December 2019 | Przegląd Piekarski i Cukierniczy (Baking and Confectionery Review)
SELLING THE COMPANY
Everyone who has sold a car or a flat knows that the object has to be prepared for sale. Sometimes a small repair, a minor renovation or a coat of paint is enough for the object to gain considerably in value in the eyes of buyers. The same principle applies to the sale of a bakery or confectioner’s shop. A company, like every other good on the market, has some value. Every value can be strengthened. In the case of business entities, however, raising or consolidating value is somewhat more complicated. An enterprise is incomparably more complicated than a car or a house. It is a system of connections, dependencies, habits and means of production linked with one another in such a way that together they create an integrated mechanism making it possible to achieve competitive advantage. Because of its complexity, a bakery should be prepared for sale over a longer time, even several years. Then this process is effective and efficient.
Today, in great brevity, we will get to know the most important areas of a bakery’s value. The areas on which the price for which we will sell our company depends.
W-MOSZCZYNSKI ppic 12-19The role of the bakery owner
When the owner’s hegemony prevails in the company and the employees are deprived of any decision-making power, the sale of the bakery or confectioner’s shop is impossible. Unless the investors buy the company with the owner as „basic equipment”. In order to make the sale of the bakery possible, power in the company has to be divided among the individual key employees. If the all-powerful owner does not decide to give up power, what the old maritime tradition speaks of may happen: „The captain goes down together with his ship”.
The structure of revenues
The value of a bakery being sold rises when the revenues come from various sources, preferably independent of one another. And conversely: a confectioner’s shop is worth less when the majority of the income is concentrated in a few customers who may suddenly leave or go bankrupt, or sell the market. This time I will make use of a folk saying: „do not put all your eggs in one basket”.
Company money separated from family money
Investors are jarred by the mixing of the bakery’s money with the family’s money. Borrowing money from the shop till, or payments of the owner’s money into the company account. The value of a bakery being sold will increase when financial discipline is introduced which unconditionally separates the confectioner’s shop’s money from the family’s money.
Financial indicators
At this point I will invoke an old principle of management theory which says: „What is measurable is manageable”. An enterprise, like a car, should be equipped with a set of indicators thanks to which it will be better controlled. The value of a bakery being sold is usually determined by investors precisely by means of indicators. Investors buying a chain of confectioners’ shops or a local bakery think in terms of value and quantity categories captured in indicators. These values are related to other companies or to universal economic magnitudes. This process is called benchmarking.
Tax optimisation
The value of a bakery being sold rises when profit rises. Tax optimisation reduces profit before tax, thanks to which we pay lower taxes. A bakery’s value is higher when over a long perspective it shows high profit and conscientiously paid taxes. Contrary to appearances, such an attitude may pay off. Tax optimisation always carries risk with it. It requires actions which lead to the tangling of accounts. Some expenditure may turn out to be difficult to justify in the economic sense. Investors usually avoid unjustified risk and a lack of transparency.
Human resources
The value of a bakery being sold is influenced even by the level of the monthly remuneration of the owner and of the key employees in the company. Investors will pay better for a company which remunerates its employees well. What counts is not only the salary, but also the way the system of motivating, rewarding and developing the employed staff is organised. The black scenario for every investor is the departure of key employees shortly after taking over the enterprise. That is why the quality of human resources, their stability, morale and expertise significantly influence the bakery’s value.
The bakery owner’s remuneration
As I have written earlier, high remuneration of the bakery owner and comfortable conditions of their work are very important for investors. This time it is a matter of the psychological aspect. Buyers instinctively enter into the role of the owner of the company being bought. This position must be attractive for them.
The development plan
The confectioner’s shop’s future development plan and the history of the realisation of the previous plan introduce an element of ordering the future. For investors this is proof of the stability of the bakery being sold. Investors like controlled, balanced development, because this eliminates unnecessary risk – something which investors try to avoid.
Goodwill value
This is the most important element of the value of a healthy, developing bakery or confectioner’s shop. These may be one’s own recipes, an unusual technological process (e.g. bread baked in a wood-fired oven), exceptional ingredients or a unique way of distributing bread. Goodwill is also licences and contracts for selling products in places inaccessible to competitors. It is loyalty programmes and one’s own tradition, worked out over years.
Goodwill is the individual way which allows a company to achieve competitive advantage. The more effective and the better protected this way is, the higher the value of the bakery being sold.
Disputed matters
When potential investors begin to analyse a bakery put up for sale, their first steps are directed to the accounting department. How will the value of the bakery being sold behave when the analysts find a „skeleton in the cupboard” there? Before beginning the process of selling the company, all disputed and court matters and all third-party claims should be closed. Even if the confectioner’s shop loses on this in the short term, it will gain on the price at which it will be sold.
The company’s image
The value of a confectioner’s shop or bakery being sold is influenced by its appearance. The customer buys with their eyes. This principle also concerns investors. Renovated offices with new equipment sell differently, old neglected storerooms differently. The company’s image is also shaped by its website. This is usually the first place potential buyers look into.
Market share
A bakery’s operational potential is determined by its real presence in a defined market. Sales markets can be expanded by sending sales representatives into new areas. Expansion may be driven by the introduction of new products or services, or by the creation of new consumer needs.
The structure of financing the business
Owners often pride themselves on the fact that the financial condition of their confectioner’s shop is so good that they do not have to make use of working capital loans. Investors see it differently: the owner does not know how to make use of financial and tax leverage, or the company for some reasons does not have creditworthiness. An old financial principle says that the most expensive cost is the cost of one’s own money, and that is why business should be financed with borrowed money. The absence of a working capital loan negatively influences the value of the bakery being sold.
The technology used
Should one invest in new machines and software so that the value of the confectioner’s shop being sold should be higher? That depends on many factors. Sometimes technology is of no significant importance, sometimes technological advantage is the basic carrier of value.
Financial reporting
Bakeries and confectioners’ shops manufacture dozens of kinds of products and often possess their own distribution network. In this trade the operating turnover takes place in a twenty-four-hour cycle, and the number of transactions is often counted in thousands. In this situation the way the accounting books are kept is an important factor of value. That is why a good sales system integrated with accounting conducted currently throughout the month (not at the end of the month) is a very important factor shaping the price at which the enterprise may be sold.
When the activity is complicated and there is no system of current management accounting, the owner practically does not know what is happening in his bakery. Intuitive management is something which investors cannot stand.
A bakery intended for sale has to be prepared. Strengthening an enterprise’s value is a long and complicated process. It may, however, bring a high premium in the sale price.
It is not good when a life’s achievement has only a charitable value – that is, one which someone takes pity and pays. Investors compete with one another to buy a good company. A badly run bakery, like an unattractive car or a neglected house, will be sold only when its value is exceptionally low.
Wojciech Moszczyński
Wojciech Moszczyński — graduate of the Department of Econometrics and Statistics of Nicolaus Copernicus University in Toruń; specialist in econometrics, finance, data science, and management accounting. He specializes in the optimization of production and logistics processes. He conducts research in the area of the development and application of artificial intelligence. For years he has been engaged in the popularization of machine learning and data science in business environments.
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