Renwick Business presents: How to sell your business webinar Wednesday 30 September 2020 at 10am
Interested in SELLING YOUR BUSINESS?
The webinar covers everything you need to know about Selling a Business in South Africa. Learn how to prepare your business to sell, understand business valuation methodologies, how to facilitate a due diligence and the sequence of documentation required throughout the process. Complete the below form to book now:
September 29, 2020 /
/ in Workshops & Events
Profitability combined with positive cash flow is key to your business’s long-term success and viability. Profitability is important to the concept of solvency and to that of a going concern.
How well is your business performing? Does its performance seem to be getting better or worse? Is your business making money? How profitable is your business compared with its competitors? These are all questions you can easily find the answers to by analyzing your profitability ratios. These ratios are used not only to evaluate the financial viability of your business; but are also essential in comparing your business to others in your industry and to identifying trends in your business by analyzing the ratios over a specific period. Profitability ratios enable you to examine how effectively your business transforms sales revenue into profits and can be broken down into three commonly applied ratios: gross profit margin, operating profit margin and net profit margin.
Gross Profit Margin:
Formula: Gross profit / Revenue
Gross profit measures how much sales income a business has left over after it covers the cost of goods sold (COGS). Gross profit margin indicates the gross profit as a percentage of revenue and is calculated by dividing gross profit by revenue. This percentage value indicates the proportion of revenue that is not consumed by the direct costs of producing the goods or services for sale. A higher gross profit margin indicates efficient processes and that a business is successfully producing profit over and above its’ costs. A lower gross profit margin may indicate that there are problems within the business, such as overpriced production inputs or under-priced products.
Operating Profit Margin:
Formula: Operating income / Revenue
Operating income takes gross profit and subtracts all overheads, administrative and operational expenses. Operating profit margin measures how much profit a business makes in sales, after paying for variable costs of production but before paying interest or tax i.e. earnings before interest and taxes (EBIT). It is calculated by dividing operating income by revenue. This is a more accurate indicator of a business’s performance than gross profit margin, since it accounts for not only the cost of sales but also the other important components of operating income, such as marketing and other overhead expenses. If your company shows a low operating profit margin (especially if your gross profit margin is healthy), it might be a sign that you are spending too much on operating costs. By analyzing this margin, you can better assess your ability to expand your business through additional debt or other investments.
Net Profit Margin:
Formula: Net income / Revenue
Net income is your business’s total profits after deducting all business expenses including interest and taxes. Net profit margin measures what percentage of a business’s sales is actual profit, after accounting for the cost of goods sold, operating costs and taxes. It reveals how much of the money your business earns makes its way to the bottom line. A high net profit margin typically indicates a company that is operating successfully and doing a good job managing costs and pricing its’ goods or services. A business with a higher profit margin than its competitor is usually more efficient, flexible and able to take on new opportunities.
Financial ratios allow you to evaluate your business’s performance, compare it with other similar businesses in your industry and uncover areas needing improvement. Ratios are used to gauge solvency, liquidity, operational efficiency and profitability of your business. Internal and external users rely on financial ratio analysis to get an in-depth understanding of a business’s financial position. Internally, it can be used by business owners or managers to monitor performance and pinpoint strengths and weaknesses from which new strategies, initiatives and goals can be formed. Externally, it can be used by financial analysts, investors, creditors, suppliers, banks, business brokers and potential buyers to gauge the future profitability and liquidity of your business.
While the advantages of making use of financial ratios are apparent, it is important to remember that no business operates within a “bubble” and as such, a number of external elements will make certain ratios more or less useful depending on the economic climate, government actions and market sentiment. A few important factors to take into consideration when analyzing financial ratios are as follows:
- No two businesses are the same and so the way you interpret their ratios should reflect what sector they operate in and their size.
- A business can change overnight which can render analysis of their historical performance irrelevant.
- Many businesses are impacted by seasonality factors and not factoring this into the analysis can lead to a false interpretation of the results.
- Financial statements are often manipulated to show a position which is better than the actual and any ratios calculated on such financials will also result in an incorrect analysis of the business.
Financial ratios can be broken down into four main categories: 1) profitability, 2) liquidity, 3) operating, and 4) solvency ratios. These ratios all work together and need to be applied and combined with other metrics in order to properly evaluate and analyze a business to get a complete picture of its’ financial performance and prospects.
We will be taking a closer look at these financial ratio categories in upcoming articles to ensure you have the necessary tools required to keep your business’s financial health in check
Renwick Business presents: How to buy a business webinar Wednesday 26 August 2020 at 10am
Interested in BUYING a BUSINESS?
Join our FREE Webinar that covers everything you need to know about buying a business in South Africa. Learn how to identify the right business, verify business valuations, complete a due diligence and access funding. Complete the below form to book now:
August 1, 2020 /
/ in Workshops & Events
There are many advantages of buying a business vs trying to start from scratch. The investment in a well established business is often less than the cost of growth in a startup. It is also a much faster route to acquire a market share then trying to grow organically. An established business will generate profit from day-1 and will provide access to cash flow.
Buying an existing business offers a good foundation for growth through an established brand, existing customer base, operational processes and procedures, supplier relationships and an experienced team. Unlocking potential in an established business can be more viable than pursuing an opportunity to start a new venture, depending on the nature of the business, its profitability and scalability.
It is however still just as important to do your research and ensure that you complete a thorough due dilligence
on all options.
October 18, 2019 /
/ in Buying a Business
Before making a final commitment to an acquisition, it is essential to complete a thorough Due Diligence. Here are a few important things to consider when completing a due diligence. Be sure to inspect all aspects of the business before moving forward. Pay attention to detail and consult with advisors where necessary. Your experienced and qualified business broker will guide you through the process, making use of checklists and their wealth of knowledge related to the due diligence.
How is this business operated, what are the daily weekly and monthly requirements to operate the business? What is your time requirement in operating the business? Where is the business located, are the premises leased or owned? If leased, is the landlord aware of the sale and what are their approval requirements and lease terms? Is there an experienced team and will they be staying on if you purchase the business? Are staff well-trained, are there performance appraisal records to review, are all contracts up to date, are there any targets and incentives in place? Is the business fully compliant in terms of industry requirements, licenses and regulations? What are the key compliance areas for this specific business? In terms of intellectual property, does the business own any unique IP? Does the business have the right to use what they are using? Are there any trademarks and or copyrights or patents in place? If purchasing a franchise, its important to understand the nature of the franchise agreement, training, support and royalties.
When you buy a business, you are also buying outstanding legal issues. It is essential to check if there are any claims, past or pending cases as these will transfer to new owner unless a special include clause is included in the sales agreement. Does the business have a valid tax clearance certificate, have the financials been audited, are there any problems with previous tax returns? What is the financial position of the business in terms of total revenue, gross profit and net profit figures and what is the cash flow requirement? What are major expenses in the business? Does the current owner draw a salary from the business and are there any discretionary earning that you need to be made aware of? What is the status of the balance sheet, what does the business own and what does it owe? Does the business make use of credit and if so what are the credit terms with suppliers? Does the business have good, long lasting relationships with its suppliers? From a customer perspective, are here any testimonials or references to review? Are there customer contracts in place, who are the biggest customers in relation to the total income of the business? Is customer support or spend related to a personal relationship with the current owners?
Pay careful attention to the DD and take the time to do it properly. This is your last chance to ensure you are entirely happy with the business to proceed with the purchase. The DD is signed off by all parties and is a binding addendum to the sale agreement.
September 5, 2019 /
/ in Buying a Business
Prior to the Due Diligence process (after having identified the business you intend to purchase), there are a number of important questions to ask the seller when considering a possible acquisition.
- Why are you selling the business?
- How long has the business been on the market for?
- Who knows the business is for sale (competitors, employees, customers)?
- What is the average turnover of the business?
- What are the net operating profits of the business?
- Who are the biggest competitors in the market?
- What is the business’s value proposition and unique selling points?
- What are the trends in the industry?
- What are the average industry benchmarks?
- What can a new owner do to increase profits?
- Why is the seller not implementing the answer to the previous question?
- What sort of training will be provided when taking over the business?
- What will the period of handover be, to provide support to the buyer?
- What does the seller intend to do after the sale of the business?
- Will the be willing to sign a restraint of trade?
April 29, 2019 /
/ in Buying a Business
The first step in successfully acquiring a business, is to understand your affordability. Many people begin their search for a business without first considering their financial position in terms of their personal balance sheet and net income requirements from their new investment.
This of vital importance to determine what you can afford as a deposit in relation to the total purchase price, as well as which funding options you could pursue to raise the balance and what the cost of capital impact will be on the business you intend purchasing.
Depending on the size and nature of the business and if it is part of a franchise, there are specific requirements in terms of the purchasers affordability. In general it is expected that the purchaser is able to provide a 40% deposit of the loan amount required.
Certain franchisors also require the purchaser to have additional unencumbered cash available for working capital purposes. In order to determine affordability a review of personal income, expense, assets and liabilities is required.
The following information is generally used to complete an affordability assessment:
Assets (present values of):
- Life Assurance Policies
- Listed Shares
- Credit cards
- Unencumbered cash
Liabilities (amounts owing):
- Mortgage Bonds
- Lease agreements
- Bank loans
- Loans from other financial institutions
- Balance due on Credit Cards
- Balance due on clothing accounts
- Other liabilities
- Allowances in cash
- Investment returns
- Salary – spouse
- Tax – PAYE / SITE
- UIF (includes spouse’s UIF)
- Medical Aid
- Rent / Bond
- Lease agreements
- Loan repayments
- Insurance premiums
- Life assurance premiums
- Electricity and water
- Rates and taxes
- Telephones including rental, cellular, internet
- Planned Savings
- Credit Card accounts
- Clothing accounts
January 31, 2019 /
/ in Buying a Business
There are many different methods used to value a business, most of which conclude similar results, however it is ultimately subjective and based on what the sellers view of the value of the business is, and what the buyer is willing to pay. There are many factors which have to be taken into consideration such as:
- The financial position of the business (good or bad)?
- How long has business been in operation?
- How long has the present owner owned it?
- Are their audited financial records for the business?
- What condition are the assets in?
- Is there a renewal option on the lease?
- Are the products or services in demand?
- Are the products being marketed effectively?
One of the most effective ways of valuating a small to medium size business is to use the following formula, which over the years has proved itself in the business broking industry to be fairly accurate. The method is based on using the average of three valuations namely; Extra Earning Potential (E.E.P.), Return on Investment (R.O.I.) and the Payback Period.
- Extra Earnings Potential (E.E.P.) – The extra earning potential is the extra one expects over and above a salary, plus the investment income from banking the money available to buy a business when one takes on the risk of owning that business.
- Return on Investment – The return on investment is the rate of return one receives from investing the capital cost of the business taking into consideration the risks associated with that business.
- Payback period – The Payback Period uses an experienced “guess” as to the number of months one would expect to take to pay for the business out of the monthly profit. When making use of the above formula there are certain “cap rates” which apply and are most important when valuing a business.
As a professional business broker, it is our responsibility to advise clients on the valuation of their business. Based on the complexities and subjectivity, we also advise our clients to have their accountant or auditor assist with valuation inputs, as they have a better view of the businesses historical financial position.
Complete a Quick Business Valuation or request a more Comprehensive Business Valuation on which to base strategic decisions related to SELLING or GROWING your business.
There are many important factors to consider when buying a business. An initial assessment of the business will assist you at determining if it is an acquisition worth pursuing. The starting point is for the buyer to ask themselves the following questions:
- What skills or expertise do I have?
- What kind of business am I best suited to?
- How much liquid cash do I have available?
- What do I need to raise in finance?
- What income do I require from the business?
- How many hours do I have to spend in the business to earn the required income?
- How far am I prepared to travel?
- How will this business affect my family and leisure time?
If you don’t have a gut feel for the business, then you shouldn’t buy it. A buyer should always buy a business that they feel they can improve on, which has potential. They should complete a detailed due diligence on the business to verify figures and profitability. Below are a few of the advantages and disadvantages to be considered when buying a business:
- Immediate profits – don’t have to wait to establish profits. Average estimated time is 18 months.
- Less risk – success of the business model is already proven
- Base to build on – new owners drive can increase profits and growth.
- Hiccups ironed out – free of start-up problems + you have existing clients, employees and suppliers etc.
- Smaller capital outlay – you may be able to buy an existing business with established profits for less than starting a new concern.
- Assistance from seller – 99% of sellers stay on in business for a period of time to assist buyer with takeover and to ensure continuity.
- Problems – you could be taking over problems someone else has created.
- Location – maybe not situated in good position.
- Future area developments – maybe not conducive to business sustaining the market, products etc.
- Time factor – minimum of 3 quotes required by bank for equipment required + one still has to find suitable premises
Other important points to consider when buying a business:
- Always remember that CASH is KING, look carefully at the figures and concentrate on the cash flow rather than on the NET PROFIT.
- Buy a business you can improve on. If there is no potential to grow the business, don’t buy it.
- Make the decision to buy yourself, don’t rely on an advisor.
- Ascertain what the appropriate method of financing the business is.
- Identify any major problems that may exist in the business and see if it can be minimized or eradicated.
- Seller finance in most cases is a form of protection, so it is important to concentrate on the terms of the agreement rather than solely on the price.
- Establish what the exact reason is for the seller wanting to sell the business
- Think creatively about the future and buy something you are going to be proud of.
- Don’t procrastinate, GOOD BUYS are GOOD BYES if you wait too long!
October 31, 2018 /
/ in Buying a Business