Going, going, SOLD!

We unpack the reasons why even good businesses are struggling to be sold.

By Kobus Oosthuizen

Through the years SA Franchise Warehouse has advertised a fair number of genuinely well-priced existing businesses and while there is no shortage of interest from credit-worthy prospective buyers, very few sale/purchase transactions where the purchaser had to procure funding, as is most often the case, ever materialised.

Why is it that a profitable business operating under the banner of a great brand is difficult to fund, even if the purchaser meets all the requirements as far as own contribution, credit record and skill sets are concerned? More often than not the reason for declining the application relates to the valuation and/or financial compliance or the integrity of information relating to the business being sold.

An existing business sold as a going concern should be valued using either the future discounted cash flow or earnings method. Rather than relying on what the current owner believes the business is capable of in the future, both these valuation methods use declared past performance as the primary assumption for the valuation. Actual, accurate financial information compiled by an independent accounting officer is a key piece of information serving as the cornerstone of any valuation.

All funders are bound by the requirements of the National Credit Act (NCA), which aims to protect the borrower. Should a funder approve a loan on an overvalued business, or where evidence supporting past performance is lacking, and if the future performance of the business does not allow for it to service the debt, the borrower may have a case against the funder on the basis that it did not comply with the NCA and may even have the loan agreement declared invalid. As funders have lost money in this way, they are rightfully sensitive towards requirements that prove the value of the business.

Other reasons for declining a funding application may pertain directly to the ‘object’ being sold. Commercial funders, for example, will not fund a vehicle that has been in a serious accident as they consider the security value of the vehicle to be compromised.

The frustrating part for the seller is that all the time that a funder took to decline the transaction, the business could have been exposed to other, possibly cash, buyers. Cash buyers are obviously any seller’s dream come true but such transactions are extremely rare. 

The solution
Any business that is going to be put up for sale should be prepared for valuation so that when the funder performs its due diligence, all the boxes have already been ticked. It is always advisable to assume that the purchaser will require funding and that all institutional funders are likely to ask the same questions.

Having facilitated loan origination transactions for many new and existing franchises over the last decade, SA Franchise Warehouse has developed a sound understanding of exactly what funders require when considering funding applications. If basic sale and purchase requirements are met, SA Franchise Warehouse is in a favourable position to originate funding for the purchaser, but only after a proper due diligence has been conducted on the business to be sold, and provided that the seller has implemented the recommendations as per the due diligence report.

SA Franchise Warehouse is not a business broker and does not charge a commission to the seller for facilitating a sale. Instead, SA Franchise Warehouse levies a fixed due diligence fee payable by the seller for performing an audit on the business. 50 Percent of the fee is payable in advance with the balance payable after the audit has been concluded, but prior to the presentation of the due diligence report. The purchaser is charged a percentage of the loan value as an origination fee and to cover legal costs.

By virtue of its networks, funding business model and media channels, SA Franchise Warehouse has access to a huge database of potential buyers.

If a franchised business owner wishes to put their business on the market and appoints SA Franchise Warehouse to perform a due diligence, we will advertise the business in our publication at no charge, provided all the recommendations per the due diligence report have been implemented. In short, SA Franchise Warehouse is reluctant to advertise a business for sale if it is doubtful that the business could be funded for the purchaser.

If are you are interested in selling your existing business, contact Debbie le Roux on +27 12 460 2345 to discuss your options.