The local motor industry is accepted by all as a cornerstone of the economy as a well-organized sector. It has grown over the years, while general manufacturing has shrunk. Government is committed to ensuring that this sector grows and develops. Starting an automotive business does not necessarily require experience in this field, although it is helpful. Above all, you should have a passion for cars. In some parts of the automotive aftermarket, there is a significant advantage in purchasing a franchise rather than going it alone. There could be a high standard of technological innovation required or benchmark standards for quality, reliability and performance that have taken an established brand many years to work towards. As with all franchising businesses, the greatest benefit is the opportunity to be be your own boss without the risk involved in starting your own business. Bear in mind that most automotive franchise businesses involve a busy atmosphere and a lot of interaction with people, so this kind of environment should suit your personality. Picking the right opportunity comes down to what you want out of the business, so be sure to do thorough research into the options available and also scrutinize the franchise document of the business you are keen to invest in. A successful franchise requires demand from the market, the ability to attract and retain customers and, but not least, a good location.
WHO ARE YOUR CUSTOMERS?
At some time during the life of a vehicle, various parts are going to wear out and will need replacing or fixing. Operators in the auto aftermarket look to supply the solutions either by targeting consumers directly, or by supplying independent workshops and specialist repairers, garages, fleet operators, or retail and wholesale parts stores.. No matter the client, the focus is always on keeping their vehicles on the road, and finding a quality, cost-effective solution to any problem that arises. The automotive industry is not going anywhere soon. As the trend continue, there will be both old and new business prospects on offer, so it’s worth keeping abreast of the market to spot any gaps. At the end of the day, as long as people drive cars, there will be a demand for maintenance, repairs and body service, and an array of opportunities for potential auto-entrepreneurs.
WHAT YOUR CUSTOMERS WANT?
To set your business apart in this highly competitive marketplace, operators should pay special attention to customer needs and provide customer service levels above expectations. The good name of the industry has been tarnished over the years by fly-by-night operators and dodgy dealers looking to cut corners by supplying inferior parts. Know your products so that you can speak knowledgeable to your customers and steer them in the right direction if they ask your advice. Develop clear procedures that all employees must adhere to when dealing with customers – from greeting them to how to handle complaints. This will all help to create and establish relationships with your customers that will hopefully not only result in a purchase, but will see them coming back time and time again. Extra touches can make all the difference and will influence how your customers view your business. So, after the repairs or service has been carried out; return the seats to their correct positions, and make sure that the car is clean. Stock control is important too. By ensuring you have the right parts on hand you will be able to provide a quick and effective service.
HOW TO START YOUR CAR REPAIR BUSINESS
If you’re mechanically inclined and skilled at troubleshooting mechanical malfunctions in automobiles, you may be interested in starting your own small car repair business. By having the knowledge and abilities for car repair work, the most significant needs of such a business are already met. The steps that remain are mainly organizational and administrative tasks.
Determine the scope of your business. Some mechanics specialize in particular types of automobile repair. Consider whether or not you wish to limit your business to what you’re most skilled at or prefer to do and open it up to all types of repairs. For example, some repair businesses specialize only in transmission work or engine rebuilds. Some shops do only oil changes and basic tune-ups. Other shops work exclusively on exhaust issues or brake systems. However, many individual mechanics who own their own businesses choose to work on all types of issues.
2. Business Plan
Write a business plan that not only includes the scope and direction of your business, but also provides detailed information about financing, number of employees, planned operating hours, plans for supply/parts ordering and any other details that show your garage will be a viable business. If you are having trouble with this step, make use of a reliable and competent consultant that can assist.
Be sure to acquire all necessary permits in order to open a shop. These will vary from region to region, so you’ll need to investigate local laws and make sure you’re covered with all the permits you need.
Find a suitable location for your car repair business. If you already have a garage set up that suits your initial purposes for start up, don’t relocate your business. However, if your location doesn’t suit your needs in size, (drive by traffic counts) or any other aspects, consider moving to a new spot. Your new location should be accessible for customers, provide a waiting area and a restroom they may use, and have enough room for you to work and store your tools.
Organize your garage to fit your needs. Create proper storage for your tools and supplies, along with an organized parts room for spare parts. If you need additional tools or new equipment for your new business to function efficiently and effectively, purchase them. Be mindful of your budget and do not exceed it with extravagant and unnecessarily items.
Establish an office for your business. Set it up so that you can keep detailed records about your customers, jobs and billing. Keep in mind that not only do you need a functional accounts receivable bookkeeping system, but you also have to have a reliable accounts payable system. Purchasing accounting software, a computer, telephones, filing cabinets and other office tools that will help you keep things organized.
Create a flyer with your business name, address and contact information. Hang the flyer up around town on free bulletin boards, hand it out at a parade and distribute it as a insert with your newspaper or local free shopper, if your budget allows. Advertise on the radio and in the newspaper. One cost-effective way to advertise is to buy an add in the classified section.
8. Stay Current
Stay current on auto repair. As new makes and models of vehicles come out every year, the technology for them increases more and more. If you stay up to date by attending workshops and reading material abouth the new technology, you help to ensure you are able to work on new vehicles, as well as older ones.
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The basic premise behind mobile vending is that you take your business on the road with you, going to where the people and likely consumers are. Sport events, beaches, flea-markets – these are all popular venues, especially when considering the types of products franchisor’s sell.There’s the summer refreshers, such as frothy juices and flavored ice; the winter warmers, such as pancakes and coffee;and, of course, the all year rounders, such as hot dogs, chicken, pies, french fries and even pizza. Most of these tasty treats are combined with unique sauces to tantalize the taste buds. It doesn’t stop there, however, other products include traditional meals such as Pap ‘n Vleis, or even toasted sandwiches and salads, which enable vendors to widen their scope to the city areas, where business folk may pass their stalls during lunchtime.
As a potential operator, there is a huge variety of rewarding mobile businesses – service or product-oriented – to choose from. You can set up just about anything from an ice cream cart to a car wash, landscaping or vehicle repair service. Container – based businesses are also a growing sector, especially in our informal settlements. Old shipping containers are used to house small businesses – anything from hairdressers to cellphone shops. They’re cheap and sturdy, though not as mobile as the carts mentioned above. While there’s nothing new about operating from a kiosk or cart, those available today can be sophisticated as you want and can come fully kitted with the storage and equipment needed to run just about any type of business.
Many franchisor’s today sell a combination of vending options, to enable the franchisee to earn profits both winter and summer, as well as to offer a wider variety of products. This is why fast food is such a hit as a mobile vending opportunity – the product is in demand and the meals sold are easy to prepare on the move. One of the key aspects to mobile vending is, of course, the customized trailer. Trailers vary in size, depending on the type of business, but most are made from lightweight, but durable materials, to ensure that they are easy to hook up to a car and take on the road. A few companies are concentrating on the design and manufacturing of these customized trailers and caravans for the mobile vending industry. They assist new and established franchises and businesses to enter this market.
WHAT TO LOOK OUT FOR?
If you’re interested in mobile vending it is very important that you look at the trailer’s technical specifications – i.e. whether it is equipped to serve the food you will be selling. For example, do you need a stove, icebox, cooler, generator, fridge, microwave, plug points, grill or storage space? Another key aspect to consider is branding and signage. Branding is very important as it will draw the crowds and create product awareness. Mobile vending is a low -investment option for those looking to enter the fast food market. Many franchisors request a once-off investment payment only, covering the purchase of the trailer, initial stock, use of the brand name, training etc, without expecting any royalties. It’s a cash business, as the money you make goes directly into your pocket. You don’t need office space, employees or have hefty expenses, that would raise the running costs of the business.
WHY GO MOBILE?
Consumers who are looking for convenience and on-site service are your target market. Time-poor consumers opt to purchase from vendors near their workplace, public transport or on their route to or from work, and will even pay a premium for this convenience. You can also target prime consumer locations such as universities, schools, hospitals, parks and trade shows.
IS THIS FOR YOU?
If you’re looking for a full-time operation that offers flexibility, or a part-time venture, mobile vending may just be right for you. Bear in mind that your income is directly dependent on the amount of hours you work. If you don’t go on the road, you won’t make any sales. This opportunity is low risk, affordable and fun!!!
FOOD TRAILER BUSINESS BOOM
For the person who wants to open a restaurant, the brick and mortar issue can make it an impossible dream, with property and rentals being so expensive and risky. For many years, we have seen food trailers that park on street corners, in events grounds and parking lots as well as business parks. These business people run low overhead operations that are less expensive than rent and easily moved where the revenue will be best. It is like embracing a new food culture. The creativity and personal style of cuisine and the design of these rolling restaurants is a lifestyle which appeals to many a family.Some of these are brightly painted to match the food they’re selling. Investing in one of these little mobile restaurants would present a multitude of opportunities.
What may be a great venue this year fade in time but now you are not stuck with rent and overheads. Pack up and move to the next venue and if this fades down the line there’s the venue somewhere else. People willing to work late hours can profit from the nightclubs too. A well-planned coffee trailer can reap many profits through morning peak hour business. The start-up investment for a trailer is around R25 000. It is possible to do it for less. Then you need to get proper licenses and permits where required. Look for auctions where you can find great bargains on catering equipment. Keep it as simple as possible – simple menu and manageable productivity and profits.
Mobile food vending offers everything from hot-dogs, burgers, chicken, Chinese, Thai, Mediterranean as well as coffee-on-the-go from a trailer to a fully equipped van. What about more variety of wraps style mobile stalls, for people who eat while they are driving, mobile curry stalls, healthy alternatives, organic variety, salads, Mediterranean style kebabs, soups and ice cream parlor mobile stalls? What about offering decent espresso and a selection of quality pastries, in the mobile market? The options are endless, and there are more than enough experts who can tailor design and manufacture mobile trailer units. Don’t wait for the mega trends from overseas to dominate the market. Follow through on your own ideas and meet the needs of the eating population.
Where to start? Well, like everything else, it starts with a proper plan. The bigger the outlay the more detailed the business plan should be. Rather ask a professional consultant to assist.
STARTING YOUR MOBILE FOOD BUSINESS
Many people dream of a work style that gives them independence, enjoyment and, at the same time, a decent income. But it still takes effort, careful planning and diligence. A few things to ponder in your planning:-
- What are you selling? (ice cream, candy floss, burgers etc).
- Develop a menu.
- Who is your target market? (general public or business, trading times etc).
- Who will operate the stand?
- Due diligence and evaluate various venues/locations.
- Select the menu (seasonal or general).
- Design the correct trailer and research ides.
- Cooking, serving and storage space requirements?
- What catering equipment will you require?
- Source your regular and reliable suppliers?
- Enquire if you require licenses or permits?.
- Make sure you are costing correctly.
- How much capital do you require before turning a sustainable profit?.
- Do a dummy run.
- Create a operations procedure.
- Make sure you comply to Health & Safety regulations.
- Brand your trailer well.
- Let the community know of your location.
- Will you require seating?.
- Will you require insurance?.
With all this information you should be ready to roll.
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Today’s coffee shops offer a variety of coffee’s from latte’s to espresso’s, mocha’s to Irish coffee’s. Some also offer a variety of light meals, for the breakfast, lunch or late-night crowd. A coffee shop requires a lot of work, as your hours are from early morning to late evening, depending on where your site is located. If in an office block, you’ll probably be open to welcome the earliest of workers who want to enjoy a cup of coffee before starting the day. If you’re in a shopping mall, or near local clubs you’ll probably stay open till late at night to cater for the late-night movie goers or party animals.
Coffee shops could be very rewarding. There is a quick turnaround on tables during the breakfast and lunchtime sessions, though late at night your crowds will be more relaxed. Quick turnaround means that your kitchen staff and waitrons need to be efficient and speedy workers, but it also means that you will have more customers coming through your door per average, than a restaurant. Of course, this all depends on how popular your shop is, so here you need to market and offer the best quality in terms of product and service.
You also may wish to investigate ” Franchised Coffee Shops” first because you will have the benefit of an established brand, concept and support structure. You can visit their shops and see how busy they are, on average, as it will give you an indicator of what you can expect in a similar location in your area. Also find out how many other competing coffee shops are located in your area and what you will be providing that they don’t in order to pull in the customers.
If you bare doing it on your own, remember to use only the best in terms of equipment and, more importantly, coffee beans. There is nothing as horrid as a bad, cold cup of coffee when you have been longing for it all day. Thin, overheated, flavorless or bitter – these are all unacceptable. Why not take a sip from each new pot, to ensure quality every time. If held in machines , ensure that coffee is replenished, as it’s rather frustrating for customers to try and pour their favorable blend, only to find the machine empty. Your first cup should make them want to come back for more. Coffee shops have a certain vibe that enable customers to relax and enjoy, even when grabbing a quick cup or coming in alone for a working lunch. They are not as pricey as restaurants, even when ordering a meal, and provide quick and speedy service. The coffee sector is taking off in South Africa and is being greatly influenced by overseas coffee concepts, and this could be a great business opportunity for you.
“Nestle” dominates the South African coffee market, followed by National Brands with its House of Coffees brand which is the leading brand within fresh coffee. Other coffee brands are Kenna and Ciro (Swiss Brands) and Jacobs (Kraft Foods). Convenience as well as value for money will continue to be key drivers of growth in South African coffee. The trend towards more premium instant coffee among the upper income groups will continue. There may also be a move towards organic coffee among these consumers as the health and wellness trends takes hold. We are seeing a change in the local coffee culture as South African consumers become more adventurous in trying out new options. More and more coffee drinkers have “bean- grinders” at home, indicating a growing shift away from drinking instant coffee. A number of new independent coffee shops with their own in-house coffee roasters have appeared in the past few years.
The Coffee Shop is determined to become a daily necessity for local coffee addicts, a place to dream of as you try to escape the daily stresses of life and just a comfortable place to meet your friends or to read a book all in one. Based on recent experience good coffee is finally become the norm in offices and boardrooms across the country heralding the dawn of a blue chip, coffee culture that appreciates the best life has to offer. This means that coffee has come a long way from the instant, chicory-laden coffee types of old which has seen South Africa going through something of a caffeine revolution in the last few years which has seen a definite move from over-roasted, milky “cappuccinos” topped with mountains of cream and chocolate sprinkles, to cinnamon roasts of flat-whites and cortados.
SOME THINGS TO CONSIDER
Determine whether owing your own business is for you. Most coffee shop owners are driven by a passion for what they do. This carries them through the hard times and the risk of failure that accompany all small business ventures. In addition to having a passion for your business, you should make sure that your personality is a good fit for the uncertainties of business ownership.
The environment in which you open your coffee shop has a significant effect on it’s success. It is very important to consider factors such as the location, how fast you can grow the business, and what makes your business different from your competitors.
Talk to other small business owners in the area. Networking with other owners of coffee shops will help you understand more about the process from a first-hand source:-
- It is a good idea to ask about the challenges and difficulties they face as well as what strategies they use to overcome these challenges;
- Remember that networking is a two – way street. Make sure you thank all the people who talk with you for their time and input.
4. The Market
You need to decide exactly who your target audience is. Even though most people drink coffee on a regular basis there is no way that you will appeal to everyone. Trying to do so is actually a recipe for failure. Focus on the niche that your coffee shop can appeal to.
5. Set – Up Decision
Determine whether you want to start from scratch or by buying an existing business. Owners of coffee shops frequently look for a new owner to hand the business to. If the business is already fairly successful, taking over an existing business could be a good idea. Another option to consider is franchising.
Starting a coffee shop requires start up capital. How much money you’ll need can vary dramatically, depending on your location, the scale of your venture, and how much investment your property requires.
7. Write a Business Plan
A fully developed business plan will make sure there are no nasty surprises once you begin the process of opening your coffee shop. A Business Plan has many elements. Make sure you have a very clear idea of your shops identity, including what products it will serve, the location and the short term/long term goals.
8. Secure Funding
Once you have a solid business plan in place, you’ll need to secure funding. Starting a coffee shop can be done with just a few thousand rand or it can require several hundred thousand Rands. Don’t borrow or spend more than you need. Speak to a professional consultant.
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Franchising is represented in most of the economy and the scope of opportunities is vast. It is not vital that a potential franchisee be experienced in all the technical aspects of a particular franchise system. Although a potential franchisee should posses some basic managerial expertise and industry knowledge, he is entitled to rely on the franchisors expertise and ability to train him and all of his staff.
Some questions you should ask yourself before even thinking of starting a franchise should be:-
Does franchising have what it takes to satisfy your ambition?
Do you, and your family, have a fair understanding of what franchise ownership will demand and offer?
Will owing a franchise, and the growth opportunities within the network, be aligned with your financial and career expectations?
Some other important questions to ask (your own research will always remain your most important tool in assessing a franchise opportunity)according to Simone Cooper – Head of Franchising – Standard Bank:-
Do you have strong people skills?
Successful franchisees always have excellent interpersonal skills and can effectively interact with their employees, customers and the franchisor. These skills are integral to building a sustainable business.
Do you have a stable support system?
Managing a franchise is a full-time job. You will have to sacrifice a great deal of your personal time with family and friends to ensure that your business is run efficiently.
Will you enjoy the franchise?
Many people view a franchise as a quick way to make money without actually considering whether the type of business they are entering into suits their personality and aligns with their passions. You need to have a natural affinity with the applicable franchise brand that you select so that you are able to enjoy what you do.
Can you afford the franchise?
Although the franchisor will be able to guide you in terms of start-up and running costs, these will vary due to building rental leases and other acquisitions you will require to run your business effectively. Ensure that you have sufficient start – up and working capital to sustain you for your first year in business, as you typically will only see a return on your investment after the first year.
Are you able to work within the boundaries of a set system?
A good franchise company has invested years of trial and error to find the best model for operating a sustainable business. The franchisor also has spend some time investigating various systems and processes to find what works best. They are not looking for prospective franchisees who want to come in and re-invent the wheel.The key to a successful franchise is the consistency in the product or service that customers find from one franchise store or restaurant to the next. Buying into a franchise and displaying the logo tells customers that you prescribe to a certain brand’s set values and standards.
Are you willing to take full responsibility and manage your own business?
One of the misconceptions about franchising is that buying into one and running it is easy. This is simply not true. Although the franchise system will offer start-up training and full support, as the owner you must be willing to run and manage the business properly. Most successful franchises have owners who are hands-on. You will probably work harder, longer hours, doing everything from managing staff to dealing with customers and even mopping floors.
Are you willing to pay royalty/management service fees to the franchisor?
Buying into a franchise system, means that you are buying into a proven concept with an established brand. The franchisor has spent years developing and building the brand. In order for you to trade under their umbrella, you will have to agree to pay a certain amount in royalty fees to the franchisor. This is an ongoing arrangement for as long as you are using the franchisor’s brand.
When investigating a franchise, don’t forget to speak with Franchisees already in the system to get the real picture. Make sure to check out the following important issues:-
Initial Training Programs.
You need to determine how well the initial training programs prepare the franchisees for opening and running their new business.
Find out how easy the Franchisor made the process of getting the first unit open and operating. Was there assistance in the site selection, lease negotiation, construction and design assistance etc.
Most Franchisors collect marketing rand’s from every franchisee to put into a pool spent to promote the brand. You need to determine whether the franchisees are happy and supportive of the way this process is handled.
Does the Franchisor use the collective buying power of the total system to get discounts on supplies and inventory beyond what an independent operator could achieve?
Determine how the franchisees feel about their relationship with the franchise company in general. Is the franchisor supportive, caring, focused on their success, responsive, effective, organized and trustworthy?
To start any franchise operation successfully or to obtain funding from an Investor it is vital to develop a “Professional” Franchise Business Plan that you can present to any lender. We can help you with this and also want to warn you against the services of some “cheap” so called business plan writers. Also see our FAQ’S section for more information on this issue.
Purchase an Existing Franchise.
With the downturn in the economy a number of existing franchises are for sale. One’s initial reaction is if a business is for sale it must have problems. While this may be true in many cases, there are some good opportunities to purchase a viable existing business at good value. If you are contemplating purchasing an existing business/franchise you need to carefully consider the following:-
Why is the business for sale?
Just confirm that the business is for sale for a valid reason. Some valid reasons are that the owner wants to retire or immigrate or the owner has an illness that stops him being able to run the business. Often a new franchisee purchases the business with new enthusiasm and the hard work results in increased sales and profit.
Is the site still optimal?
Geographic areas change, and often a site changes. Town centres have become ghost towns as the shopping node moves out of town. Shopping centres also change the flow when they make additions and changes to the centre. Assuming the site and position in the centre are still correct you must study the lease. How long has the lease got left, is there a renewal clause and what will the rent be increased by?
Position of the Franchisor
You won’t be able to purchase a franchise unless the franchisor approved you as a new franchisee. We suggest that you visit the franchisor and discuss the purchase with him. Reputable franchisors will want you to be successful so will make sure you don’t over-pay or buy a bad franchise. However, be careful of bad franchisors who will encourage the sale to get rid of problem franchises. Check the position regarding a revamp that can cost in excess of R1 million.
Make sure the business has a good set of audited financials and that all debtors are up to date. Also check that the VAT payments are up to date. Get an experienced accountant to review the financials with you or get a financial analysis be done by a professional consultant.
7 TIPS FOR PROSPECTIVE FRANCHISEES
Bernard Schoeman of the “Tax Shop” has the following advice for prospective franchisees:-
Look for Commitment.
This should be evident from the franchisor and other franchisees. All parties in the relationship should be fully committed to its success.
Back up and support.
This is crucial. Most people who buy into a franchise do so because of the support on offer.
Ongoing training is necessary. Your franchisor should offer regular training to ensure that franchisees remain ahead of the competition technically and in terms of service delivery.
Financial standing of the Franchisor. – should be sound. A sound franchise system should be backed by a franchisor with the financial ability to weather difficult times.
Continuity of the franchise provides peace of mind. The franchise should be able to continue operating in the event that the franchisor is changed or discontinued.
Technical knowledge of the franchisor and franchisee should be adequate. No franchise system can thrive if its people are under-qualified.
Franchise culture should not be foreign. For a franchise to be successful, franchisees should be comfortable within the framework of the franchise and its culture.
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There are two broad ways of going into business for oneself. You could either start from scratch or purchase an existing business. Starting from scratch has the advantage of allowing you to shape the business exactly as you want it. Purchasing an existing business also has advantages, such as an existing location that is often hard to find, and ideally, a track record of proven performance.
Business Owners who start from scratch have to do many months of preparations to ensure that the business idea can indeed turn a profit. However, those who purchase an existing business should apply the same level of diligence to ensure that a fair price is paid and that no nasty surprises are hiding around the corner. Always a good idea to do a proper financial analysis by a professional consultant.
Calculating the value of a business is a tricky exercise because there are so many variables that should be taken into account. The help of a professional is recommended. However, there are a few basic principles that prospective business owners can keep in mind to get the negotiations ball rolling.
Most people enter into business for themselves to fulfill a particular passion or to be their own boss, but although these are the main driving factors, everyone does so with the expectation that the business will pay them to do so. The easiest way to find out whether the business can afford its new owner is to look at its cash flow or do a proper financial analysis. This figure also makes a big contribution to the price the seller is going to ask.
Although businesses can generate cash flows from investments or by extending credit, the cash flow most pertinent to the health of the business is the operating cash flow. Operating Cash Flow is simply the money paid to the company by customers (its revenue or turnover) minus the money paid to suppliers. This is the money generated by the company’s core operations.
A company’s cash flow statement is different from the income statement and balance sheet because it does not factor in cash that will be coming into or leaving the business in the future. While the balance sheet and income statement calculate the company’s net earnings, it is the revenue recorded on the cash flow statement that is all-important in determining the health of a business. A company might show huge net earnings without being able to pay its bills. If a company records high earnings growth but little growth in cash flow, it is usually because it has sold the product or service on credit, in other words, there are many people owing the company money. While debtors are good for business, they can be bad for cash flow. If these debts turn bad, the company could be in serious trouble.
The cash flow statement gives a good indication of future revenue through its recording of past performance. Therefore, if a person is looking to buy a business and renovate it, the ash flow statement gives a good indication if there will be enough money available to pay for any plans that the new owner may have.
FREE CASH FLOW
One of the disadvantages of only looking at cash flow to determine the sales price of a business is that it does not include capital outlay for fixed assets. Capital outlay is any expenditure on assets that is paid off over a term longer than a tax year. Capital outlays can vary dramatically from industry to industry. Compare, for instance, the heavy machinery that has to be purchased by manufacturing companies, with the rent of an office and an IT infrastructure for some service industry companies. The cash flow that is available after provision has been made for capital outlays is called free cash flow.
Increasingly, free cash flow is being factored in to determine the asking price of a business. Some companies that report massive cash flows have little free cash flow because of the expensive equipment used in manufacturing the product. When a company reports its earnings on its income statement, it is possible to prop up the final figure through clever accounting. This is much harder to do with free cash flow, which is why it is an effective tool to determine how much the company generates for its stakeholders.
Another calculation often used to determine the business price is earnings before income and taxes – (EBIT). This figure is the operating revenue plus the non-operating revenue, minus operating expenses. This calculation allows the owner to know how much money can be taken from the business as a personal salary. After the money that the owner wishes to take out of the business is subtracted from the EBIT, the money that is left should be around 25% of the asking price of the business. For instance, if the business generates R1 million a year and you or the manager requires a salary of R400 000 for the year, what is left of the earnings before interest and taxes for the company comes to R600 000. A good price for the business would therefore be R2,4 million, because R600 000 is 25% of this total.
The EBIT of a business is a broad tool and differs considerably in practice. In general, the higher the price of the business, the higher the percentage of EBIT left after subtracting the owner’s salary would be. The age of the business would also determine the EBIT, with more established businesses able to command a higher percentage. Businesses that operate in a riskier space should charge a lower percentage.
EBITDA is another ratio that is often used to valuate companies. It is the earnings before income and taxes, with depreciation and amortization added back to the figure. The figure shows the profitability of the company, regardless of the way its operations are financed, through credit or cash, for instance. This figure shows whether a company is able to service debt in the long run, and is therefore an especially popular valuation tool for companies that own expensive equipment that must be paid off over a long period. EBITDA is therefore a good indicator of the company’s profitability, but not its cash flow.
The value of the assets owned by a business plays a major role in determining the sale price of the business. Many business owners do not wish to part with every asset in the business when they move on. It is therefore important to receive a list of every item that forms part of the transaction and not to simply assume that all business assets are included in the price and will automatically be transferred to the new owner.
The aforementioned ratios are some of the ones used most often to arrive at a good selling price. There are many more than these available, and volumes have been written on how to determine business value, with intricate and confusing formulas being used by people with master’s degrees in economics. While these calculations can go a long way to provide a clear cut value, the human element should not be disregarded. A prospective business owner who is serious about making a success of the business about to be purchased should not be afraid to break a sweat when analyzing the value of the business. This means not only perusing the financial statements of the business, but to actually be familiar with every inch of the physical premises and the employees that will still be there when the owner departs.By visiting a company, one can get a feeling for the strengths and weaknesses of the business that may not be apparent from the financial statements alone. One gets to see the managers in action, as well as being able to gauge the demographic composition of the average clients.
PREPARING YOUR BUSINESS FOR SALE
“Rick Grantham” of Quickberry gives the following guidelines for the sales process:-
Phase 1 – Preparing for sale:
This is after you have made the decision to sell and before you actually take the business to the market. It involves documentation, business plans and researching potential acquirers to approach.
Phase 2 – Initial discussions with interested parties:
Run through what to say and what not to say, and develop tactics for each prospect. For example, how do you answer a question like: “How much do you want for your business?”. The response can potentially cost you millions!
Phase 3 – Selecting the acquirer:
You may not want to go for the acquirer who offers the most money. There are a number of issues relating to structure and credibility that need to be taken into account.
Phase 4 – Closing:
This is so critical, and it is amazing how many deals fall apart at this late stage. The simple rule is: the longer it takes to close (i.e. the money changing hands), the more likely the deal is to fail.
8 KEY TIPS TO GETTING THE BEST PRICE FOR A BUSINESS:
Actively look for buyers.
Never have only one potential buyer.
Look for strategic buyers.
Look internationally as well as locally.
The value of your business can only be assessed by a buyer.
Be well prepared.
Choice is critical.
Sell the future, not the past.
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