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Baby boomers have stamina In a recent newsletter we questioned surveys that predicted a flood of businesses coming on the market as baby boomers reached their 60?s and retired. We maintained that these ?boomers? were living longer and healthier, many had married later and had families later, and that business ownership gives them a purpose in life as well as continuing cash flow.More recent surveys show an increasing number of 60+ year olds putting off retirement as they are hit by the economic slowdown and more financial stress. Where to invest given the failures of investment companies, the volatility of the sharemarket, and the slump in housing values? Maintaining their lifestyle in retirement looks increasingly risky. Where economists were forecasting a drop in business values the reality is that there will fewer businesses on the market and more buyers? and a consequent rise in prices. Replacement salaries? All valuations are opinions ? and all business valuations will involve subjective judgements by the appraiser. Capitalised earnings is the most commonly used method in valuing businesses and in court cases in N.Z. Conceptually, it is a simple calculation: value = earnings divided by an appropriate capitalisation rate. There are various earnings levels but EBIT (Earnings Before Interest and Tax) is usually the level used for capitalised earnings. Arriving at the EBIT for an owner-operated SME mandates that the appraiser must deduct a notional replacement salary for the owner commensurate with the skills, experience, and responsibilities required for the position. With most SME the owner has a wide range of responsibilities and few management layers. Too often the replacement salary is under-estimated and this can seriously skew the opinion of value. If a realistic salary is $30,000 more than ?guessed? and the cap rate is 25% then the valuation will be over-stated by $120,000! A prudent appraiser will research the market to establish a reasonable replacement figure. Why deals ?crash?? The economic downturn has lead to more transactions falling apart. Buyers are more cautious, conservative, and slower to make commitment. Financiers likewise. Sellers need to be very aware of this. They need to have up-to-date financials, full fixed assets lists, a secure lease, and contracts in place with employees, suppliers, and customers where appropriate. They need to avoid ?surprises? and be totally honest and open with their business broker and professional advisors. If full information is not available immediately the deal can lose momentum and the buyer gets ?cold feet?. Distrust can develop between the parties. One way business brokers add value to the sales process is their understanding of the problems likely to arise, the importance of moving the sale along, and their experience in handling the emotional issues. |
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