Between the Devil and the Deep Blue Sea
November has arrived and the management rights industry powers ahead. Sales are occurring on a near daily basis with purchaser enquiry also at a near record high!
Alas stock is at an all time low. Be it holiday or permanent management rights the emails and general inquiries continue to be above average and the mobile phones of the brokers continuously ring with strong buyer enquiry.
The solicitors have desks of contracts as do the industry accountants and financiers. Management rights that become available for sale with a willing vendor and an industry savvy purchaser, packaged along with high net incomes are highly sought after and strongly negotiated. It is not uncommon for above market value contracts being exchanged on a regular basis with the majority eventually ‘sold and settled’.
I dusted off my Crystal Ball, gazed into the past history of the industry and found predictions of the past have come to fruition. The vendors appear to be better prepared when deciding to go to the market, purchasers leave no doubt they have all done their homework. It is now established first and foremost that the old days of so called fixed multipliers are gone. Finally after many years of seminars and forums, the industry professionals are all, or at least the majority of them, handling contracts that are highly negotiated on the basis that each sale has its own particular value.
The majority of industry accountants appear to have the same formula when preparing a profit and loss for sale purpose or verifying for a purchaser at contract. Gone are the days of industry averages and unusual add back of wages and quality of life choices. Solicitors also have a stronger response time on due diligence issues and banks directly, or in association with the recognised finance brokers, have a stronger qualification process. Consequently, all of the above lead to the header Between the Devil and the Deep Blue Sea.
Between the devil and the deep blue sea is an idiom meaning a dilemma, that is to choose between two undesirable situations (equivalent to being between a rock and a hard place). Yes I am referring to the industry recognised lending institutes lack of, or in some cases poor selections of, so called industry recognised and bank panel appointed valuers. There is no argument the previous global finance crisis had a slowing down effect on the number of management rights transactions that took place. Numerous management rights owners where asked by their respective financier to provide a current profit and loss for the past 12 months. Given the tourism industry was being affected by the high Australian dollar exchange rate, tourism numbers were down both internationally and domestically, hence it was always expected the net profit of these management rights would have had a diminished bottom line.
The industry also at this time had very few management rights with high net profits go to the market, the majority of the large net profit contracts that were forthcoming were due mainly to financiers calling in debt. The majority of these cases were due to the new valuations that financiers asked of the management rights operator. Unfortunately this resulted in some of these owners of particular management and letting rights being unable to continue their business based on the financiers new borrowing demands, hence “receivers and managers” were appointed.
We in the industry have had numerous meetings with many of the financial institute appointed valuers to seek clarification of how the actual valuation was obtained. The real estate component is not a problem and can be backed up from various business sources. We have been told in the majority of cases the valuation is compared with current and past sales to come up with the valuers term ‘year’s purchase factor’. How, in layman’s terms, can this be apples for apples? If the business contract has a net profit of for example say of $800,000 and no sales in this range of net profit have occurred in the past 12 months, how can a comparison even be considered?
We have a business contract price of, lets adopt 5.45 multiplier or in valuation terms, ‘year’s purchase factor’. This hypothetical contract is a sale highly negotiated by a willing seller and an equally willing purchaser. Given there have been no sales of this value or in this geographical area for the past 12 months, what is the valuation?
The valuer appointed by the financial institution is looking for current sales to obtain a comparison, how does this so-called comparison become a valuation!
The sooner the management rights industry addresses this ancient and outdated practice, the sooner contracts of sale between two willing parties on a win-win basis will settle on a regular basis. One further example for consideration: the highest recorded sale of an active holiday building in a popular holiday location with a net profit of, let’s say, $950,000, sold and settled and adopted was at a year’s purchase factor of 5.5 times. At round about the same time another business contract was being negotiated. Both parties are willing to sell on the negotiated terms (agreed business price). The net profit is $2,400,000. No sale of this net profit has ever occurred past or present. There are certainly no comparisons available, it’s not apples for apples. The year’s purchase factor is well above 5.5 times. What is it worth? The answer is simple “the negotiated and contracted price”.
In closing I again quote we are Between the Devil and the Dark Blue Sea.
There must be another way to overcome this continuing problem. This article is the opinion of the writer and should not be read in any other way.
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