The Switch Business Men; Paul Devcich and David Newport

Co-owner Paul Devcich says they have people “biting their arms off” trying to get information on new businesses placed on the market. 

There is a demand from genuine buyers right now, but owners may have been advised to sit tight until profits returned to levels of previous years and consider selling later.  

However, might be a different situation in few years if all businesses owners held on there would eventually be a glut.  “If someone if looking in this market now, they can do the transaction” says Switch co-owner David Newport.

First, Switch Business is pleased to announce that all-American burger chain Johnny Rockets plans to enter the New Zealand market with the help of Switch founders David Newport and Paul Devcich.

The introduction of the iconic brand to the South Pacific provides a plum opportunity for would-be buyers to purchase their own business and possess a slice of feel-good Americana.

Featured in Business to Business (12 February), the Switch team discusses the area development projection of 10 Johnny Rockets restaurants to be established around the country over the next decade.

Second, David discusses business sale strategy with Gill South in the My Generation pullout.  Serving up food for thought, Newport provides his perspective on selling now, how to prepare and who to target, revealing a market you might not have considered. 

And finally, David’s New Zealand Herald opinion piece on baby boomers as new-age business owners was published on 15 February. He discusses the burgeoning business desire among baby boomers as they approach ‘official’ retirement age and discover their inner entrepreneur.

Switch Business has also gained recent coverage in the NZ Retail magazine, March 2010 which mentions the expansion of the classic burger chain Johnny Rockets to NZ.

David has been published regularly in the New Zealand Herald and other media and in this recent article gives some pointers to business owners about what to look out for around your working capital requirements. This is especially relevant as we enter 2010  and companies look to adjust their strategy.

David also wrote an article for Business to Business : Is it your New Years Resolution to Buy a business? where he presents seven factors to consider before doing so. Worth a read.

In today’s economy, the question of what business owners should do regarding retirement and succession planning is urgent and topical. Many are seeking answers: my business partner Paul discussed this issue last week on ASB Breakfast TV, and also last week, an MBA student asked for my thoughts on it for his thesis.

The truth is that most business owners lack a succession plan. Meanwhile, various industry experts are advising owners to ride out the current market dip and wait for better times before they exit. Bearing in mind that the March 2009 ASB survey found that a full 25% of business owners wish to sell in the next five years, how good is this advice?

A look at the business broker websites shows there are about 2,500 businesses on the market through brokers. This is all businesses, from corner dairies to much larger operations. Of these, around 150 have enterprise values exceeding  $1 million. Right now, there are still more buyers than sellers in the market, and a good business is achieving a multiple of 2.5-3.25 times’ its net income at sale (business with enterprise value under $2 million, which is most New Zealand businesses). This is a little down on 2007 numbers, but still a fair ROI for both transacting parties considering the market conditions. Statistics NZ says that there are 471,000 businesses in New Zealand with a turnover exceeding $30,000 (excluding farming). The aforementioned ASB poll points toward owners who are planning for voluntary retirement, and doesn’t include those who, for whatever reason, are forced to exit. That means that about 120,000 businesses could hit the market during the next five years, or 24,000 annually – more than 10 times the number that are currently listed for sale.

The question I have (remembering my high school economics teacher’s explanation of ‘supply and demand’) is, what will 10 times more supply do to, first, pricing, and then demand? Is it valid to ask whether a business owner exiting in the current economic downturn could achieve a better sale price now than if he waits for five years and joins the rush? I think so. There are still more buyers than sellers, and any good business will stand out in the current climate.

A fair question on the reader’s lips would be whether these are the thoughts of a business broker wanting more businesses to sell. Of course we would always like more, though things for our business are looking very good right now. I think the important distinction  is that purchasers want more opportunities on the market. That has to sway the argument. If in the current market there are about 2,500 businesses (good and bad) for buyers to fight over, they will be spoilt for choice if nearly 24,000 hit the market in the same year, as is projected. Having more buyers than sellers in the current market gives a business owner an opportunity to defend their price in the negotiations. This won’t be the case if the numbers flip.

Ultimately, if you want to sell sometime in the next five years, it seems less of a risk to sell now. There are significantly more buyers than sellers, market and business confidence has improved markedly, and lenders are indicating that their appetite for risk is moderating. Or, you could hold on in the hope that things might improve, and take the chance of getting hit by the wave of baby boomers all exiting at the same time.

It is our opinion that business prices achieved in this market are only down somewhere in the range of 10-15%. Is it worth taking the risk of holding on for such a small upside? We think not.

David Newport is a principal at Switch Business Ltd – Business Sales & Acquisitions experts