The Market

Second Quarter Thoughts

Having passed the shortest day of the year, we are on the slope towards spring. Hopefully the first quarter of the financial year has treated you well. Most people we have been talking to feel that business confidence is on the increase, though this isn’t necessarily the case with business brokers, most of whom think tough times will continue in our market.

Fortunately we aren’t seeing that; rather, we’re finding that our strategy of a content-rich website, regular blog posts and a constant investment in PR has led to a good enquiry level. We could always do with more, but Paul and I are very positive about our prospects for the balance of the year.

The ANZ Privately-Owned Business Barometer 2010 was released in the last week and makes for very interesting reading: ANZ Business Barometer 2010- Key Insights

The key points that relate to the business sales arena are (from 804 respondents):

87% of respondents saw growth in their business;
85% of owners have developed or are developing plans for the future ownership of their business, up from 75% in 2009;
10% of respondents thought there was an increased chance they could make an acquisition, while another 10% have placed their plans on hold;
Funds for expansion were less available than in 2009;
In the past three years the percentage of companies reporting EBITDA of $1-3 million has hovered around 50% - this year it is 33%.

It is good to see an increase in exit planning; New Zealand business owners’ inactivity in this regard has been written about ad nauseam. We have been advertising recently for businesses with an EBIT in excess of $1 million, without much success, and maybe we now know why – there has been a dramatic decrease in those businesses in this sample (see NZ Herald article).

Another interesting comment was that redundancies were lower than expected, with companies choosing to hold on to staff and ride it out. Coupled with this, to keep staff busy these owners have chosen to reduce margins to retain sales, resulting in dramatic decreases in GP.

This is a long-term strategy but not a good one for any owner wishing to exit in the next year or so. It’s definitely better to retain margins if you wish to sell because putting your prices up again can be almost impossible, especially when most owners in this survey believe the changes in their operating environment will be permanent. This is the ‘new normal’.

We have had a couple of recent editorial PR pieces published in the New Zealand Herald, the most recent of which can be seen here: Vendor Finance

Buyer interest remains very strong; we have recently released a business to the market that was almost 100% goodwill, valued in excess of $2 million. In a two-week period we had more than 50 applications for information and four written offers. The business in is due diligence with at least one applicant with a back-up offer waiting.

Our marketing piece to our CRM system asked for buyers who had an aversion to businesses with no assets to please not apply – and we still had in excess of 50 applicants.

So there are certainly buyers in the market but not as many sellers as the market would like. It seems the strategy for most owners is to ride it out and hope to exit later when the business returns to previous levels. We wonder, though, if margins have been reduced to retain customers, whether those businesses will ever return to previous levels or whether this is (as quoted) the new normal!