Is there a silver lining to the low value of sterling that has hit the headlines in recent days? According to experts, our exports will be cheaper and so boost manufacturing, companies with foreign earnings will be in a good position, and we will see more tourist pounds in our shops. With regard to the export sector this has not fared as well as had been expected but this is more likely to be to do with weak demand in our export markets such as the eurozone. More about the eurozone later.

At the Business Sale Report, we think there might be another reason the cheap pound could benefit UK plc. Business owners who are thinking of selling would do well to investigate the possibility of marketing the business abroad. Overseas investors can buy larger businesses in the UK than they would have been able to do in the past. Of course, revenue would still be in sterling but if, after holding the company for a while, the currency appreciated then the investor would make a profit on the sale. Inward investment is bound to help UK plc. A recent survey by Standard and Poors has also suggested that businesses with strong overseas earnings, particularly in Asia and America, are attractive to other UK firms looking to increase revenues and hedge their currency risk.

In our view, sterling is undervalued for a number of reasons. In the first instance, the markets have become concerned about the possibility of a hung parliament, which is not necessarily a bad thing given that there is less to separate the main political parties these days, but it does create uncertainty. Markets hate uncertainty more than anything. However, once a new government is formed it simply will not survive unless it has a credible policy to cut the deficit. This should help to support sterling.

So what about the Euro? Against the pound it looks strong at the moment but the eurozone’s problems are really only just beginning. There will need to be deep cuts in public spending in Southern Europe and they will have to lower wages and prices in order to remain competitive with Germany, the strongest economy in the Eurozone. Unless Germany can power ahead with strong economic growth to offset the problems in the the weaker european countries then the prospects for the euro are not very good in the medium term.

The weak pound is also, in some part, due to the perception that we have a poor manufacturing and export base, so increased competitiveness in exported goods is not going to benefit us. This is not really true. The UK is among the leading exporters of manufactured goods in the world. Germany and China, of course, are way out in front, then comes the USA, followed by Japan. But in fifth, sixth and seventh places, in a tight group, are the UK, France and Italy. What is more some of our manufactured goods like defence, where we are a global leader, are seen as having better than average growth prospects. After all, the world doesn’t seem to be getting any more peaceful.

The weak pound has fuelled the UK’s export market to such an extent that British exporters are more confident about future export growth than their counterparts in the Eurozone, according to the latest European Business Trends report by accountants and business advisers BDO LLP.
However, while UK confidence around exports is increasing, so too is the threat from inflation. The BDO Inflation Index reveals that Britain experienced the largest ever increase in the annual rate of inflation in the fourth quarter of 2009. The BDO inflation index rose 99.2 in January, a significant increase compared to October 2009’s reading of 93.8. This compares to the Eurozone inflation index which rose to 89.6 in January from 89.2 in October. This may indicate an earlier raising of interest rates which will help underpin the value of sterling.

Also it is quite clear that the Bank of England’s remit is to target inflation and economic stability, not exchange rates. Whereas many countries have made it clear that they are very keen to keep a high value currency, no matter what. This of course is bound to attract capital inflows and speculators at the expense of the pound.

The currency issues aside, UK plc is still a very good place to do business especially when compared to other countries. Perhaps the most obvious advantage that the UK has over other European countries is its flexible labour laws, which translate into lower hiring costs, uncomplicated takeover rules, and a generally non-protectionist government that welcomes foreign ownership of UK companies.

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The chief executive of Portsmouth, which is on the verge of becoming the first Premier League club to enter administration, claims two more parties have come forward with proposals to buy the business.

Peter Storrie's announcement came as the club scrambles to present a statement of its financial affairs by 4pm on Wednesday (17 February) before a High Court hearing on March 1.

It was previously revealed that two potential buyers were interested in the Fratton Park outfit, as it desperately searches for investors to wipe out its £11.5 million unpaid-tax debt.

"We have two more interested now, so hopefully something will come out of this," an optimistic Storrie told The Portsmouth News on Saturday. "One of them is a very serious interest, and I will find out more after this game (against Southampton last Saturday)."

He added: "We will continue to fight hell and water to keep this club alive. I am in regular contact with Sir Dave Richards (chairman) and Richard Scudamore (chief executive) from the Premier League, and we are keeping them up-to-date with the latest proceedings."

It also emerged at the weekend that the Premier League plans to crack down on clubs which mismanage their finances in an attempt to stave off further Portsmouth-style debacles.

From next month, clubs will be asked to submit their accounts and spending plans to independent league auditors, with those whose figures don't stack up facing sanctions like the withholding of TV money and a ban on transfers and contract renewals to their players.

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At the Business Sale Report we have undertaken a straw poll of the business brokers and other professionals in the small to mid-market M&A industry to see how they thought 2010 would be for the buying and selling of businesses. Subscribers to the report can see who said what. So here are some of the opinions of the movers and shakers in the industry:

“Investors seem to be thinking that 2010 will be an improvement on 2009. People who have access to liquidity are making tentative signs they are willing to invest in the middle of the year when the situation should be clearer. Investors who can be creative when it comes to financing a deal are in a great position.”

“At the moment there appears to be a disconnect between the real business world and how the bankers who are funding businesses are operating. Recently there have been more signs of banks lending but they are only lending to people with a good track record, and also really only looking at one project at a time. However, some banks are lending at 75% debt for equity. The February bank reporting season will be important for the confidence of M&A in 2010. Asset-based businesses and those involved in the Internet I expect to be the best M&A prospects for 2010.”

“The market in businesses valued at between £1m and £2m has seen growth so far in the last quarter. I am therefore very positive about the outlook for 2010. People are looking to sell at the moment and funding is not too difficult for the right deal.”

“I am expecting 2010 to be better than 2009 but the outlook for 2011 is more uncertain as there may be more forced sellers then and prices for businesses will fall.”

“Some businesses are happy to sell assets to strengthen balance sheets. There will always be deals to be done but I envisage more forced sellers. My advice to anyone looking to buy a business in this market is to stick with what you know, as there are good deals to be had.”

“If unemployment hits 3 million then we will be in trouble. There are simply not enough smaller businesses on the market at the moment and demand has outstripped supply for good businesses. People are desperate to buy for turnover, as they want to exit in 5-10 years. People are not coming to the market as they think they will not get a good price. If the business is a good one and there are synergies with the buyer then businesses are selling for decent money.”

“There is no appetite for acquisitions of businesses with a high premium on goodwill. The banks have a policy that they will only lend on the value of goodwill if assets of the same value are used as collateral for the loan. I cannot see a revival of fortunes for engineering businesses for 2010. However I believe that Health and Safety businesses and those involved in the medical sector will be in demand next year.”

“I expect 2010 to be better for buying businesses but we are starting from a very low base. With a low volume of private equity transactions it is hard to gauge how strong the Limited Partnerships will be going into next year, as they haven’t really been tested. An expected change in Government will no doubt cause some uncertainty for the prospects in 2010.”

So there we have it, a mixture of positive and negative sentiment on the prospects for 2010. We certainly agree that any business with a good asset base and with good contracted positive cashflow will be a good prospect. To find out who said what, you will need to subscribe to the report. We believe that 2010 will be a good opportunity for buying businesses as long as you know exactly what you are doing as mistakes will be very costly. Make sure you have done good due diligence, have a good relationship with your funding partners and be ready to move quickly.

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Demand for hotels for sale in the UK has been stimulated by an influx of newcomers to the hospitality industry, with particular interest focused on the cheaper end of the market.

If you’re one of the many keen for a change of career, contemplating early retirement or worried about redundancy, there are annual profits of around £20,000 to be made from the average five-bedroom guesthouse, going up to £130,000 for a 20-bedroom hotel including a bar/restaurant.

Allow half of that to cover the costs of running the establishment, bearing in mind that business rates and compliance with fire regulations will apply if you acquire anything bigger than four letting bedrooms.

Brokers say anyone with equity of at least £100,000 in their home is in a healthy position to buy a small hotel – chances are you’ll need to take out a mortgage, but the lowest interest rates for fifty years mean any reasonable operator should be able to take home a decent profit.

Things to bear in mind when sizing up hotels for sale:

Why is a given outlet on the market and how long has the current owner been there? How much has been spent on improvements?

What kind of custom does it attract? Are there any other new hotels in the pipeline in the area?

What is and isn’t included in the hotel sale? Take a detailed look at the contract and accounts.

And finally, don’t underestimate the benefits to be gained from getting a hotel’s previous owners on side – their help and goodwill often prove invaluable to buyers.

For more resources on buying a hotel please visit our pages which list leisure businesses and hotels for sale and more advice on buying a hotel.

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During the third quarter of 2009 the Private Company Price Index (PCPI), which gives an indication of the average multiple of after tax profits at which private firms are sold for, rose again – much to the delight of anyone looking to sell a business. This is the second quarter in a row that we have seen rising multiples being paid. Please see our previous blog on business valuations rising posted in October.

Although merger and acquisition activity declined in the third quarter, for the seventh consecutive period, the multiples of profits at which business for sale are being sold for increased by 5 per cent. With the 5 per cent rise, people selling businesses were achieving an average of 11.7 times their historic after-tax profit. Of course, it should be noted that these figures relate to announced deals which have an average deal size of £15m. Smaller businesses multiples are lower overall to reflect the increased risk but if you wish to have a guide on the possible value of your business then please feel free to fill out our form for a no obligation business valuation

In addition to improvements in the PCPI, the Private Equity Price Index (PEPI), which tracks the multiples of profits that businesses sold to private equity achieve, also reported good news, rising 4 per cent to 12.3 times.

The continuing slow M&A market can be partly blamed on a more restrictive lending policies, particularly within the leveraged buyout market. This is reported to have offset the benefits an increase in corporate bank debt available to people wanting to buy a business for sale.

The increase in confidence among the corporate finance community has helped to boost the amount of money companies are being sold for. In addition, the number of exit reviews, proposals and pitches is increasing in response to a change in sentiment among business vendors. Many are realising that income and capital gains tax increases will catch up with them next year and that selling a business takes several months to complete – leading to an increase in the number of business being put on the market.

Business Sale Report has seen a 20 per cent increase in listings in the past quarter! To contact the sellers of these businesses then please subscribe.

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Considering the type of business you are buying shouldn’t be your only priority when it comes to purchases. Understanding the type of vendor you’re buying from is also crucial.
 
There are various kinds of vendor in the market and buyers should ascertain which is most suited to their specific circumstances, as well as researching the probable consequences of buying a business from a given type.
 
Corporate groups selling off subsidiaries: A group that has decided to dispose of one or more non-core divisions may be doing so to repay due debts or boost company focus. Selling quickly may be their goal, so poised and ready buyers could land a purchase price below the market valuation. The same goes for groups selling because of falling share prices.
 
Private equity owners: Professional buyers and sellers of assets tend not to be emotionally attached to businesses for sale – price and speed are their priorities. Venture capitalists, who usually provide private equity capital to early-stage, high-potential firms, also focus on return on investment. In addition, they tend to prefer to sell rather than generate a stock exchange offering or flotation with their investments – particularly during a downturn.
 
Privately-owned firms: Here is where you’re likely to come up against emotionally-attached owner/founders, so reassuring them you’re a safe option is as important as proving you have the money to purchase. Do your research to get a good idea of the value of the business, as private sellers do not always have an accurate picture themselves. You could even end up with an undervalued bargain business gem.
 
Firms in administration: Currently in abundance, this is an option you shouldn’t dismiss. Assess why a given business has failed and whether it’s still a good acquisition option. If you can act quickly and exercise due care, a company in administration could prove to be the best business bargain of all.

See also: know who you are buying from

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The market for care homes has been holding up quite well given the current restrictions on credit for buying businesses. Banks have been willing to lend money for purchases of care homes on a 70/30 percent debt for equity split.

These are better terms than in other industries where the minimum split has been as much as 50/50 for deals to be approved. Whilst valuations have slipped from up to 9 times the operating profit to no more than 7 times, this does represent a good return on your money of 14.3% with a good prospect of capital growth. The population is not getting any younger!

However, it is important to realise that running and owning a care home is a time consuming task and you will also need to be qualified by the National Care Standards Commission.

The requirements are that any owner must have a level 4 NVQ in care management and have at least two years senior care management experience. There are a myriad of regulations that must be adhered to and a bad inspection of the care home can be very damaging to the long term value.

So, if you are still interested, then where do you look to buy a care home? At the Business Sale Report we have a dedicated section on medical and educational businesses for sale.

We also write specialist articles and provide advice to subscribers on how to buy certain types of businesses. In the latest issue of the Business Sale Report, we take an in-depth look at the care homes market.

Excerpts of the care home article can be viewed here.

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During a corporate transaction, such as the purchase of a business, a solvency opinion is a financial opinion issued by an M&A advisor about the likely solvency of the newly created entity. The solvency opinion is based on an analysis that includes a general review of the fair saleable value of the assets and stated value of the liabilities, the cashflow capacity of the company and the ability to meet obligations as they become due.

The opinion is often required by boards and/or lenders as additional protection in the case of a subsequent fraudulent conveyance claim. Opinions issued by third party advisors can be assurance for creditors in the case of bankruptcy. In bankruptcy the absence of an independent opinion presented to the parties involved in a given transaction can result in a lender’s loss of right to priority repayment of debt from liquidation proceeds. As such solvency opinions are mostly given where a deal is highly leveraged.

The percentage of M&A advisors who believe solvency opinions will have a direct impact on the terms or completion of a transaction over the next year has doubled since before the onset of the credit crisis, according to a study released by mergermarket in association with Houlihan Lokey. The study, conducted during the third quarter of 2009, compiles interviews of senior corporate executives, private equity practitioners and lawyers from the US and Europe regarding their recent and historical experience with solvency and related business valuation opinions.

Ben A. Buettell, managing director and head of Houlihan Lokey’s solvency opinion practice. “In the transactions that are coming to market, buyers and lenders are taking a closer look at the valuations of assets and liabilities on a pre-and post-transaction basis. The study’s findings are in line with our observations that professionals are responding to ongoing market complexities and the growing concern that solvency opinions are more likely to be challenged in the future by spending more time on these valuation issues.”

The report has highlighted key differences between the use of solvency opinions in Europe and North America. In North America two thirds of respondents reported that they had been involved in a transaction that included a solvency opinion compared to just one third in Europe. However, it is in Europe that there is the expectation of wider use of the solvency opinions in major transactions. The study also concluded that distressed asset sales would play a more important part in driving demand for solvency opinions due to the much closer scrutiny surrounding these transactions today.

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Times are still tough for a lot of businesses. According to recent figures from The Insolvency Service, there were 5,055 liquidations in England and Wales in the second quarter of this year.

This was a 39.1% increase on the same period last year and a 2.9% increase on the first quarter of 2009. So the trend may be slowing but it is still a marked problem. In addition, the number of administrations, receiverships, and company voluntary agreements (1,529 in total) rose by 22.7 per cent on the same quarter last year. 1,027 of these were businesses in administration, slightly down from 1,311 in the first quarter.

So, while companies are still falling by the wayside like victims of a modern-day plague, in the ’survival of the fittest’ world of capitalism, this can represent an excellent opportunity for smarter entrepreneurs. For all businesses it is important to stay fit and lean in order to survive.

Drastically cutting costs is one way to stay afloat. But if you want to develop as an organisation, it is important to progress and be in a position to take opportunities as they arise.

And with so many struggling businesses out there, a failing business might represent an attractive investment opportunity. Businesses can fail for a number of reasons, not all of which mean the business cannot be saved as a going concern.

You really need to look under the bonnet to see what is going on. Incapable or tired management, insufficient knowledge or skill-base in the company, or overriding debts and stifling interest payments can bring a business to insolvency or the brink of insolvency, and all of these can be correctable by the right buyer.

For example, a start-up business could have a healthy and increasing turnover, but may fail due to a difficulty in raising capital.

Perhaps the owner is an ineffective manager, without the necessary skills to structure the business, the marketing skills to capitalise on sales opportunities or the discipline to manage inventory levels. An investor with sufficient financial resources and expertise could turn around such a company; and although capital is not exactly abundant at the moment, the cost of a deal is often a lot less now than it would have been just a couple of years ago. What is vital when considering such an investment is to be able to act quickly and carry out vigilant due diligence.

It is not just the balance sheet of the proposed acquisition that needs to be examined carefully. All financial records should be checked, plus anything else that is material to the sale. This means in essence that all aspects of the business need to be properly analysed.

Commercial due diligence should cover everything from operations to company strategy, and should include a comprehensive analysis of the company’s accounts, including past and forecast financial performance, a valuation of all property and other assets, major customer contracts, intellectual property protection, legal and tax compliance and any outstanding legal issues or action against the company.

In the past, vendor due diligence (VDD) was quite common. But it is a slight contradiction to rely on a report written by the vendor of the business you are buying. Best to do your own legwork.

And it cuts both ways. Vendors could also consider performing a due diligence analysis on the buyer, to review their ability to purchase, as well as reviewing other issues that could affect the business or the vendor following the sale.

Forced sellers are abundant at the moment and there are bargains to be had if you choose carefully and do your homework. Sectors that have been hardest hit, such as retail, hospitality and financial services, can offer good value. Now is not a time for the faint-hearted. If you have the confidence, the expertise, and of course the financial means to take opportunities as they arise, you could be a winner in the Darwinian game.

It is not down to chance that over half (52%) of the 50 top companies in the United States were started in a recession year. And of the top 10 companies, an astounding 8 of them were incorporated in a recession year. It is likely that the tough start-up environment in a recession forms a company culture that thrives by exploiting opportunities whenever and wherever they arise, and that includes buying business at their weakest point.

Of course none of this is easy. Finding the right acquisition can be a lengthy process, requiring a lot of time and effort. And there is risk involved. But the results speak for themselves. And when we do eventually emerge from this recession, it may be those who have had the entrepreneurial confidence during the hard times to take risk and effectively consolidate that ultimately come out on top.

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In this month’s (June 2009) issue of the Business Sale Report, we feature an exclusive interview with Luke Johnson, the serial entrepreneur who made his first big move with the purchase, with Hugh Osmond, of Pizza Express back in 1993 for £15 million.

Since then Luke has owned or part-owned over twenty businesses covering industries ranging from dentistry to retailing and recruitment.

In 2000, Luke set up Risk Capital partners, a private equity firm, through which he transacts most of his deals and has produced around £200m profits a year.

We’ll publish the full interview later in June, but in the meantime our Business Sale Report subscribers will be able to read the full interview in the Members’ area from 1st June.

Luke talks about the UK business buy/sell marketplace, how the recession is impacting upon it and how business buying and selling behaviour and activity should alter in these conditions. Certainly there are always bargains to be had, and the economic climate doesn’t stop Luke from actively pursuing deals to buy niche businesses and established companies.

He also reveals his personal pick of the hot niche sectors to be looking out for great business buying opportunities over the next twelve months.

If you’re not already a subscriber, you can do so now at a specially reduced price.

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