The best news that the business community could have received to start the new year is the success Australian banks have had raising overseas debt finance on the back of the Australian Government deposit guarantee.
The best news that the business community could have received to start the new year is the success Australian banks have had raising overseas debt finance on the back of the Australian Government deposit guarantee.
As a result we may see some dramatic changes in parts of the SME business sector. And the combination of the availability of bank funds and the heavy retrenchments taking place in the finance sector may revive demand for the better “I am the boss” businesses, along the lines of what happened in the 1990s.
The Australian bank deposit base is not large enough to fund our need for loans and if the tight overseas markets we experienced in the second half of calendar 2008 had continued in 2009, we would have experienced a massive credit squeeze and a severe recession.
The Government’s deposit guarantee facility was introduced to prevent this happening, and it is working.
NAB recently briefed its business clients, stating that it was “business as usual”. That’s not totally correct, but the basic message is encouraging and will be followed by other banks.
The Federal Government is virtually forcing banks to pass on to residential home mortgage holders the full extent of the Reserve Bank interest rate cuts, so business is being forced in turn to cover the higher cost of overseas funding. Business interest rate cuts have not matched home mortgages.
Longer term, however, the fact that business lending offers much higher margins will divert money to the business sector. Banks are now undertaking much more vigorous credit checks than two years ago – an overdue development. It is also still very tough for those who previously relied on non-bank lenders to gain finance, especially if their balance sheet is not first class.
Nevertheless, despite the interest rate situation and the tighter credit checks, the availability of bank finance is going to help the selling prices of small to medium sized businesses.
Last week I described how a survey by the BizExchange group showed that small businesses with a turnover of between $500,000 and $1 million operating in manufacturing, wholesale, retail, accommodation, restaurants and transport were being sold on an average EBIT multiple of only around two. Many businesses were sold for an EBIT multiple of less than one.
Peter Gwynne of Queensland-based business sales specialist Hallmark adds a different perspective to the BizExchange data, and forecasts a return of buyers for smaller business. He says: “The softening of the multiples used in the calculation of selling prices of businesses described in your recent article can be attributed to panic selling and businesses in decline, where an owner is anxious to get out at any cost, and cannot be related to global economic effects.
“What we have experienced is a lack of buyers since September’s mostly bad news from the US and Europe. But we are now seeing a rebound-like return of buyers to the market for high quality businesses, especially for the ‘be your own boss’ sector. My firm specialises in the sale of businesses in the categories of manufacturing, wholesale, retail and distribution – and generally high quality businesses in those fields. In the past 20 years we have not seen any significant fluctuation in the multiples in the calculation of selling prices of businesses due to cyclic economic conditions, and that predominantly remains the same today,” Gwynne says.
“Multiples vary with the size and type of business and can range from one or even less for a ‘buy you a job’ type business through to three to five time’s earnings for sizable businesses in the $2 million-plus range. Those categories that have recently experienced diminishing returns, such as childcare centres, post offices, hotels, storage sheds and management rights, have subsequently felt a shift in demand and therefore these have started to soften substantially compared to 15 to 20 years ago when the multiples on these categories were comparable to the industrial-based sector,” he says.
“However, throughout this time, the industrial sector of the SME market has in fact managed to increase in business value by increasing EBIT and the application of a consistent multiple – that is, their profits went up so their business value went up when multiplied by the same factor,” Gwynne says. “It follows then that in a weaker earnings market the business value will fall, based on lower earnings. To penalise the SME owner by lowering the multiple on a decreased EBIT is surely double dipping. There are many SMEs increasing sales and profits and these businesses still have significant value.”
Those smaller business people I spoke to over the Christmas/new year period who were involved in the building or resource industries were very nervous. Some tradespeople were selling their highly mortgaged holiday homes. And those executives who had been living on big bonuses in the merchant banking industry were also selling their mortgaged holiday houses.
However, many enterprises were not seeing their demand collapse but were nervous because almost every time a politician speaks they refer to the “global financial crisis”. The combination of the Government bank guarantee, lower interest rates and the Rudd package has cushioned big areas of our business sector from the worst of that crisis.
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