want for your business?”. The response can potentially cost you millions!

Phase 3 – Selecting the acquirer:

You may not want to go for the acquirer who offers the most money. There are a number of issues relating to structure and credibility that need to be taken into account.

Phase 4 – Closing:

This is so critical, and it is amazing how many deals fall apart at this late stage. The simple rule is: the longer it takes to close (i.e. the money changing hands), the more likely the deal is to fail.

8 KEY TIPS TO GETTING THE BEST PRICE FOR A BUSINESS:

  1. Actively look for buyers.
  2. Never have only one potential buyer.
  3. Look for strategic buyers.
  4. Look internationally as well as locally.
  5. The value of your business can only be assessed by a buyer.
  6. Be well prepared.
  7. Choice is critical.
  8. Sell the future, not the past.

 

 

 

23 April 2015
Hansie Britz

How to get involved in the Printing Industry.

                                  printing-3                 printing-1                 printing
                              

No matter what type of printing business you want to set up or run, the client’s requirements remain the same:

  • quick turnaround times;
  • competitive pricing; and
  • professional service.

Your client’s loyalty will depend on meeting the above demands as well as the quality of your prints.

SERVICES YOU CAN OFFER:-

Many exciting opportunities exist in the printing industry that include:-

  • Textbook printing;
  • Magazines;
  • Marketing Documents;
  • Printing of Business Cards;
  • Printing Invitations;
  • Advertising Pamphlets.

Value Added Services:-

  • Designing;
  • Binding;
  • Laminating;
  • Embossing;
  • Couriering.

To accomplish this companies started offering:

  1. signage printing;
  2. poster printing;
  3. photo printing; and
  4. t-shirt printing.

Although you could start and run your printing business on your own or with a partner, a better option might be to go the franchise route. Franchise Companies built up a good reputation in the printing industry. They also sourced the best deals for quality machinery and paper products, have good support systems in place and offer training on equipment and even business management. Furthermore, work can be outsourced between various branches and provinces thereby keeping it in the group and building on the group’s reputation as a professional unit.

Technology has enabled printing companies to speed up processes. They can receive material from clients, via email during day/night and then printing directly from the applicable file. The ability to receive files via electronic mail also means that services can be extended nationwide, with turnaround times remaining high. Your best chance and sometimes the only one in securing a job is during the quotation stage. To enable you to calculate a competitive price, you need to know certain facts upfront:-

  • number of pages;
  • whether double- sided printing is necessary;
  • type of paper (weight, grade, colour and finish); and
  • if binding is required.

It is also important to enquire if any value added services such as lamination or couriering, is required. The printing industry is a creative one and there are no room for errors, therefore an eye for detail is vital. Furthermore, a prospective printer should be able to work tight deadlines, be able to cope with stressful situations and enjoy working with people.

OFFERING PROFITABLE SERVICES

Choose a Business Location

To start a profitable and successful printing business, you’ll need to choose a location that will work for you. Look for a place that is within your budget and that is easily accessible to customers. You can look at locations online or hire someone to help you find the perfect location for your business.

Turn printed items into products by creating a menu of what you offer.

When it comes to printing, most people or business owners don’t know exactly what they need. For example, a food manufacurer might think they need a traditional vinyl banner for an event but they don’t understand the pitfalls of using it in various scenarios. What they really need is a portable tabletop sign that can be utilized at events, sales meetings, and other public awareness activities. The more customers understand what a product can do, the happier they will be with the finished product.

Promote your new print shop.

Once you start a printing business, you need to get the word out to bring in sales. Join your local chamber of commerce, sponsor community events, and advertise in your local newspaper. Also, don’t forget to promote yourself online by building an effective website, participating in  industry forum discussions, and taking steps to distinguish yourself from local and nationwide competition.

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

   

30 December 2014
Hansie Britz

How to Start a Guesthouse or B&B

 

B&B 1                    B&B                B&B 2

1. FORMULATE THE CONCEPT.

Clarify in your own mind the type of establishment you would like to develop.

Decide on your objectives:

  • Is the objective to be host to visitors from abroad?
  • Will local tourist be welcome?
  • Will children be welcome?
  • What kind of accommodation do you intend to offer?
  • Is your objective primarily to make money by taking in guests or are you also interested in the social aspects of the venture?

Factors to be considered:

  • Changes to your daily routine.
  • Intrusion upon your privacy.
  • You will have to be available 24/7.
  • As the entire family will be affected by a business of this nature, canvass the support of family members.

Location of Establishment.

Location is of major significance and factors influencing this include:

  • Proximity to popular tourist attractions, conference facilities etc.
  • Location along tourist routes.
  • Proximity to alternate affordable accommodation.
  • Easy access.
  • Good visibility.

2. CONDUCT FEASIBILITY RESEARCH.

Thorough research should be undertaken before deciding whether to embark on the project. A concise, well formulated feasibility analysis serves a dual purpose – (1) It marshals the thought and ideals of the developer -:

  • Does the prospective developer have the right temperament to run the enterprise?
  • Were all organizations approached for relevant information?
  • Did the developer carefully consider the cost and other implications of admitting overnight guests to his/her home?
  • Are calculations of expenditure versus envisaged income realistic?
  • Is trained staff readily available or will additional tasks be handled by the developer?

(2) It serves as a document to convince others of the viability of the project:-

  • To obtain financing if necessary.
  • To convince suppliers and possibly a partner/s.
  • To convince the family who will be affected by the enterprise.

The following elements should be included in the feasibility analysis:- (We strongly suggest you approach a small business institute or advisory bureau to assist you)

Competitive Analysis.

  • Do similar facilities exist in the immediate vicinity?
  • Where are they located?
  • At which markets are they targeted?
  • Could there be a market overlap with your envisaged establishment?
  • Is there a market need for your establishment?
  • What percentage of the overall market do you expect to draw?

Financial Analysis.

Clearly determine the objective of the business – project income and expenditure scenarios – investigate the availability of trained staff, if required – approach small business consultants to provide you with advice if at all possible.

3. DRAW UP A WORKING PLAN.

After researching all aspects pertaining to your project draw up a working plan and include the following:-

  1. Daily running of the establishment.
  2. Financing the facility.
  3. Legal Matters.

Daily Running of the Establishment.

In the daily running of the establishment acceptable standards should be maintained. Particular attention should be paid to the following:-

  • Staff must be well trained.
  • Neatness is of the utmost importance.
  • Quality equipment – towels, bedding etc must be provided – also consider extras such as special soap, shampoo etc.
  • Furniture, fittings and fixtures must be of good quality and in working order.
  • Building must be well maintained.
  • Rest rooms and other public amenities should be cleaned regularly and kept tidy.
  • Provision must be made for guest parking. This is of utmost importance to the business and self-drive traveler.
  • Bath and toilet facilities must be serviced daily.

Handling of guests.

  • Aspects such as welcoming, friendliness, warmth and hospitality are the cornerstones and key features of the hospitality industry.
  • Cultural differences must be considered.
  • Language proficiency is an advantage.
  • Knowledge of tourist attractions in the immediate vicinity is an important requirement.
  • Telephone numbers of emergency medical services must be readily available to guests.
  • There must be no confusion with regard to meal times, coffee and tea times, provision of keys and other relevant matters.
  • Courtesy and punctuality are very important.

Financing of the facility.

Three possibilities for which financing may be required:-

1. If the property is suitable for the purpose and meets the requirements, only a small capital expenditure may be needed for furnishings and refurbishing, including linen.

2. If the property does not meet the requirements, structural adjustments may be necessary such as outbuildings, outer doors, etc. It may also be necessary to enlarge or improve the kitchen and dining room facilities and to build additional parking facilities.

3. If the property must still be purchased or developed, a large capital expenditure may be required.

Where necessary, provision must be made for:-

  • Transfer fees.
  • Bond fees – registration etc.
  • Attorney fees.
  • Property Valuation Fees.
  • Inspection Fees.
  • Insurance.
  • Issuing Guarantees.
  • Cost of Drawing up contracts.
  • Purchasing furniture, linen and fittings.

Beware of an unprofitable investment. The potential income must be weighed carefully against the interest on the investment, both in the short and long term.

 

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