Often, brokers handling the sales of newsagencies add back owners wages to the profit of a business before determining the selling price. For someone who has not purchased a newsagency before this can provide a false view of what the newsagency is worth. They see a ‘profit’ of $150,000 a year and think that is a nice return. Once you factor in that the husband and wife running the business together put in 100 hours a week, the real net profit of the business is under $50,000.
My view is that the multiple, if used in setting the sale price of a newsagency, should be based on real net profit and that real net profit must reflect a fair wage for the owners time working in the business.
I have seen recently situations where the add-back approach results in new newsagents paying over the odds and wondering, three or four months in, why they are not making the money pitched by the vendor and their broker.
I appreciate that this is a contentious issue. It is, however, something we need to discuss and resolve. The financial health of our channel depends on new newsagents joining us on fair and equitable terms.
Mark,
You could apply this to just about everything you see these days…..the number crunchers just keep playing around with figures until they get the result that they want….governments have been doing this forever.
When people buy a business it pays to have an accountant look over the books to give a true position of the business, I would not trust what a broker says as it is their job to sell the business for the best price.
I, like you Mark, buy one of all the syndicates we do. Whilst not being a necessity, and still drawing a wage I would still consider this type of thing to be in the profits, but it would also affect the turnover if the new owner did not do this practice. Very confusing!
Best the buyer get an accountant to look at the business first.
I don’t see a problem with this as long as there is a breakdown of the profit showing how much of it this accounts for. When we bought ours it was included in the profit, but was clearly stated as the owners salary.
Mark
Business valuations iffer from industry to industry. P.E. Ratios are a part of the industry, usually, believe or not set by banker’s actuarial staff.
Never by the broker. The broker is merely a present of figures. He dosen’t own the business. The responsibilities of broker vary depend largley on the individual broker. Newstrade prefers to “examine” the figures and conduct its own Due Diligence then discuss same with the owners Then if agreement and marketing techiques can be agreed upon ti goes to market WITH FULL DISCLOSE. It is noted that the industry allows 110 hours for H&W or two partners. This is a Bank proposal as it sets a standard. Most franchises including McDonalds do the same. Why because a set wage cannot be struck to suit all. So what’s left over B.O.S. or EBIDTA Before owners salary or Earnings Before Income Tax Depreciation and Amortisation. These are accepted and normal accounting standards and are employed by the Due Diligence Accountants representing this industry. It is therefore up to the purschaser very simply to deduct those expense that he/she nees to live on and the rest is there to be distributed after tax and loan repayment -to shareholders.
Pretty simple really – tricks there, unless ofcourse the buyer presenting your agument dosen’t want to pay Goodwill.
I have yet to meet a newsagent that doesn’t want Goodwill, usually a higher one than the going rate. Good luck to them for if their books are “clean” and accurate they deserve it. The purchaser can clearly substantiate the profit in this industry as most lines have fixed margins.
I am more than happy to demonstrate how an accountable profit can be determined.
The biggest lie is that newsagents understate their wage pay-outs to staff – understate how many hours they work and oversate -if they can-their earnings. Most of this is not deliberate so much as they want to maximise their opportunity when selling.
I don’t particulary agree with that approach and find the best way to avoid such is to do the Due Diligence before listing so their can be no misunderstanding.
Banks also look at rik minimisation (today’s phrase) they want more (room) in the housing loan than ever before. They want proof os some sort of skill set in retailing and they want contracts-publisher-lottery etc plus a substaintial lease with good terms. I posted a report written yesterday by Business Spectator on the current plight of SME’S and the Banks’ position within that scenario. on the Newsagents Yahoo site as an attachment. I suggest those that are interested readit.
Also as a point the Banks have reduced their exposure to certain industries by lowering the P.E. Ratios on lending Hotels have dropped by up to 40% of previous price earnings some from $53m to $28m most from $12mto$10m or even $8m.
Newsagencies have also been allocated lower P.E.’s Franchises and Pharmacies as well.
Mark, with respect there is a lot more to the newsagent taking over and finding within 3 months that they are cash strapped, than the fact they paid Goodwill for the owners earnings.
We actually insist on all purchasers getting a due diligence and get them to acknowledge if they don’t.
Our P.I. Insurance is too high otherwise.
Good explanation Graeme,
Having done in the last year due diligence for several business, one of which was a Newsagency (and one of the reasons I read this blog). It’s industry standard to add back owners wages when working out the sale price of a business and goodwill.
We take several approaches to working out the sale price, and it usually is ex-wages, ex-interest etc. We still do all those calculations for the owner to help guage the quality of the investment.
A business might have profits of $250k after owners wages, or $400k without owners wages. We then might say the business is worth between 800k-1.2mill as an owner operator (being an average 40% risk factor).
But if you still pay the 1.2 million and put in 2 managers instead of the owners working (and still make $250k, which is debateable) your rate of return is only 20%. Its up to the new owner how they want to run the business either as a “worker” or as an “investor” and they get paid accordingly
Just reviewing a newsagency profile and the shop staff wages have been added back into the “adjusted net profit” on the basis the wife is not involved in the business and used for all calculations. The broker claims a great return despite the business only providing two average full time wages.
I believe this is wrong- – Wages of staff either owners or managers must not be added back into the bottom line – Many people are paying far too much for newsagencies as owners include this and then brokers value the business on that.
Jas,
I am a newsagent and the way I am structured I do not take a wage, but draw money from the business…
Therefore no wages will appear on the P&L, thus if there is no adjustment for those who do pay themselves a wage which appears on their P&L you cannot compare apples with apples…
Jas after all you are buying a revenue stream to provide you with an income, the question is what is someone willing to pay for that revenue stream…
Cheers
Peter