Fealty Articles

Business Valuation in New Zealand

In summary, there are three approaches to business valuation. The Income Approach calculates future earnings and divides it by a capitalisation rate representing risk. The Asset Approach sums up the assets at fair market value and subtracts liabilities. The Market Approach uses ratios of similar business sales transactions. Discounts for control and marketability may be applied to these indicated values. Here’s the process and those calculations in more detail. How to value a business in New Zealand Back in the day, figuring out what a business was worth was often guesswork. People relied heavily on their intuition because there weren’t many

Business Valuation for a Divorce in New Zealand

Business Valuation for a Divorce in New Zealand In this article, I’ll step through the business valuation process from a divorce perspective. It may be useful to read my general article on business valuation first. Business Valuation for the Purpose of Divorce How do you value a business for the purposes of a divorce situation in New Zealand? The business valuation principles remain the same but there are some differences from other business valuation situations. The courts have said that a valuation is no different an exercise from other purposes and that, “it is essentially a practical question: and which

What is Enterprise Value in New Zealand

What is Enterprise Value in New Zealand Enterprise Value (EV) is a business’ total value, including equity and debt, but not cash and cash equivalents. It’s often used for M&A situations where the phrase ‘debt-free and cash-free’ is often used in share sale and purchase terms. Likewise, it is often used in the market approach public comparables method. The data is usually Enterprise Value (but sometimes MVIC, see below) so this is the appropriate comparator to use. In a public stockmarket listed company, the calculation is reasonably simple:EV =market capitalisation (share price times shares)plus total short and long-term debtless cash

What is the Meaning of EBPITD?

What is the Meaning of EBPITD or SDE in NZ? EBPITD stands for Earnings Before Proprietor’s (wages), Interest, Tax, and Depreciation. EBPITDA stands for the same thing plus Amortisation. New Zealand is moving to the American phrase Seller’s Discretionary Earnings (SDE). EBPITD’s meaning depends on the source. In New Zealand a small business sales transaction database called BizStats defines EBPITD or SDE as the earnings of the business before:– proprietors income (salary, wages, director fees)– interest– taxes– depreciation How to use EBPITD or SDE? EBPITD or SDE is used in the market approach in a method variously called Private Comparables (and

How to Sell a Business in New Zealand

Bruce McGechan literally wrote the book on selling a business in New Zealand. Below is the introductory chapter of Part II of the book explaining the business sales process from a New Zealand perspective. The Business Sale Process (Chapter 21) Introduction This chapter gives an overview of the process of selling a business to a third party whether it be a 100% sale or a partial sale. It steps through each major part of the process. The following chapters go into a little more depth of each part. Intermediary Advisor The business owner first appoints an intermediary. See Chapter 23

Business Exit Planning in New Zealand

Bruce McGechan literally wrote the book on exit planning in New Zealand. Below are the first four chapters of the book explaining the core concepts of exit planning from a New Zealand perspective. Most Businesses Don’t Sell (Chapter 1) I really liked my client. He was a hard-working entrepreneur who built a business that offered a unique health treatment. His business was promising, offering a unique scientific health approach, it required licensing, was widely used in America and Australia but was yet to take off in New Zealand. He had started in Wellington and was expanding into Auckland. It had oodles

Personal Financial Planning for the Business Owner

When you are preparing to sell a business through an exit planning process you consider “three legs of a three-legged stool” (Chris Snider). The first leg is the business itself, the next leg is your personal life-after-sale readiness, and the last leg is your personal financial readiness. If all three legs are not ready to support the exit then the stool may get wobbly and fall over, to use Snider’s analogy. This article is all about the last leg, personal financial readiness. It combines the financial advice and investment planning of a “wealth manager” or “financial adviser” working in a

How to avoid Business Owner Seller Remorse and an Unhappy Retirement

Being a business owner can be all-consuming with no time to think about life-after-business. And yet, when you exit the business you find those 60 hours weeks are now left with…what exactly? Those highs and lows you get from the business are replaced with golf and… It’s said that people retire and go through the five of seven stages of grief, their lives seem over. This “seller’s remorse” covers two situations. One where the business owner is about to sell their business but, when forced to think about retirement, changes their mind, cancels the sale (even if at a high

Valuation for Start-Ups from a Venture Capital perspective

This article outlines approaches to valuing a new venture from a venture capital (VC) perspective. It attempts to help early and late-stage start-up entrepreneurs value their business when raising equity. At its heart business valuation is the sum of the discounted future cash flows. Easy to say, or write, in practice it’s difficult. Difficult for a mature listed public company where accurate information that’s readily available and the business is regularly marked to market, and even more difficult for a mature profitable mid-market private company. But it is probably most difficult of all when it is a new venture that

Valuing a Share Sale Offer vs an Asset Sale

This article is for those valuing a share sale for a mid-market private business. It is crucial to understand the offer’s net asset position at settlement before you can understand the total value of a share offer to the seller or buyer. Mid-market business prices are usually expressed as “Price plus SAV” (stock at valuation). The presumption is that the purchaser’s lawyer strongly advises not to buy shares because there are unknown liabilities attached to the limited liability company that you may be exposed to. Lawyers prefer asset sales to avoid unknown liabilities—the buyer’s own limited liability company buys the

A Private Capital Markets view on the Capital Markets 2029 Report

To remarkably little coverage (or PR fanfare) the New Zealand “Capital Markets 2029” report came out on 10 September 2019. Kris Faafoi, the Commerce Minister, seemed to kick it for touch (NBR interview) which means it will now wait a National government I guess, or perhaps he is waiting on MBIE to digest the 101 page report (about half of which are strange stock photos). I think its a superb report, and to save you time dear reader, I have pasted the parts to do with private capital markets below in italics with the relevant page number, and my comment.

Search Funds in New Zealand: what are they and a way forward

This article describes search funds and their application in New Zealand. It suggests a way forward for New Zealand searchers, the investment community and business owners looking to exit. A search fund receives capital from investors for the entrepreneur (“searcher”) to search and acquire a SME business. The searcher aims to improve the business over a period of 3-7 years and sell the business at a much higher value. Stanford’s 2016 research (Stanford GSB, 2016) on fund performance shows investors received a 36.7% internal rate of return (IRR) and 8.4x multiple of investment. There were 258 search funds by the

Business Valuation in the COVID-19 Recession

So how do you value a private business in New Zealand in these covid19 recession times? It’s not simple. The process I suggest is to: work out if your business truly is a going concern forecast your earnings and balance sheet during and post-shutdown analyse the risk of those future earnings in the coming years look for recent market data consider asset values accept the uncertainty of the valuation but be clear about assumptions and consider a staggered sale of equity. Let’s go through these. Going Concern: can the business survive? This is simply about cash flow or solvency. Do

The Contract for Selling a Business

So you’ve found a buyer, you’ve pre qualified them to establish they have the financial resources and skills to buy the business and aren’t just kicking tyres or attempting to find out confidential information. Before you open the books of your business for due diligence you want a signed contract to sell the business. This is known as a “sales and purchase agreement” or “sales contract” or “purchase contract” and various derivations of this. Note: this article does not provide an agreement for you to use for a sale and purchase of a business. You’ll need to either buy one