Different Ways To Value A Business
One of the services we can help with is business valuation of a prospective purchase. A couple of the ways that you might value a business is a multiple of profit.
In the technology space, it becomes less about profit or revenue. It can become more about what’s the value of this asset, because quite often there won’t be. If we have a business that is making a loss or those sorts of things and when we’re in the acquihire so we were acquiring a business for the talent, we might go back to revenue rather than profit as well. Generally, 90% is a good indicator of the profit multiple versus revenue.
We’ve got multiple of profit and multiple of revenue, and then kind of whatever someone will pay. A lot of it has to do with what it’s worth to the buyer. It’s important that one of the first two options might start the conversation.
If we are looking at profit, there’s this thing called EBITDA, an acronym for earnings, also known as profit before interest, tax, depreciation and amortisation. Depreciation is the write off of your assets, let’s say cars or equipment that you own. Depreciation is claiming a portion of that each year. Interest is interest on any debt. Tax, if it’s a company, companies pay tax, trusts don’t if you’re acquiring from a trust. Also, you need to remove the owner’s benefits. If it’s a small business that the owner might be putting their car through or their mobile, which you don’t need to pay for if you acquire it. Any other benefits to them, need to be taken out or added back to the profit figure.
You need to pay the owner, if the owner’s working full-time in the business, but if a lot of the clients are structured as trusts and usually we take the profit from the trust and distribute the profit. We don’t pay a salary before the profit, so we need to go and adjust that profit figure to pay a market rate salary and we need to hire someone to pay for that, to run that business. So you need to replace the current business owner and It could be a process in adjusting that profit figure.
Watch the full webinar, ’Aquire a business‘ at https://learning.benwalker.com/courses/acquiring-a-business
Is A Novated Lease Right For You?
Two types of novated leases are fully maintained, which involves maintenance, fuel, tyres, servicing and non-maintained.
The thing with a novated lease is that whilst it does have some tax benefits, when they’re put up against a commercial chattel mortgage, the cost of the novated lease per month is generally far higher than the cost of a chattel mortgage per month.
When you take out the tax benefits that you get through the novated, it actually works out to be cheaper generally to go to a straight chattel mortgage, because the cost of the novated is so high the tax benefits don’t cover the benefits against the chattel.
It works out better to go with chattel and forego some of that tax benefit because you’re paying so much in repayment to get access. It’s a deal-by-deal basis but that’s what we’ve seen in regard to novated leases. They’re not something we encourage people to do, but it depends on your circumstance.
Watch the full webinar, https://learning.benwalker.com/courses/asset-finance
The 2 Main Ways To Purchase A Business
The first one is to buy the actual business or assets of the business versus the shares in a company or the units in a unit trust. They’re kind of the two main ways.
The Business or Assets, the accounting word for that is ‘goodwill’ and it is the most common way. You buy the seller’s business into your own entity in most cases versus the shares or units where they run in a company structure and you just buy the shares off them, whether in part or in full depending on the structure of the purchase. And there’s pros and cons between both.
Watch the full webinar, ‘’Acquiring a Business’ at https://learning.benwalker.com/courses/acquiring-a-business
How To Approach Exclusivity In Acquisitions
On the recent webinar, we were asked “Is that period of exclusivity, a bit like a property contract?”
We can do it in two ways. We can do it either in the Terms Sheet, which is the exclusivity. The problem is it will end at some point. So generally we see exclusivity between 1 month to 3 months. That’s a general exclusivity period. The problem is when you get to that period, your generally just on a Terms Sheet.
You’re not forcing the seller into the transaction, because they haven’t got enough in terms of the meat or the detail of how it’s all working. If you want to go through that process and you want to lock them in, You need to go through the transaction documentation, which is the next step.
Transaction Documentation is the sale of a business contract or the share sale contract, and it might also be employment or consulting agreements. If you’re keeping on board the seller for a period of time, it might be shareholders agreements. There might be a few things that are part of it but let’s just think of it as sort of just broadly, the sale documents.
You can enter into the sale documents quickly and then have a right to pull out, On the basis of your due diligence findings or finance or any other terms. We call those conditions, Precedent. It’s like a funky legal terminology for giving you the right to pull out. So in relation to the question there, you would actually need to exchange contracts first. And that can be a really good approach, sometimes it’s not.
So, What’s the best way to protect you in this situation? Which way should we go?
Watch the full webinar video at, ‘ Acquiring a Business’ at https://learning.benwalker.com/courses/acquiring-a-business
This Is How Banks Look At Funding
A little bit of a rule of thumb, in terms of how banks will look at some of the funding, the first one there is a bit of a shared risk. Banks are going to want to know that the owners of the business have got some skin in the game. An industry term is ‘hurt money’, which basically looks at a shared risk position so that if the banks and owners are coming in, and both parties are contributing to the success of that business.
That may come in the form of cash. Their buying a business for $200,000, customer puts in a hundred thousand, bank puts in a hundred thousand, fairly straightforward sort of transaction or an equity contribution. That equity may come from a residential or a commercial property. And banks will look at those up to 80% of the value of the property for residential, 70% of the value of property for commercial. Important to note, less any existing loan that is already against that property. It is looking at an equity position up to those numbers.
Potentially, it may be a situation where if there’s equity in a property, we actually look at increasing a home loan or a loan against that property to generate some cash to then contribute the cash to the business purchase, as opposed to putting the property in as security. That becomes a conversation we’ll have about the positives and negatives of each option and which way it works for the business owner to structure their funding. You may end up with, if a business is under a particular franchise agreement that may have preferential funding with the bank, there could be security around that that allows the bank to get a bit more comfort.
If you’re buying a McDonald’s franchise, for instance, you’ll probably get a higher lending than a 50-50 because of the brand behind that business, as opposed to maybe setting up a florist in a strip of shops, that would probably book back to a 50-50 side of things. So the franchise or industry or brand behind a business can also help in terms of how much equity you need to contribute to that purchase.
Watch the full webinar, “Asset Finance’ at https://learning.benwalker.com/courses/asset-finance
The Importance Of Knowing Your Numbers In Detail
“Not enough detail,” is kind of caused by a couple of things. When you set up a Xero account or a chartered account, the list of expenses or the list of income, will only give you a standard list.
Let’s take subscriptions for instance, we’re a service business and we have at least 20 software subscriptions that we pay for. If I had one account that showed me subscriptions, I’m not going to really be able to make decisions or do much with seeing one number there and it’s fluctuating up and down. And so, one of the things we’ve done and we encourage you to do is, for big grouping expenses like that, is actually detail, “Okay, we paid for Xero, cool; that’s a separate line item. We pay for HubSpot, cool; that’s a separate line item.” so we can see what that expense is doing month to month.
Instead of having a nice tidy P&L on one page, you might have a three or four page profit-and-loss statement. But you’re going to get more from that than you are going to get from that one page.
It doesn’t really tell you too much detail.
This ties in with the bookkeeping, all of this stuff is related. Your bookkeeper will then need to take a step further and make sure they’re coding what the certain expenses are to the right account.
There’s a bit of work involved in setting all of that up. But once it’s set up, it is a lot easier to make decisions and keep an eye on expenses so that they don’t get away on you.
The reason why we say ‘not enough detail’ is because people always view the high-level version and they can’t get, “I don’t understand, why is my expenses suddenly 40 grand for one month, then 10 grand for another?” The reason why we say this, is because you didn’t spot the detail level to bookkeep first.
It doesn’t mean that you have to review it at every single dollar. Yes, you can. It depends on your budgeting and sizes of expenses, but once you get that first bit out of the way, the detailed instructions on how to actually keep your P&L healthy and clean, then you can start having conversations at the higher level, trusting the numbers. It’s all about trusting those numbers, and having that detail gives you that trust.
Catch the full discussions and watch the full webinar, ‘Numbers for non-accountants’ at https://learning.benwalker.com/courses/NFN
Winter Is The Season Where Millionaires Are Made
The right strategy at the wrong time is the wrong strategy.
You need to know what season we are in. Economically, you’ve got it wrong. There are only one or two people that actually get it right. Where are we right now? We’ve had a downturn and uptick. There’s a growth wave and this is normal. So we are absolutely in winter and moving more into winter.
Fortunately in this country in Australia, we haven’t been harboured. We’ve been harboured or sheltered from a lot of drama that’s going on so we haven’t had as big a dip. But this year, the rest of this year is still going to be funky. There is still going to be things that are going to happen. And as we turn and the market will turn around December this year, we’re going to have one of the greatest bull runs in our lifetime, if not the greatest, through to 2026, 2027. We have this window of opportunity to play your cards right.
The decisions you make today, the things you literally make today, are going to make a massive difference to your future. The way you play your cards right now, it’s a season of winter, you should be doing winter activities, not spring and not summer. If you do that, you’ll run out of cash, you’ll be doing the right strategy at the wrong time and you’re going to miss the boat. And you’re going to go, “Oh, I could’ve, should’ve, would’ve.”
Has anyone else ever felt that they had imposter syndrome?
The only people that don’t have imposter syndrome are imposters. So whatever mindset issue or whatever story it is, Now is the time to get over it and just do the work that you need to. Because the next sprint, between now and December this year, are absolutely vital in the life of your business.
You play your cards right and you’ll create intergenerational wealth for your business, for your family, and those other people around you. So I want to encourage you to bring this high degree of urgency to everything you do. I want to give you a pathway that you can move out and keep in mind that more millionaires are made in the season of winter than any other season. It’s the people that play their cards right now will reap the rewards later.
Watch the full webinar, ‘How to Navigate 2021’ at https://learning.benwalker.com/courses/how-to-navigate-2021
The Rules For Claiming Meal Expenses
Something that you can do as a business is to pay a meal allowance for your employees.
The reason why you pay meal allowances is if they went for a business trip, and you send them off for a seminar and you pay them a meal allowance. That meal allowance is usually included on your PAYG summary if it’s above a certain amount.
The ATO releases a ruling or guidance showing what a reasonable amount of allowance is. If it’s below the reasonable amount, you don’t have to include it in your PAYG summary. It’s not considered income but it’s still a tax deduction to the company.
If you’re a business owner, the big benefit of doing that is if you, as an employee of the business, and you work overtime, What they can do is they can pay the overtime meal allowance in their name, not get tax in their individual name but essentially get that deduction in the business as a meal allowance.
Here’s a question from Jen, “Can you claim the whole amount as a deduction as well?”
It depends on what level are you entering it at. If it’s above the reasonable amount, you just need to claim the expenses against that allowance. Obviously, those expenses have to happen in the first place for you to claim that. If it’s below the reasonable amount, you don’t even need to include in your PAYG summary. It’s not taxable.
Watch the full webinar, ‘Numbers for non-accountants’ at https://learning.benwalker.com/courses/NFN
The 5 Keys To Total Financial Control
When I was putting this together, I kind of felt there were five main things to talk about. And they’re in this particular order for a reason, because we can kind of build on each of the topics as we go.
The first one, bit of the old Simon Sinek, but I want to start with Why.
Why do you want to kind of talk about this stuff? Taking a bit of control of your numbers and that sort of thing. Often a boring topic, and the amount of times, if I had a dollar for every client who told me I’m not a numbers person, I would’ve retired many years ago. It’s interesting that so many people are keen to learn more about this, and I want to encourage that that’s a great thing.
The next topic is Bookkeeping, often an undervalued element in a business. I want to kind of stress the importance of getting this right. We got some interesting slides I want to share on that, and then five big mistakes I see as well.
Cash, I’ve got to say that out of all the feedback we’ve had for the webinar, cash and cash flow is one of the biggest elements that people wanted to learn more about. But we’re going to cover some interesting things that you may not hear from an accountant, or even us, when we’re doing the tax side of things, it’s definitely almost like a financial controller, and an element of what all of these things are, but just not your typical conversation about cash. The idea is to get you thinking a bit differently about your business.
Planning and Budgeting, That second word there, budgeting, might be a turn off for you. At the end of the day, what I want to emphasize is that it gives you clarity. So the result of a budget is clarity, and give you some really good tips on how to use this in your day-to-day management of your business.
And then the last one we’re going to have a look at is Reporting, I often ask clients “How often do you look at your Xero file or your reports?” And very rarely do we get someone who says, “Oh yeah, I review them on regular intervals, and here’s what I look at.”
Watch the full webinar, ‘Numbers for non-accountants’ at https://learning.benwalker.com/courses/NFN
The Acquisition Process - Deal Flow
What are you trying to do? Let’s get a strategy of how you’re getting this.
So you can work out what your targets are, What do they look like? Where are you going to find them? Go find your targets, understand a bit about the business to the extent that you can agree on commercial terms. How are you going to buy it, price and timing of payment. Then you put this out all together in a term sheet. And term sheets can be called so many different things, which is very exciting. You can call them term sheets, heads of agreement, memorandum of understanding, letter of intent, non-binding letter of intent, and so many names for them.
I did a podcast one day on this because someone called me and said “Oh no, not an MOU.” I mean, no, no, I’m talking about a commercial terms document.” I’m like, “Okay, stop! The industry has got to stop.” This is all the same thing.
Find the target, the commercial terms are like you have a conversation with them. Then you come to some sort of initial short two-page agreement. And in that, one of the things that you should be building in is making sure you have the period of exclusivity while you’re kicking in funds to due diligence.
You don’t want to be spending money on advisors if someone is just going to come and buy some business from under you. We get term sheets in place and they’re usually called non-binding but what we keep finding and which is important, some people don’t realise you need legal advice at this point, because we need to make sure it’s working right.
The right place is right in the beginning before you’re starting, because the best place to start with all of these is making sure your current business is strong enough to withstand an acquisition.
It is about making sure you’re super clear about what you’re doing. And I think at that point, you need to get together with your deal team, your accountant, and your lawyer to sit down and get clear on what your strategy is and how your business is looking from a strength perspective before you start it.
Watch the full webinar, ‘Acquiring a Business’ at https://learning.benwalker.com/courses/acquiring-a-business
Get Cashed Up
