Here at Business for Sale blog, I’m sometimes asked, “What is a trial?” in respect to business listings. If you’ve spent time looking at business listings online and offline, you’ll eventually see wording along the lines of “Will trial at $8,000 per week” (or any amount – it depends on how well the business is doing).
So what does this mean?
Well, it’s all about making sure you’re comfortable with what the business makes each week.
If you had read my post on multipliers, you’d know that a business can be valued based on a multiple of its sales or profits. And if you’re buying a business priced that way, you want to get what you paid for, right?
You’d want to make sure those sales or profits are reproducible, right?
But how do you know the seller is telling you the truth?
A trial allows you to be part of the business for a set period of time (usually two to four weeks), where you can be in the shop to see money flow through the cash registers. You’d also be able to check end-of-day reports to see totals and ensure that the sales are in line with what the trial says.
At the end of the trial period, if the average of all weekly sales equal or exceed the trial amount, the contract goes through and the business is yours. But if it falls short, the contract can still go through…
Huh? What’s the point of the trial then?
That is, unless you let the seller know that you want to terminate the contract, based on the grounds that the trial wasn’t met. You have to notify them in writing within two business days of the trial’s expiry date (as per the standard conditions of the REIQ business sale contract).
Finally, a trial is only really used in food & beverage businesses, like cafes, take aways or restaurants. Other types of retail businesses can also offer a trial, but it is not very common.
OK, I understand. But what if…
Now if you’re the skeptical type, you might say that sellers could bring in their friends to artificially boost sales during the trial period. And you could be right – I’ve heard stories of sellers going to great lengths to do exactly that. So the truth of the matter is, trials are not a solution in itself – you’ll still need to do your due diligence before and during the sale of the business to ensure you’re getting what you paid for.
If you liked what you read, leave a comment below!
Chris Khoo
Business Broker
If you had subscribed to my newsletter on the right, you’d have just gotten my free guide on “How to Maximise the Value of Your RetailBusiness”. Below is an excerpt on a controversial topic – skimming off the till.
5. Be Truthful
This is not a mini-guide on morals, but the fact is… being truthful usually means more profit and less frustration in the long run. What do I mean?
Take skimming off the till as an example. This is the practice of taking cash out of the cash register (i.e. not declaring all income on the tax return), which means less tax needs to be paid. And for most owners, it sounds good because they save money. But aside from being highly illegal, till skimming also affects the sale price dramatically.
How? As a simple example, let’s say you take $1,000 out of the cash register each week without declaring it. This equates to $52,000 a year. Taking it out of your BAS statements, you save about $4,727 in GST payments (= $52,000 divided by 11). That leaves $47,273 in post-GST income.
If you pay a flat company tax rate of 30%, you save $14,182 by not declaring it (= $47,273 times 0.3). So in total, you save $18,909 in taxes (= $14,182 + $4,727). Pretty good, huh?
Now let’s look at when you sell your business. Assuming the current earnings multiple for your industry is about 1.5x, your business could’ve been worth $78,000 more if that income had been declared (= $52,000 times 1.5).
So what’s the result? If you take the cash now, you’d be making a net loss of about $60,000 when you sell your business! Ouch!
If you enjoyed reading it, subscribe to the newsletter (on the right) for the full guide.
Chris Khoo
Business Broker
Credit: Cash register image by thiagofest