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Business

Tell em he's dreaming

on Friday 17 April / by Tom Beswick

What does buying a business have to do with the timeless line 'tell em he's dreaming' from the 1997 Australian movie, The Castle?

A few of you may remember the 1997 Australian movie, The Castle. It was a comedy classic (personal view here) about a family in Melbourne whose home was being compulsorily acquired by the airport – and the family’s efforts to fight this.

A few times in the movie one of the sons, Steve, reads the local trading newspaper (2 years pre Trademe) – and after telling the dad Darryl about an advert he responds with the now timeless line “tell em he’s dreaming.”

Now here is where I tell you what this has to do with buying a business.

I suggest it is not uncommon for a prospective business buyer to go to an accountant all excited to tell them about the potential business they have found to buy. And sometimes the response is effectively “tell em he’s dreaming.”

Now of course at times this is absolutely the right thing to say. There are vendors out there who want moon beams for their business – and it is our job to advise our clients that that price is too high in that case.

However, I believe there are other occasions where we risk pouring cold water on an idea – without necessarily holding all the facts.

Generally, accountants see a lot of businesses across many industries – which means we see success but also failure. We want to protect our clients from poor decisions. But what we do not see as often as business brokers is what businesses sell for.

Most of the time when a client brings us a business to consider, they do not want to pay for us to do our own valuation. They just ask us for our views on whether it is worth the price. We must watch out that we give advice based on facts – and not any inherent bias that a value should not be over say a 3x multiple etc.

There is a risk that if we do not take the time to understand the opportunity, the motivations and plans of the buyer and the reasons for why the business is asking we may do our clients a disservice.

People buy businesses for many reasons – and money is just one of them. Sometimes it is for lifestyle and location reasons. Sometimes it is just to have the opportunity to be self-employed. Often it is a bit of all the above.

Now accountants are not taught what to do about any of the touchy-feely reasons, so we gravitate to the numbers by nature. Sometimes that can risk souring a buyer on an idea they were previously excited about – and that might not be in their best interest.

As a rule, I think it is fair to say that most asking prices bear some relationship to the valuation the broker has done on the business. That appraisal should be reflective of what other people have paid in recent times for similar businesses. So, it should (for the most part) be a reasonable starting point in a negotiation.

Overall, I believe the accountants role is to understand why the vendor is asking for what they are, and then to help the prospective buyer understand the wider opportunities and risks of the acquisition – not just the multiple of profits being asked. I think this is more valuable advice then a default setting of “tell em he’s dreaming.”