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Restraints of Trade Market ReportOur business sales have steadied this month i.e. good, but not great. This reflects the shortage of listings not an absence of buyers. Where are all the ‘boomers’ looking to reap the rewards of their efforts and spend their time golfing, travelling, and relaxing? (Who am I to ask this question?) We are still exuberantly optimistic about the New Zealand economy. Employment is up, migration outflow is lower, and most primary sector export prospects are healthy. Book Review “the value of nothing – mastering business valuations” by Julian Roche (2005) is a compact, commonsensical, informative and entertaining book on business valuation. Early on he differentiates between “elementary” and “advanced” business valuations – with the latter being more about moving from science to art and from theory to practice. He recognises the benefits and limits of various appraisal methods and how they interplay in the real world. He asserts that intellectual curiosity is a pre-requisite for competent valuers and “rigidity of thought and addiction to spreadsheets combined with a trusting nature are the two vices to be avoided.” He argues strongly that something is only worth what is paid for it, that the market is the ultimate test, and that all valuations are only estimates and judgements. And he recognises that buyers and sellers are human beings and will also be subjective. Interestingly, the largest chapter is on “Valuation Using Ratios”. The most important development in business appraisal practice in recent years (particularly in the SME sector) has been the advent of transaction databases such as Pratts Stats and BizComp in the USA and BizStats in New Zealand. A general rule is that ‘people will pay no more for a specific asset than other similar assets are currently selling for’. i.e. the principle of substitution. Rightly, Roche recognises that stats are persuasive but not conclusive. It is rare to find an identical business so subjectivity comes into assessing the value impact of the differences. The more transaction reports available and the more homogeneous the businesses are then the more useful the data is. The Direct Market Data Method has been endorsed in recent years by such valuation luminaries as Shannon Pratt and this book confirms that in many cases “it is by far the best approach to take.” “The value of nothing” would be a worthwhile investment for any business valuer, accountant, or business broker. Restraints of Trade The standard Agreement for Sale and Purchase of a Business (REINZ and ADLS) provides for the business owner entering into a restraint of trade to not compete with the buyer for a certain period within a certain radius of the business premises. The seller undertakes not to be involved in any similar business in any way whatever during the period of the restraint. Business buyers are purchasing the future income stream of the enterprise. This restraint provision protects them against the previous owner attracting customers from within the stated area. This is particularly important where the seller’s personality, skills, and relationships have been important to the business success. The extent of the restraint of trade will depend on the circumstances. For a manufacturer or wholesale / distributor a nationwide restraint may be justified. For a fast food outlet in a Queen Street food court 400 metres may be sufficient. Restraints of trade need to be “reasonable”. The courts will consider the term, geographic scope, the nature of the business, and the consideration paid. Business owners who shuffle on entering into a reasonable non-compete clause will scare off a prudent buyer. The restraint may be an important element in the buy decision. |
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