29 minute read
Tim Krotiris
HOW TO START A BUSINESS WITH THE INTENT TO SELL
Author:
Tim Krotiris
Founder Philotimo Global
E. tkrotiris@philotimoglobal.com
www.philotimoglobal.com
Tim Kritoris is the Founder and CEO of Philotimo Global. Philotimo works with SME business owners to address challenges in sales and growth, finance and operations, and structure and leadership.
Imagine if we could run an experiment in parallel universes with two sets of identical people who are starting the same business in the same markets on the same day. They have the same opportunities; they have the same starting resources and the same initial abilities. The only difference is that one of the business owners begins with the intent to sell, while the other allows fate and see how it goes to be their guiding idea.
If we fast-forwarded 10 years and had a look at the progress of each business, Do you think there would be a difference?
In reality, we will never know the answer but as business owners thinking about this, it does force us to ask ourselves a different question. Why wouldn’t you start, buy or operate a business with the intent to sell?
The fact is when we build a successful business, we should have also built a valuable asset that has produced income over many the years as well as something we can sell.
What most business owners fail to do is realise the full value of their asset. This ‘failure to realise’ is due to their business no being built in a way that allows the true value to be unlocked. This is such a waste after going through the journey of building a company.
So how do you make sure that you don’t miss out on realising the value of your asset when it comes time to sell?
The first thing to do is at the beginning is clearly understand who would want to buy a business like yours? Who has acquired businesses like yours before and why did they buy them? Once you understand why businesses like yours have sold you can then work out how potential buyers valued these businesses? We call this knowing the key value drivers.
You may be asking why do I have to worry about this from the start and can’t you just figure it out later? The answer is simple: because you should always be looking to maximise your efforts and resources when building a business. Day one is a good day to begin this habit. You may also find that undoing parts of your business can be very costly down the track. It costs nothing to be well informed from the beginning… just a little effort.
Once you understand the key value drivers for the asset you will find decision-making, strategy and basically every function of the business easier as you have a guiding light by always asking does this add or detract from the value of my business if I was to sell?. Having an understanding of the end game changes how you will operate.
Simply build a quality business that becomes a valuable asset. Do this successfully and you will not only have created a great business but have an asset you can sell and reap the rewards of a job well done.
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Having personal experience in buying, selling, and starting businesses can be a valuable asset for a business broker to have. Justin Bunt from MMJ Real Estate has a wealth of experience as an entrepreneur, creating multiple startups to now advising owners as a business broker.
Bsale recently spoke to Justin about his business journey and his advice for entrepreneurs on growing faster. Many owners think a startup is the only way to be successful; his professional experience in business sales has more to tell.
ENTREPRENEURIAL JOURNEY
Justin studied commerce and hospitality at university and worked for Tricon Restaurants, now known as KFC. It was here that Justin met his first business partner, and they embarked on a journey in the hospitality industry.
“I started my first business when I was 23. I decided I wasn’t made to work for somebody else. I wanted to start my own business. I started a business called That Wicked Sandwich shop. [We] both quit our jobs at KFC at the time and built our shop at Meadowbank in Sydney. We built that up from scratch and lasted in that together for about six years.” Justin said.
As many business owners and entrepreneurs can appreciate, those early years were a learning curve for both Justin and his business partner. They worked second jobs to cover expenses, and the business partners soon discovered there was money to be made in catering, which transpired in their following business path.
“The shop transformed into a corporate catering company and was renamed Wicked Foods after a couple of years. We sold it to a competitor, who I ended up working with to grow the business. We actually bought another CBD based catering company as part of that growth.”
“Wicked Foods started in 1993. I sold it in 2000 (and) I went back to work for the guys that bought it, and with them, I started up another business called Ezy Fridge. It was leading into the GFC, and it just didn’t take off because of that. The timing was a big problem with that one. So we had experience in buying an existing business, and we also set up a couple of start-ups along the way with mixed results.” Justin said.
Justin’s experience as a business owner was not solely focused on operating one business. As a true entrepreneur, while working with Wicked Foods, Justin had multiple start-ups and other business ventures on the side. He also went to work for the Department of Health and found he still had that desire of owning a business so he went back to Wicked Foods.
In 2009, the new owners of Wicked Foods gave Justin a share of the business. “I did that for a couple of years, working back at Wicked Foods, growing that business in a marketing capacity.”
“During this time, startup was called ‘Pigeon House 150’ and funnily enough, that was with Martin Lo Surdo, who is now my boss at MMJ. We played soccer together and it was my idea to have a local food wholesaler, we had all products from the South Coast. There is a mountain down here called Pigeon House Mountain and that was kind of the centre of the area where we were getting the food from.”
Justin was with Pigeon House for approximately 4 years while still working with Wicked Foods and when Pigeon House 150 closed down, he took on a more substantial role at Wicked Foods before selling it again in 2019, right before Covid hit.
“I sold Wicked Foods again in 2019 to one of the staff members and when Covid hit, Wicked Foods being in mostly corporate catering at this stage, the business went from turning over $35,000 a week in sales to $1,000 a week overnight.”
“I was still working for them doing their marketing, but even with the subsidies, the business couldn’t find a new way of getting revenue, so that folded pretty quickly actually, which is rather sad because that was a 25-year-old business with 20 staff that lasted not even 2 months after Covid hit,” Justin said.
With Wicked Foods officially shut down and with more time for opportunities on Justin’s hands, Martin encouraged Justin to join him at MMJ real estate and work in business sales. So Justin came across to MMJ in September of 2020. The transition to business sales for Justin was smooth thanks to his varied background in business.
TRAINING TO BECOME A BUSINESS BROKER
“I had to do the real estate training, which took a bit over a year to do on top of working. I think the main thing with business sales is understanding business owners, with which I had enough personal experience.”
“I understood how the business owner’s mind works. I know how to look at a business and kind of see what is going on there pretty easily.”
“Probably the hardest thing is learning new sectors. We’re selling a solar installation business, for instance, I didn’t know anything about that at all. You have got to learn how that all works because the people ringing up about that business do know how it works”
After working in and adjacent to food industries for the majority of his professional career, Justin said that learning a new business every couple of weeks is the best part of the job as a business broker.
“There is a lot to learn in terms of the technical side with agency agreements, contracts, that kind of legal. When I had sold my businesses before, I did my own contracts so I knew a bit about that process, but in most business sales now, you have a buyers lawyer and a sellers lawyer doing a lot of that, and we are just helping make sure it all goes smoothly.” Justin said.
BUSINESS OWNERSHIP CAN BE A CAREER
As an experienced entrepreneur, Justin understands what it takes to build and successfully own a business. As a broker, he has met many business owners and understands their journeys. Buyers' motives are changing post covid, with many new potential business owners coming from varied backgrounds.
“It actually is possible to have a career, or even your entire career could be in your own business and sell it when you’re ready to retire or step back.”
Whilst professionals such as accountants, lawyers, and architects see the benefits of owning their practice or firm. There is an entire section of business ownership that is about management and operations. Whether it's selling a product or service, it can be an effective career move.
“There are plenty of people that have done it for 10 or 20 years. You achieve that dream of being your own boss, that does happen, it isn’t an illusion.”
Often people don't see owning a business as a career move, it is seen more as the chance to be in control of your lifestyle and to make decisions. There is so much variety in the businesses for sale that a buyer needs to have a plan. “It’s important to consider as a business owner how involved you want to be at the start and then make a plan around that from day one. When you buy a business, it would be pretty scary to jump in there when you’re learning everything but if you’ve got a plan in mind to get to the point you want to be, that legendary work-life balance and it is possible.” Justin said.
“It’s not easy to get to that level where you’ve got a business which is flexible, there is that real small business mindset which is that they ‘can’t step back’ but you can, most of the time you can, it’s just hard to do and when they sell the business, the buyer will come in and run it differently.”
“Actually working out why you want to own a business, there are all sorts of reasons for that, controlling your own destiny is a big part of that.”
THE TWO MOUNTAINS OF BUSINESS SALES
Business sales are not just a simple process of finding a buyer and having a conversation:
“There really are two big mountains. One is finding a buyer which can be years of working through hundreds of leads, and dozens of inspections, it’s very different to a house sale. Then once you find them and you think you’re done, then you have the second mountain to climb.”
“The next phase, I call them the 3 ‘L’s the Lawyers, Lenders and Landlords. It all starts again basically once you’re in that second phase and that's where, as a broker, you kind of prove your worth. It’s so easy for things to go off course and no one is objective aside from the broker. We’re not totally objective but we’re more objective than the buyer-seller, lawyer or landlord because we’re
always focused on getting the deal done.” Justin said.
STARTUP VS EXISTING BUSINESS CHALLENGE
Buying an existing business as an entryway to building a startup can be a really cost-effective approach for the right business person. Justin says the key is knowing when and what to compromise on.
“There are usually two types of buyers we see like in a couple for example or business partners, one is the person that sees the potential and one sees the problem. They could be the right buyer, I don’t write off somebody because they see the problem, it’s just about knowing that different approach to those two types of people.” “We had a guy who had a cafe there, he didn’t reopen his cafe after the last lockdown, but he was doing a lot of catering on properties so he kept using the kitchen. We sold the business in the end to someone who turned the cafe into a bar, totally different and was happy to pay a fair amount of money to access the fitout and the space.”
“Buying an existing business and then making a start-up, I think if that buyer had built that business from scratch, she would have paid a lot more money and at least she knew it was in a spot where there would be a lot of customers. It wasn’t a lucky dip, she knew it was going to work.”
You can make better decisions when you understand the business you want to build. It's not always about starting from scratch to achieve your business goals.
“Someone seeing the problems, for example, that the business is on the wrong street or the kitchen isn’t big enough or whatever [it may be] that is obviously harder as a broker to work with. You want to try to make them see that the chances of them finding what they’re looking for exactly is almost zero and that goes back to a start-up point of view. “ Sometimes you will have a potential buyer, who constantly sees problems and wants to start a business from scratch to try and get exactly the vision they are after.
“Theoretically, with a start-up, you can do that, you can build it exactly how you want it to be, but it’s certainly going to cost a lot more than you think and it is something that needs a location and obviously finding a space to rent in the right area can be impossible and if it’s an area that has a good chance of having a successful business then there is a good chance there is already leased out to someone.”
“So you might need to buy a business just to set up in the space you want.”
BUYING AN ESTABLISHED BUSINESS TO GROW THAT STARTUP
Justin recently sold a business in Berry, a small busy tourist town on the South Coast of NSW, to a buyer who wanted to run a business on the busy main strip in town where there were no retail vacancies.
“There are just so many more variables [when starting up a business] and getting to the point where you’re cashflow positive, it is
so hard to predict that when you’re a start-up, you just don’t have the data, you don’t know.”
“Thinking back to that very first sandwich business I set up, I still remember that very first day, 29 years ago, we had no idea when we opened the doors what was going to happen and I think we got about $120 of sales and we were hoping to pay two guys wages. I don’t know what we were hoping for but it was nowhere near what we were going to get.” Justin said.
WHY THE ROI OF AN EXISTING BUSINESS HELPS
Return on investment (ROI) is hard to pinpoint when you start your own business, and there is no certainty in your sales and future earnings. But when you look at buying a business, you have a sales history and the ability to predict your ROI.
“After you’ve paid your own wages is there enough there to get a 30% return?”
“With buying a business versus a start-up, it’s tough to project that ROI in a start-up whereas at least when you buy a business you know you can keep everything as it is, and if that business is returning 30%, that should be a good investment for you.”
A buyer is in a different mindset than the person selling the business. They are excited and passionate about the opportunity they are buying, and can potentially drive profits and achieve their returns faster.
“It’s a nice baseline for you to work off and most people who buy a business, are going to do the job better than the person they bought it off after a little while of learning how to do it, so that can make a really worthwhile financial exercise to get your ROI higher as you learn more.”
“To compare that to a start-up where you just don’t know, you can do your excel spreadsheet ‘if we do this much we’ll get this much profit’ but with an existing business you’ve already got that data to work off of.”
If you require a loan for your business, it is easier to obtain finance when the business has established figures versus trying to get capital for a new venture or startup. There is often a misconception, even amongst accountants, about the level of finance needed to secure and run a business.
“I have someone buying a business and an accountant has told them ‘you need $100k working capital to buy the business’ which is not true. If this business is turning over $30k a week, that profit is coming in week one of ownership, if there is positive cash flow now you don’t need that much working capital and it is surprising that accountants are giving their clients that advice as if they’re doing a startup. “
“Yes, if you’re doing a start-up, you need working capital but for an existing business you clearly demonstrate it has positive cash flow, you don’t need that much working capital.”
“This was a hospitality business turning over that much money ($30,000 a week). You don’t pay suppliers for a month and you don’t pay your staff for 2 weeks, so for the first 2 weeks the only expense they had to pay was their rent upfront, so by the end of those first 2 weeks they have around $50,000 in the bank. They can pay their wages easily and away you go, this you cannot get from a start-up.” Justin said.
Of the choice between buying an existing business or starting one from scratch, Justin appreciates that it is a real genuine choice that the buyer has to make. Justin suggests buying a business that, perhaps isn’t exactly what you want, but turning it into what you wanted, can be the best approach for most buyers.
SELLERS NEED AN EXIT STRATEGY
Selling a business isn’t as easy as placing a for sale sign, signing a contract and handing over the keys. As a business owner, you know the complexities within your business. What needs to be established is an exit plan, whether it's 6 months, 5 years or 2 decades. A plan must be in place, especially if a business has multiple owners.
“You definitely need to have an exit strategy in place, especially if you have a partnership. Most of my businesses have been partnerships and while none of them has ended horribly, it’s definitely better if you know how it is going to work if say one person wants to get out, and even better if you’ve got an idea of what point you want to get out.”
“If there's not a partnership, why wouldn’t you start with an exit plan? Even if you want to run the business for 40 years, that’s still an exit plan, to build it up over 40 years is different to 3 years in and out.”
“I’ve seen a few business sales recently that have been like that, where a person has gone ‘I’m doing this for 3 years’ and they have a plan to tidy it up and that’s quite effective. They want to keep keen and they don't want to get jaded by hanging on for too long. You need a good plan.” Justin said.
An exit strategy is like a contingency plan, so if something happens, be it good or bad, you know what to do next. If your goal is to sell the business for as much as possible, you may sell it once a certain turnover is reached. If your goal is to have a business to support you until retirement, your plan may be to sell when you're 68 years old.
“An exit strategy is not essential but it’s definitely important for a partnership, if you’re running the business yourself this exit can be more of a target.”
“I think it’s always great to have some destination in mind, to have potential Plan A and Plan B and it probably won’t end up exactly like that but at least it keeps you on track.”
CURRENT MARKETPLACE TRENDS
When asked about what his current buyers and sellers are like and if he has noticed any trends, Justin said there is a little bit of everything.
“It’s actually really strong on both sides at the moment, at the end of last year we definitely had a big uptick in people looking to sell and I think there was a lot of ‘Covid lag’. People didn’t want to sell during Covid, nothing wrong with the businesses as such but then they “We went from 5 to 10 enquiries to 20 to 30 from November [2021] and every month has been up at that level. Really strong on that side, to the point where we’re almost at capacity, we should get another broker on board!” Justin laughed.
“On the buyer side, I was a bit nervous in November last year that this volume of seller enquiry was going to be an oversupply, but there has been a new lot of buyers coming through.”
Justin suggested that a lot of these new buyers were looking to buy as a result of stress and burnout from Covid. For example, he has seen a lot of teachers and nurses who are in the final stages of getting out of their careers after experiencing “burnout from working in tough sectors and now they’re buying restaurants and ceramic studios and stuff like that. An interesting little churn is happening.” Justin said.
“There is still definitely acquisition type buying as well, in some industries, it’s not across the board but we’ve seen a bit of that. Because we’re regional as well, we’re definitely getting that ‘Sydney refugee tree changer’ type of buyer this year, that has been really strong. Last year we were waiting for it and it didn’t happen but this year it has.”
Going on to say that he has also
Covid and the subsequent lockdowns, and now rising interest rates, have forced a lot of people to reevaluate and contemplate their careers and buying an existing business can be a great way to change careers.
FINAL THOUGHTS
Owning a business doesn’t need to always be about starting from scratch. An established business has a sales history and a forecast. The opportunity to be successful can occur faster when you have something to work with, like an established business.
Justin's entrepreneurial journey, and experience as a business broker, guide many Wollongong and South Coast NSW owners into their dreams of owning a business. He understands what it takes to own and sell a business so that he can guide his clients through their transitional journey.
To find out more about Justin and the team at MMJ Real Estate, please reach out to them and discuss your circumstances.
www.mmj.com.au
WOLLONGONG
The Region's Only Specialist Business Broker
www.mmj.com.au
MMJ Business Sales & Acquisitions provides businesses for sale in Sydney, Wollongong, Shellharbour, Kiama, The Shoalhaven, NSW South Coast and The Southern Highlands.
In 2019, two of Wollongong's market leaders, MMJ Real Estate and Amplify Business Sales, partnered up to provide a real estate powerhouse like no other in the Illawarra. MMJ Real Estate already offers the most diverse real estate experience for clients in the Illawarra, but has now increased its range of services to include Business Sales & Acquisitions with the addition of the Amplify Business Sales team.
As a result MMJ Business Brokers now have the most businesses for sale and access to the largest business buyer database.
Phone. 04 3757 5200 | Email. info@mmj.com.au | Office. 6-8 Regent Street, Wollongong, 2500, NSW
Transforming the lives of Business Owners & Future Entrepreneurs Is Our Passion!
We are the leader in helping people sell their business and acquiring new businesses. When a business owner decides to sell their business, they need a trusted broker to help maximize the value of their business and sell it at great price. On the other side, future business owners (buyers) need an expert business broker who can help evaluate potential business and franchises.
Specialist agency, facilitating and managing the dynamic process of business and commercial property sales for clients.
We represent business and commercial property owners and present businesses in such a high-quality way that our qualified buyers and investors find it easier to take that next step of making an offer and executing a final contract of sale.
Phone. 07 3221 1441 Email. info@mercury5sky.com Level 19/10, Eagle St, Brisbane QLD 4000 www.mercury5sky.com
WHEN SHOULD YOU CONSIDER FRANCHISING YOUR NEW BUSINESS?
*This article is of a general nature only and is not intended to constitute legal advice or any other advice of a professional nature. You should not rely on this article as legal advice and should seek your own legal and professional advice.
Author:
Bill Morgan
Consultant | Morgan Mac Lawyers
www.morganmac.com.au
Bill Morgan has over 25 years experience in Franchising Law and Commercial Litigation and Dispute Resolution. Commercial Litigation and franchising are complex areas of law and it is important that you seek legal advice.
Franchising is one way of raising capital and increasing market share or geographical reach. Franchising involves the licensing of a franchisor’s know-how, procedures, business model, brand and rights to sell products and services to a franchisee, who in return, pays franchise fees and meets obligations set out in a franchise agreement.
Here are some fundamental things that are critical to establishing a franchise network.
SYSTEM
Entrepreneurs who establish a franchise either create a system or acquire and improve an existing system someone else developed for the supply of products and/or services. The term ‘system’ is essentially the unique business methods, procedures, processes that have been developed to acquire and sell specific products and/or services. Franchising grants each franchisee a right to use that system and imposes on them an obligation not to change or depart from the system. This extends the reach of the business undertaken by the franchise network and maintains uniformity in the way the franchise business in undertaken.
Before you start selling franchises you need to know the system works and that a franchisee can understand the system and follow or apply the system’s requirements.
Not all systems can be easily replicated. For example, you may have an established brand connected to a sports celebrity or have an instinctive knack for certain skills. However, you need to translate that instinctual
knack or brand into procedures that another person can follow to ensure that franchisees can implement the system and are equally successful.
Replication is the process in which all the products, operations process, and marketing is replicated so that it can be uniformly applied and followed in every franchisee’s business.
FRANCHISE UNIFORMITY
Once you have a system that can be replicated, you are ready to grant rights to use that system in return for a fee.
Replication is the result of all franchisees uniformly applying and following the methods, operations, processes, and marketing of the franchise system in the operation of each franchisee’s franchise business. It often extends to acquiring products from a confined range of suppliers to ensure quality control and consistency in what is offered by franchisees to the public.
Uniformity in the franchise network is a very important key to success. Different outcomes lead to disappointed consumer expectations, and this damages the franchise network’s brand and reputation.
You should document the franchise system in an operations manual. This is a means to keep franchisees accountable.
INTELLECTUAL PROPERTY
It is imperative that you simultaneously protect that system by having rigorous mechanisms in place to protect the intellectual property that inherently exists in the system. That is, the products, processes, know-how, trade secrets and formulae to name a few. Trademarks, patents and well drafted legal documentation stipulating the terms and conditions of use of the intellectual property are common mechanisms The success of your franchise business is dependent on many factors and a well established name or brand is one. Having control over the franchise’s branding means you can determine how and when it can be used and this is particularly important when it comes to advertising, promoting and marketing the brand. This is why franchisees are required to obtain your written consent before using the franchise name or logo for advertising purposes.
THE FIRST FRANCHISEES
If you are about to franchise your business system, your current employees are your greatest asset because they are familiar with the business and have tested and tried the system. They may wish to become your first franchisees. Cultivating a happy first franchisee who will act as the brand ambassador is critical to creating a successful franchise network. It is imperative that a franchisor provides incentives and operational support to the first or first few franchisees.
You need to make sure that you will always be prepared to support your franchisees.
It is essential that your franchisees receive training before they commence operating the franchise business. Have a clear training plan and ensure your training is comprehensive. If you do this, you are on your way to having consistency and uniformity across the franchise network.
A source of many franchise disputes is different expectations between franchisors and franchisees as to what support and training the franchisor will provide. There must be clear communications about what support and training will be provided to a prospective franchisee before the franchise agreement is signed to avoid future disputes. Having clearly defined territorial boundaries is important especially as ecommerce becomes the predominant method of sales of products as opposed to the traditional shop front premisesbased method.
In an online sale environment, you can maintain control of the operation of the franchise network and the supply of its approved products and services by having a centralised call centre/customer relationship management system to help in allocating customer enquiries to the most proximate franchisee. You can also allocate specific areas in which a franchisee has a right to promote and market his or her franchise business to the exclusion of other franchisees.
Where goods and services are supplied through the traditional premises-based method, territorial boundaries can be determined by either geographical region or a specific site or sites to ensure the franchise business is sustainable. The geographical region may be determined by the analysis of the demographics of the area. A defined geographical area in a franchise agreement may confer exclusivity to a franchisee operating in that geographical area.
An exclusive territory is an area within which a franchisee has exclusive rights to conduct the franchise business to the exclusion of all other franchisees (and also can exclude the franchisor) in the franchise network. Alternatively, a franchise system may limit exclusivity to marketing activities by providing for an exclusive marketing territory where franchisees have exclusive rights to advertise their franchise business within the territory to the exclusion of all other franchisees from the franchise network.
MELBOURNE
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We provide access to expert specialists in your sector; they will advise on current market trends and determine the best approach to meet your business needs.
We are fresh and energetic. We have awardwinning valuation and marketing tools, finetuned after decades in the business, which help us to stay ahead of the pace and deliver advice that is both informed and current.
We offer you a team of experienced experts who are uncompromising in protecting your confidential information - rigorous, industryleading training results in sound, smart advice. Our brokers boast real-world experience and the highest professional standards.
Irrespective of the size or nature of your business, our team is perfectly positioned to help you connect with the right people. LINK has been connecting business buyer and sellers since 1996. We are trusted to get results.
