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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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 quids in, and we will see more of our friends from over the pond spending money in our shops. At the Business Sale Report we think there might be another reason the cheap pound could benefit UK plc. Businesses 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.

In our view, Sterling is undervalued for a number of reasons. In the first instance, the media have gone into overdrive about the state of the economy partly because they love bashing the Labour Government. In addition, there is a 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.

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.

Other commentators have argued that the pound�s fall is partly related to the curtailment of international banking flows into the City. Therefore it becomes an indicator of the perceptions of global financial risk. When risk aversion rises Stirling gets hammered. Things change � after the 1976 IMF crisis the pound rose from $1.65 to $2.40.

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.

In addition, the likelihood of a high number of distressed companies for sale in the UK has attracted the interest of Vulture funds. A recent poll of a 100 funds by Debtwire, the news service owned by the Financial Times, found that they ranked the UK ahead of Germany, France and Russia as places to invest. Another reason for the funds� interest is the relative friendly bankruptcy regime in the UK which is seen as more favourable to creditors compared to other European countries

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Now that the ‘easy-credit’ party is over and businesses are facing uncertainty in the face of a faltering UK economy, there will likely be extraordinary opportunities for entrepreneurs to buy distressed businesses.

Recent figures released by the Insolvency Service reveal just how difficult the situation has become for some businesses. Between April and June this year, there were 3,560 liquidations, up 12 percent on the first three months of the year and a 15 percent increase on the second quarter last year. It also looks like the third quarter of this year will show a similar, if not higher, increase. Receiverships, often initiated by the high street banks and involving businesses that are at least three years old, have also more than doubled.

The Business Sale Report’s own figures show there were 2084 Administrative Appointments recorded throughout England and Wales in the first eight months of the year. This represents a 51% increase over the same period last year (1379). The industries most affected are property and construction. Other sectors suffering are those reliant on household discretionary spending including retail of white goods, furniture and leisure-based industries including travel, pubs and clubs.

Before venturing further, it is necessary to understand exactly what a distressed business is. The Insolvency Act 1986 (Section 123) sets out two primary forms of validation. The cashflow test. Where the business is unable to pay debts as they fall due; and the balance sheet test. The value of the business’ assets is less than its liabilities, taking into account its contingent liabilities and prospective liabilities. Obviously the degree of seriousness determines whether the business is liquidated or put into administration or receivership.

So why buy a distressed business?

Only buy a struggling business if you understand exactly why the business is currently in trouble, you know how to turn it around, and you have an exit strategy.

The one important myth to dispel is that the purchase of a troubled business is a bargain. The old adage that “if it looks too good to be true, it usually is” applies here.

Print film in a digital world�. many industries have a lifecycle that ultimately come to an end. If the product or service is no longer required at a level of need that enables you and your competitors to make a reasonable profit, why take on that struggling business and try to beat the odds?
Profitable investing in a distressed company is no different than investing in other types of business. It requires selecting a business, that once stabilised, has a demonstrable demand for its product or service going forward, for at least long enough to maximise your return on investment prior to or at your intended exit.
So you must do your research. Why is the business in trouble? Careful due diligence is absolutely critical in connection with a distressed business due to, amongst other things, the likelihood of limited or complete lack of recourse once the business has been bought.

So here are the important questions to ask:

• Is the business overburdened with debt?
• Are there any significant liabilities such as an adverse judgement or product liability claim?
• Are any tax losses available?
• Has the business lost key management?
• Are the company’s problems merely due to poor delivery or execution?

The ability to maintain the value of contracts going forward is essential. There may be restrictions on assigning contracts. Insolvency status may invalidate them and previous non-performance of contracts may incur penalties.

One of the main reasons that entrepreneurs buy businesses is the belief that they will be able to run the business better. So a buyer needs to be sure that they have what it takes to achieve this. The business may have been run poorly only because management time was taken up by a problem in the recent past so the current management are not incompetent, just distracted.

Of course, when buying a distressed business, ‘time is of the essence’, so it is important that you have a full team assembled so that you can go in and get all the information that is required quickly.
An entrepreneur has two possible methods of buying distressed businesses: either he or she can buy it to prevent it going officially insolvent, or else wait until the business is declared insolvent and buy it from the insolvency practitioner. There are advantages and disadvantages of both methods. We published an article on how to buy a business out of insolvency in the “September 2007″ edition, which you can access here. Here we will look at more general aspects of buying a troubled business.

How to find a distressed business.

A proportion of businesses up for sale are in some form of stress, as financial problems are often the catalyst that prompts the management to seek a sale. In addition to the listings here, you may consider contacting businesses via a trade association membership list, appropriate when a whole industry is in trouble i.e. estate agencies.
Specialist intermediaries are particularly useful if they also have considerable turnaround expertise. If you are known to them, you will usually be treated as an important buyer prospect, particularly if you have previously demonstrated the ability to act decisively and close a transaction in an efficient and timely manner.
Investors should be prepared to sift through many bad opportunities, and also accept that, for the good ones, there may well be a competitive bidding environment. If this happens, what, then, is the right price to bid? The “value” of a distressed company is often difficult to ascertain. The right price is going to be different for every bidder, because no two bidders:

• plan to run the business in the same way
• will effect a turnaround and stabilize the business in the same manner
• know how the business will integrate with the other businesses they hold.
• have the same cost of capital structure.
• have the same growth plans.
• share the same exit strategy.

In the current climate, where lending is drying up, the cost of capital is a key factor. Entrepreneurs who have large amounts of cash and do not wish to be highly leveraged are at a definite advantage at the moment.

So buying a distressed business can often have distinct advantages over alternatives. Start-ups always require more investment, in time and money, than is typically budgeted for. Moreover, there is often little or no track record of acceptability of the product or service. Profitable businesses have few reasons to sell other than to generate fast cash in excess of the net present value of the anticipated stream of the future cash. At the moment there are many owners of profitable businesses who are holding out for stretched multiples. So entrepreneurs who are keen to rapidly expand their portfolio of businesses interests would be advised to take a serious look at distressed businesses.
Another opportunity that cash rich entrepreneurs can exploit is the possibility that businesses might be divesting assets and divisions in order to improve their liquidity. According to Michael Garstka, a partner at Bain & Company, asset values are lower than they have been for a long time. “The downturn provides opportunities not just to acquire direct competitors, but also potentially key parts of your distribution networks or even choke points in your industry’s supplier chain.”

It is generally true that it is advantageous for the acquirer of a private company to purchase the assets not equity of the business for two main reasons – the tax advantages; and the fact that you will not be inheriting all the liabilities of the business. However, some assets still have liabilities attached to them such as contaminated land clean-up costs. Also, a purchaser may find him/herself exposed to intellectual property disputes on products. The entrepreneur will no doubt be under pressure from the seller to buy the entire company, but each situation is different and it is down to smart negotiation and good advice on structuring any deal.

In conclusion, if you have got what it takes to turn around a failing business, have cash in the bank or the ability to raise finance on good terms, then you are in a winning position. Cash is king. There are more failing businesses to choose from and fewer serious buyers in the market. This all leads to the prospect of rich pickings for a smart investor who is in a strong position in the market when the economy eventually picks up.

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