Business Planning & Advisory

As we’ve always said we’re more than just your average Chartered Accounting firm, we are strong advocates for business growth throughout Nelson and Marlborough.

So we wholeheartedly agree with Forbes magazine, that this week rated New Zealand the best country in the world to do business, saying this is due to “a transparent and stable business climate that encourages entrepreneurship”. You can read the full article here.

Our core business of chartered accounting has evolved to include one-on-one coaching services. We equip business owners and key decision makers with a better understanding of the fundamentals of business accounting and finance.

We currently offer the following courses:

• Masterminding Introduction to Financial Reporting
• Masterminding Financial Business Planning
• Masterminding Financial Business Planning for Start Ups
• Masterminding Governance and Structure
• Masterminding Profit and Cash Flow
• Masterminding Reporting: Forecasting and Cash Flow Planning

What’s more Johnston Associates South is an approved service provider under the NZTE Capability Development Voucher Scheme.

Which means you may be eligible for up to 50% discount on our training courses.

Feel free to contact us for more details.

Following on from last week’s article, we thought it only right to cover the other side of the story, and write a post about selling a business.

As a seller you obviously wish to package your business in a manner that presents it to best advantage, consistent with telling the truth. It is a little like selling a house – always make sure the premises are attractively presented, encourage people to call at times when you know the business will be busy, and be prepared to provide the buyer with the type of information that will be required, such as:

• Copies of financial statements
• A list of staff
• A list of major customers
• A list of major suppliers
• A copy of the lease
• Copies of property titles
• A schedule of plant and equipment
• An estimate of likely value of stock in trade

It is well to remember that the buyer may ask your accountant to provide him or her with financial information about your business

At Johnston Associates South we have a strict rule never to release client financial statements to outside parties without the specific consent of the client concerned. You should advise your accountant if you wish him or her to release information to prospective buyers.

Packaging Your Business For Sale

Business owners are sometimes more concerned with tax savings than with reported earnings and financial position – until they are refinancing, going public or structuring their business for sale. Their accounting practices historically may have focused solely on minimising tax. If you’re looking to sell your business, feel free to contact us and we can review your accounts to ensure they are fully prepared, accurate and correct before packaging your business for sale.

If you would like to read more about buying a business, check out last week’s article.

The idea of owning a business and being one’s own boss is appealing to many entrepreneurs, and when most people think of starting a business, they think of starting from scratch. However there is an alternative… Investing in an existing business that already has customers and cash flow can offer some advantages over starting a business from scratch.

If you’re thinking of going down this road there is a golden rule… “Buyer Beware”

Buying a business is like buying anything else – you must undertake careful investigation and research into the business to make sure you know what you are buying, why you are buying it and how much you should pay.

Here are some of the things you should consider:

• Turnover – it is most important to ensure that the level of turnover or sales that the seller says the business is earning is factual. This can be checked by reference to sales records, daily takings books, cash register tapes and others.
• Expenses – these can be determined from a careful review of financial statements. You should compare one period with another and investigate any differences or unusual trends.
• Plant, machinery, equipment and vehicles – have a careful look at all the equipment, always ask for a schedule of the items you are buying (fully detailed) and check the value with someone who is experienced in the industry. You should also take into account the nature of the technology – will it date quickly and be superseded?
• Inventory (trading stock) – this is always a major item. It is most important to have it valued the day you acquire the business by someone independent of the buyer and seller, who is experienced in the type of stock being valued. It is also very important that you attend the stock-take and make sure that the stock being sold to you is of good retail value or, alternatively, if it is old or obsolete, an appropriate reduction in price is made.
• The market – is the market growing or does the company operate in a ‘mature’ market? What factors affect demand? Who is the competition? What is the degree of customer turnover? What is the sales volume of major customers? What are the channels of distribution? Are there any changing patterns in the distribution process?
• Products and services – in addition to obtaining the expected product line information, you should be concerned with the rate of product liability claims. Does the company have adequate patent and trademark protection?
• Premises – if you are buying land and buildings you must undertake the usual research and examination of title and premises that you would if you were buying your own house. You must check the zoning, district plan and all the other local body and regulatory requirements. If you are taking over a lease, you must have the lease carefully checked by your solicitor so that you know when the rent is due for review, who pays the rates, who pays the insurance and when the lease expires.
• Goodwill – this is the thorny subject – sellers of businesses always think that goodwill exists – buyers don’t. Accountants are often asked what is the goodwill that applies to a particular business, and there are a variety of technical approaches that can be taken to calculate this. Your business adviser can assist you in determining the amount that you should pay for goodwill, and you should not buy a business without completing such a review. However, the fact remains that the best determinant of goodwill is the market place, i.e., what a seller will accept and what a buyer will pay. Many people buy businesses with an inflated goodwill value simply because the seller paid an amount a few years earlier and has added a bit onto it – the price very often does not relate to the earning ability of the assets. Take great care in considering the amount you pay for goodwill.
• Financial Data – A buyer of a business should determine, or seek advice on:
  • What type of business am I interested in and how will I find it?
  • How much should I pay for a particular business?
  • How should the transaction be structured?
  • Will the new business meet my objectives?
  • Am I familiar with the company, industry and its products or services, its people and its facilities?
• Management – If you are buying an existing business with existing staff, take a very careful look at the people you are employing. If key management or former owners are staying on as employees, how would the company be affected if they were to leave? To what extent does the company’s success depend on the people?
• Reason for Sale – Always find out why the business is being sold (just as you always find out why a house is being sold). This is often difficult to determine but it is usually worth the trouble to find out the real reason.

Most Important, if the seller cannot provide you with the formal financial statements – BE CAREFUL. Do not rely on estimates or unsubstantiated profits. Check with your business adviser.

As your local Chartered Accountants we’re passionate about helping our Nelson and Marlborough based clients succeed in business.

We’ve noticed that for many self-employed people and SMEs, one of the biggest business challenges is getting paid.

Our friends at Xero did a bit of research on this, analysing more than 12 million invoices, to work out how long it takes people to pay up. It found that no matter what payment terms businesses put on their invoices, people were, on average, a fortnight late with their payments. The research concluded, that if you require payment within 30 days, you need to set your terms at 13 days or less.

Dun & Bradstreet’s latest Trade Payments Analysis showed it took the average Kiwi business 40.3 days to pay invoices in the September quarter.

Cashflow has become very tight. But it is a two-pronged situation. Your customers don’t pay you and therefore you are not able to pay your suppliers.

The arithmetic is very simple, if you sell a product which has a mark-up of 33.3%, consider the following sums:

If you are not paid the $4.00 for selling that particular article then you must sell three more at a gross profit of $1 per article to put yourself back in the position you were before you sold the first one.

The problem is particularly severe in industries with high volume and low margins.

Here are a few tips to help manage your debtors:

• Be careful about extending credit in the first place (remember the arithmetic above)
•  Make sure your invoices give you the right to add interest on unpaid accounts. If they do not have this on them you cannot charge interest.
• Consider prompt payment discounts. This is usually more attractive than the threat of penalty for slow payment, which most people know are seldom acted on.
• Offer alternate payment options. Let credit card providers provide the credit facility instead of you.
• Be prepared to charge interest on overdue accounts; go through your unpaid accounts regularly and do not hesitate to ring, personally contact, or write to slow payers
• Consider registering a security interest on the PPSR.
• Make it clear to your customers that you expect payment do not be afraid or backward about being quite positive in requesting payment.
• Establish a set of structured and consistent reminders.