Risk a factor in prices

It’s nigh-on impossible for a business to plan when the market wildly throws the level of costs willy-nilly. ANDREW KENT

By Andew Kent

An increasing absence of certainty and predictability at a global, national or local level has not gone unnoticed among business buyers. It is always a bad sign when investors start pulling out of bank stocks, particularly when they have been delivering near record profits year on year for a decade.

While undoubtedly some of this is due to the ability of the sub-prime mortgage crisis to emerge like an iceberg in otherwise clear financial seas, it also reflects the fact that businesses are valued on future earnings, not past earnings.

When it comes to privately owned businesses, both the historic and future earnings and business valuation can be harder to establish clearly. Perhaps no sector illustrates this more clearly than agriculture. At present the world is experiencing record food prices, and this is expected to continue for some time. At a national level this is also true. However at a local level agri-businesses are selling cheaply. The reasons are simple – it does not matter how much people are prepared to pay for the goods if you can’t produce them.

Uncertainty is also increasing in the retail sector – it is in fact part of the Reserve Bank grand plan – with an expectation that overall spending will decrease. However the pain is not evenly felt. Just as 18 months ago WA was booming and NSW was bordering on recession, today neighbouring shops are having very different experiences.

Transport is also another sector in which uncertainty has increased markedly in recent times. While we might all bemoan a 20-cent-a-litre petrol price hike at Easter, imagine having one of your major costs fluctuate by up to 15% in a week while you are contracted to supply goods/services at an annually negotiated cost.

While none of this may come as a surprise to you, it might just change the way you feel about a potential business investment.

Andrew Kent is a director of BizExchange, an independent marketplace for business for sale or seeking investment. BizExchange has a directory of independent advisers and business brokers and information on valuations

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