‘Flush buyers are looking for businesses’

5:00 AM Saturday July 22, 2017 Bayleys Business Sales team

Those looking to purchase a business include people who have done well out of the sale of a home. Photo / Getty

It’s a great time to purchase a business, say the experts.

Right now, New Zealand banks are more accommodating toward business lending, while higher numbers of quality cashed-up buyers are out looking to purchase and Bayleys Real Estate business sales agents Paul Dixon and Tony van Camp see these factors are heating-up the sector.

And though it would be a stretch to say that the banks are “bending over backwards” to fund business sales, the men are equivocal: the current lending market is an attractive one, they maintain.

Dixon says lending to buy businesses is an alternative to traditional lending sectors — such as development and construction — in which some banks see the lending levels as close to saturation.

“Banks always want to spread their lending portfolio risk and right now business sales represent an appealing opportunity,” he adds.

It’s important for prospective buyers and sellers to remember a business doesn’t always need a lot of tangible assets to invite funding.

Some banks have very good lending criteria that focus on what the business makes in profit, rather than what it holds in assets, says Dixon.

“That’s important because there are businesses that make good money, but they’ve depreciated the hard assets down to a nominal figure over time, which results in a high level of goodwill that needs to be financed.

“The funding packages available for that type of deal at the moment are accommodating,” says Dixon.

Van Camp adds that one of the most significant dynamics behind why now is a great time to sell, is the number of quality cashed-up buyers looking for a business.

“These folk include the highly skilled ex-pat population, who are being drawn back to the relative security of New Zealand.

“They want the independence of their own business, rather than just jumping back on to the corporate bandwagon,” says van Camp.

“There’s a similar demographic from within New Zealand, people who — because of the housing boom — now have significant equity in their homes and they’ve decided they want to put that money to work for them in a business.

“So there’s a fair volume of ready-cash looking for a home — or in this case, a business — but not just any business.

“They want a strong, appealing business,” he says.

To maximise the sales process, van Camp believes that the best method is to showcase why the business makes commercial sense to buy.

“Vendors need a robust narrative around the future earning potential of their business; one a potential buyer can understand; one they will be able to ratify within the due diligence process.

“It’s also essential to make this easily understandable to the buyer’s independent advisers, for example, their banker and accountant.”

Potential methods of achieving this, include:

  • Have up-to-the-minute financial information. Clear information allows you to explain what product you’re selling; at what margin; to which customers; and why those customers are buying from you.
  • Bring contracts and leases up-to-date. Have contracts locked-in, and extendable if possible — especially contracts with suppliers or customers that would be beneficial to a new owner.
  • If location is important, a buyer should also be assured they will be able to stay there for a reasonable period of time. Make sure the lease isn’t due to expire and finalise overdue rent reviews.
  • Have an operations manual ready. Many small businesses rely on a mix of procedures that exist only inside the owner’s head. Businesses are more saleable if procedures are clearly systemised and documented in an operations manual, in which case a new owner can take over with minimal training.

Dixon concludes that once the decision to list the business for sale has been made — don’t rush the process.

“Businesses generally take months to sell rather than weeks; selling in a hurry sends the wrong market signals and puts a vendor in a weak position to achieve the best possible price,” he says.

“The time is right to sell, so make sure everything you do contributes to getting the right price as well.”