Diligence makes the deals count

GOOD FOOTING: Hawke's Bay's Ed Connolly knows well when a business for sale is a good fit.

DESPITE a successful business career Hawke's Bay's Ed Connolly says he would rather buy a business than start one.

Currently he owns the franchised Guthrie Bowron and The Athlete's Foot chains in New Zealand, which he bought.

Previously he scoured Europe looking for companies to buy for United States venture capitalists and in the UK he was a director of a £3 billion company that was sold.

Buying for the venture capitalists involved a lot of cold-calling after scouring business news and networking.

"That tells you that somebody might be in trouble," he said.

"We were more vulture capitalists than venture capitalists.
"Their model was to find a business that was struggling and use their retail skills to turn it around."

He said selling to another business in the same industry was always the most profitable way to sell, as well as buy.

"If you are already in business you would look for companies that would add value and try to avoid geographical overlaps.

"You are looking for somebody in the same market, ideally weakened, that has a good synergy in terms of geography."

By sharing infrastructure savings could be "massive".

"There must be an element of trust. It is about a fair price, not trying to screw someone in terms of the price."

He said emotion was part of the deal, particularly in New Zealand.

"They tend to be much more concerned about the people remaining in the business. It can be an important part of the deal.

"Another issue is if you are buying, particularly if it's a small business, you must make sure the individual you are going to buy from has got something else to do."

He tells of an Auckland food outlet where a good price was paid and a standard restraint-of-trade agreement signed, but the vendor set up in opposition under his girlfriend's name.

"Nasty little things like that do happen."

From a manufacturing point of view, economy of scale was the prime motivator for buying another business.

"How can we have our machines working more efficiently, which might mean shutting down some of the factories and just putting more volume through one plant.

"Efficiency runs a manufacturing takeover and in retail it is about geography.

"I can't stress enough that you have to have a willing buyer and a willing seller. If they try to screw each other generally the deal doesn't happen.

Most deals fell over "because of the people at the top and not industry logic".

"They say they 'know it's quite a good thing to do, but I'm quite happy where we are and I quite like what I'm doing, it gives me a reason to get up in the morning, I am not convinced you are going to look after my people' etc.
"They are some of the things you should get through right at the beginning, so you're not wasting each other's time."

He said the more money a company made the greater the multiple used to decide a sale price "but the professionals say there is no standard multiple - it is what people are prepared to offer and accept".

"If the purchaser is a trade buyer - somebody in that category - they can always pay more than a venture capitalist coming in for the first time. He doesn't get the synergies."

He said an increasing number of businesses were being sold but not an equal number being bought.

"You have all these baby boomers coming towards retirement looking to sell their businesses. The issues are an unrealistic sale price and younger people don't necessarily have the financial wherewithal."

The next generation was "about experiences rather than personal possessions".
"Many would rather go and have a great holiday rather than put a deposit on a house. If they are not building equity and security then when they go to bank and say, 'I want to buy a business', the banks says 'you have no security'.

"There is a real issue in finding people with money to be able to take on businesses from older franchisees and all sorts of schemes are developed whereby it is a partnership between the new franchisee and franchisor."

He said a potential franchisee recently pulled out at the last minute.

"It is a big leap of faith signing a big cheque over.

"I must admit I had second thoughts about buying The Athlete's Foot at first.

"It was a big chunk of money, but you have to back yourself and be confident that you can turn it around."

Bayleys business broker Tony van Camp sells businesses for between $1 million and $10 million.

He said there were about 70 things to look for in a business while "quantifying the risk around future-maintainable earnings".

"You look at those 60 or 70 things and they beg some more questions.

"If it is very risky it is hard to sell. If the earnings are safe and present a fair return on investment to the new owner, then it is easy to sell."
He said a lot of small businesses are "hugely reliant on the owner".

"They are more jobs with contingent liability than they are businesses."

While profit was important, many people went into business for a lifestyle change, which wasn't always a good choice.

"There seems to be a real Kiwi mentality of leaving a $80,000-a-year/40-hours-a-week job and then go and work 80 hours a week for $40,000."

Most good businesses had infrastructure "and the owner can go away for two weeks and come back to everything still the same".

The safest, and therefore more valuable, businesses were often based on the necessities of life like food and toilet paper, a very high barrier of entry for potential competitors and offering surety of customers and suppliers.

"They have key staff that run the business and everything is right with them - they tick all the boxes."

Adrienne Pierce has smoothly sold two business.

The first was Bay Nursing Network, supplying relief staff to rest homes, ACC and the
Napier and Hastings hospitals

The Hastings district councillor had contracts with rest homes which she sold to buy into childcare business PORSE.

When she exited PORSE she sold to a fellow shareholder.

"The value was around the size of the business and assets. We had a number of properties which were easy to value," she said.

"We only had one customer, the Ministry of Education, so if they pulled the pin ... "

A purchase price was arrived at "by picking a number" and negotiating further.

She said personal relationships were key.

"I have clients in my current business that would probably choose to use another supplier if I sold."

She said "getting your books in order" was a prerequisite to any sale.

"It is a big process to go from living and breathing a business to getting rid of it."

After her nursing business she said she tried to buy Havelock North's New World supermarket, but was turned down at a Wellington interview, she recounts.
"How much you want?"
"You don't fit our criteria."
"What's your criteria? I'll try to be whatever your criteria is."
"You'll need to start stacking shelves."

She said she was devastated and looked at buying a Levene franchise "but I couldn't buy a business where the rules were already written".
Chris McLean said a good franchise was a good stepping stone to independence.
He started design business Printing.com's Onekawa's franchise and just one year later bought printing.com in Ahuriri along with No9 Marketing and Design.
"It put us ahead a number of years," he said. "There are more opportunities, more customers and a bigger database."

A confidentiality agreement was signed before he could look at its books "and from there we negotiated through the agent".
He said there were few assets - the sale was mainly goodwill.

"You hope, I suppose, that the customers will carry on with you as they had for a considerable time - No9 has its 10th anniversary in June."
He said it paid to do a lot of due diligence and ask a lot of questions on things like customer spend, customer history and contracts in place.

After an offer was made, conditional on another round of due diligence making sure the answers to earlier questions were correct, "we handed over the money and took over".

"To be perfectly honest there hasn't been any surprises. The business came with a good design team therefore the risk is pretty minimal from my point of view, albeit it can be scary at times when you have days when not a lot of business comes through the door.
"But then again you could be a sales rep for somebody and not sell anything, so they fire you.

"The biggest thing for me, going into business, is I enjoy making my own decisions and just do what I want to do.
"I know I have to keep my finger on the pulse all the time and where we are at from a money point of view.

"When I wake up in the morning I can't wait to get there to get things done - that's the difference between when I used to work for someone.
"This is my own personal thing. I've never had as much energy as I have now."