As always, I have decided what to write about this month. That’s pretty much as far as I usually get before writer’s block sets in and I resort to Google for an appropriate opening quote. It always works but not today! The word Sustainable has been hijacked by the woke, the deluded and the thought police and must now only be used in the context of saving the world. All manner of sustainable practices and definitions pop up, mostly meaningless motherhood statements and sadly none addressing infinite population growth on a finite ball of spinning rock.
In my mind sustainability is the concept of maintaining a process, relationship, practice or dynamic which can be reliably replicated over time. Of course, if any such practice diminishes a finite resource, then it’s not sustainable. Simple.
As an example, I am not an easy bloke to live with and the managing director has a finite level of patience. As such my demeanor is not sustainable unless the MD makes a concerted effort to move to an infinite patience setting.Despite my best efforts to convince her of the benefits of such an arrangement there seems little prospect of success. Put simply, to sustain my relationship with the MD I need to make an effort to be a more beautiful and compassionate person. Simple…………
Of course, there are those who argue that a practice can be sustainable even if it relies on a finite resource. That is, the use of the finite resource will be replaced with a different process before the resource runs out. The flaw in this argument is that the “different process” is often an unproven and uncosted concept that fails to account for resource use in its delivery. Those carbon fibre wind turbines aren’t made from fairy dust apparently. A tangled web to be sure!
All this, dear readers inevitable leads me to the point of this month’s missive. About time you say!
In the management rights and motel industries businesses are bought, sold and valued with reliance on a range of information. In recent times buyers and their advisors have started to pay attention to the sustainability of the business. That is, can current business practices be sustained over time and can the business maintain or improve profitability based on historical levels. In fact, we are starting to see sustainability of net profit creeping into contract conditions. Not before time.
The challenge as always is that vendors want to maximize price. The strategies to do so range from highly professional presentation of the opportunity through to what some might think of as misleading and deceptive conduct
Of course, the best way to maximize price is to maximize net profit, either real or imagined. To this end, in nearly all cases we see vendors argue that their actual operating costs are inflated by practices that are discretionary in nature. Labour costs are the big ticket item and the easiest to fudge. For example, in management rights the typical two person team, despite arguments to the contrary, is not an infinite resource. As such the sustainability of the business profit needs to be predicated on the reasonable performance of the managers and the support they will require. When a vendor says that they have staff they don’t need all they are really saying is that they are trying to sell an unsustainable business model.
While adjusted operating costs is an obvious area of discussion, I think the concept of sustainability needs to inform vendor due diligence in all facets of the business. For example, can current vendor practices be perpetuated while maintaining a cordial relationship with a body corporate, unit owners or landlord? In an environment of increasing holding costs and interest rates will investor owners be happy with current letting agents’ fees and commissions? Can advertising levies continue to derive profit in cases where the direct use of those levies cannot be satisfactorily explained? Is it fair to adopt the current BC salary in the profit where there’s been a recent increase but ignore proportionate cost increases in delivering caretaking services? Can the goodwill of the BC be relied upon for future agreement top ups?
Of course, it’s not all bad news. Plenty of these businesses have upside and provided a buyer can readily assess the opportunity there’s no reason not to factor profit or value uplift into price considerations.
For buyers there is a simple solution to ensuring the sustainability of the business. Take into account all the information provided, adjust the profit and loss statement to reflect your expectations, reflect on your risk appetite and make an offer accordingly. The profit and loss for sale purposes is not engraved in granite and you have every right to disagree. Just make sure you can justify your position. In doing so remember that a truly sustainable business model is worth more than a one year wonder!
This article was contributed by Mike Phipps Finance.
You can find more information at: https://www.mikephippsfinance.com.au/