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CHANGING TIMES Is it the cooler, wetter, winter weather? Is it the rising interest rates and the media?s gloom about our economy? Is it the high $NZ dollar and its impact on exporters and manufacturers?Whatever, our sales have been a tad slower in June. Buyers appear a little more cautious and slower to commit. But good businesses are still selling fast and we still have a huge pool of qualified buyers. Perhaps some over-optimistic sellers may need to adjust their price expectations? The market is the market. We cannot change the market. But we can change our attitude to it. We are positive about the future. CHANGING TIMES Good friend, Tom West, who publishes the Business Brokerage Press in the USA commented recently. "We have been in this business for a lot of years, and we have watched the progression of disclosure improve greatly. Buyers today are better educated, more sophisticated, more apt to use outside advisors, and generally, have more money to invest. They also tend to be former ?white collar? workers, which is how they developed most of the traits just mentioned. The downside is that many of them cannot make the leap of faith necessary to consummate the transaction. Yesterday's buyers were "blue collar" and more apt to take a chance. They bought bars, small fast food outlets, donut shops, etc. Many of the types of businesses they purchased are now million dollar franchise offerings. They had less money and less knowledge, at least, about the financial aspects of a business; however, they had courage, people skills, and a positive attitude. And, another plus, they didn't have to make "mega" bucks. The jobs they were leaving didn't pay so well that a business couldn't replace their previous income - and then some. The biggest change, in our opinion, is the change in the business brokers themselves. They are better educated and more knowledgeable. They are not as people-oriented as years ago - in other words, they are less "salespersonlike," if that's a word. In addition, the rules of the game have changed. "As always, spot on Tom!" FAIR MARKET VALUE AND OTHER STANDARDS When appraising businesses the most commonly used standard is Fair Market Value (FMV) - or the "willing buyer, willing seller" concept. One definition is: "the amount at which the business would change hands between a willing buyer and a willing seller when neither is acting under compulsion and both have reasonable knowledge of the relevant facts." Several points should be noted from this definition: - the amount - FMV contemplates a cash price for the business - the availability of terms (e.g. vendor finance) can significantly skew the price achievable. - change hands - FMV envisages a notional open market where an actual transaction takes place between arms-length parties. - willing buyer - i.e. ready, willing and able to settle the purchase. - willing seller - again the vendor must be able to sell and ready to meet the market. If the seller won't meet the market then effectively he/she has bought the business themselves. - compulsion - FMV considers a notional perfect market. Value is an opinion. In the real world, price may vary from value according to the negotiating skills and the motivations of the parties. It is rarely an even contest. - reasonable knowledge of the relevant facts - obviously the owner will be more knowledgeable about the business than the prospective buyer. This is one of the reasons industry buyers may pay a higher price than someone without experience in the sector. FMV is more complex than many think. Its application to the subject business will involve subjective judgements. Depending on the particular engagement, other standards of value may be more appropriate or mandated. These include: fair value, special value, liquidation value, firesale value, going concern value, and intrinsic value. |
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