Fealty Articles

Business Valuation in New Zealand

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 specific guidelines to help. As the business world became more complex, with more people buying and selling businesses, it became necessary to have a more accurate way to value these companies. That’s why business valuation has transformed from an art, to a mix of art and science with clear methods and standards. So, while it might sound complex, business valuation is about combining real data with educated guesses to come up with the best estimate

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

Crowd Funding with Simeon Burnett of Snowball Effect

Episode 8 of the Curious Kiwi Capitalist Podcast 28 January 2020 My guest for this show is Simeon Burnett of Snowball Effect, a crowd funding platform and private equity marketplace. We discuss the crowd funding and equity raising landscape. Snowball Effect tends to work in the post-earnings post start-up stage of companies rather than the start-up and rewards part of crowd funding. Simeon walks through how Snowball Effect helps connect entrepreneurs to investors. We get into the weeds with their process including screening, wholesale investors, documentation and the like. We finish off with his career in corporate finance at Fonterra

Venture Capital with Lance Wiggs

Episode 7 of the Curious Kiwi Capitalist Podcast 12th December 2019 My guest for this episode is Lance Wiggs, Manager of the Punakaiki Fund, a Venture Capital fund. We discuss the New Zealand venture capital landscape and how a venture capital firm operates. Lance takes a different approach to most VCs in how he has structured the LP side of the Punakaiki Fund with capital raising from wholesale and retail investors over time rather than a smaller number of instituional investors up front. This is partly due to the shortage of NZ venture capital investorssomething we also discuss. We finish off

Tax Reform including Capital Gains Tax with John Shewan

Episode 6 of the Curious Kiwi Capitalist Podcast 25 September 2019 My guest for this show is John Shewan—former chair of PWC, and serving Adjunct Professor of Victoria University and independent director. In this episode we discuss: Why the Capital Gains Tax (CGT) 2019 recommendation failed Lessons from tax reform through the decades including: the rebellion against Muldoon’s tax rates, wide support and importance of the broad-base / low-rate approach, always talk about tax in terms of tradeoffs and how taxpayers will be no worse off e.g. Sir John Key selling the GST and income tax rate changes together, unless

Long-Term Private Equity with Ian Frame

Episode 5 of the Curious Kiwi Capitalist Podcast 13th September 2019 My guest for this show is Ian Frame, retired CEO of Rangatira Investments, a long-term private equity firm. In this episode we discuss what is a private equity firm, what’s their fees, investors and strategy the difference between classic private equity (PE) firms and long-term PE firms what sort of investments they’re after and their investment horizon stock market crashes, investor cynicism and regulation venture capital and angel investing and much more.. Show Notes About Ian Frame was the CEO of Rangatira, a long-term private equity company, for 11

Entrepreneurship & Early Venture Capital in NZ with Richard Higham

Episode 4 of the Curious Kiwi Capitalist Podcast 27th August 2019 My guest for this show is Richard Higham. Richard is one of the top business academic practitioners in New Zealand history. He has not only experienced but researched and studied entrepreneurship. He has run his own firm, consulted to corporates about entrepreneurship, and saw the start of venture capital in NZ before “venture capital” was even really a word. Now in his eighties, he is still going strong, as you’ll see he is the master of the rhetorical question and pretty much ran this interview himself! In this show,

Search Funds in Australasia with Alexander Simmons

Episode 3 of the Curious Kiwi Capitalist Podcast 15th August 2019 My guest for this show is Alexander Simmons. Alex is the founder of Voyager Equity a search fund. Search funds are completely new to New Zealand with no fund yet launched but with some interest from Kiwi searchers overseas. In Australia they have gained traction in the last couple of years with at least two funds succesfully acquiring businesses. Alex is the first Australian search fund to get investment for “search capital”, the traditional first tranche of investment in a fund. The other two funds self-funded their search and

M&A and Business Sale Legal Process with David Quigg

Episode 2 of the Curious Kiwi Capitalist Podcast Show 9th August 2019 My guest for this show is David Quigg. David is the head of Mergers & Acquisitions at Quigg Partners a boutique Wellington law firm specialising in M&A and a few other specialist areas. In this show we’ll discuss M&A from a lawyer’s perspective including: publically listed company M&A process and the differences with private company M&A a practical approach to buying and selling a company including agreeing on key terms in an MOU (while being careful about what is binding) how a fixed auction process is unusual in

NZ Public Capital Markets with Sir Eion Edgar

Episode 1 of the Curious Kiwi Capitalist Podcast Show 4th August 2019 My guest for this show is Sir Eion Edgar KNZM. Sir Eion recently retired as Chairman of Forsyth Barr, a firm he was with for almost 50 years with the last 20 as Chairman. There are few people who know more about the New Zealand public capital markets. In this show we cover the evolution of the public capital markets including: Show Notes About Sir Eion Sir Eion is well known for his time at Forsyth Barr but he is also a skilled private markets investor and philanthropist.

Curious Kiwi Capitalist Podcast Introduction

Episode 0. Introduction to the Curious Kiwi Capitalist Podcast 1st August 2019 The Curious Kiwi Capitalist podcast is about the New Zealand capital markets and the people in them including: asset allocation and portfolios private business capital structure business valuation M&A process behavioural finance capital allocators private equity venture capital alternative investments investment strategies and how we apply them from NZ (e.g. passive, active, factor based, savings vehicles including ETFs, PIE funds and KiwiSaver managed investment fund CIOs hedge funds IPO and NZ NZX ASX banks, non-banks, reserve bank, investment banks financial advisers due diligence negotiating a sale and purchase