Over Inflated Valuations Are Holding Us Back.

The push to align Australian accounting standards to recently introduced changes requiring leasing liabilities to be declared as liabilities on the balance sheet has many commentators mumbling about ‘technical insolvencies’ and ‘bank covenant failures’ leading to widespread industry defaults and disastrous outcomes. From most of the people I have spoken to privately in the banking world this alignment to international standards will have little to no affect for their loan books. Predominantly because most smart lenders already factor in the reality of leasing obligations and default penalties to their assessment of retail business health prior to agreeing to loan terms.

The bigger issue is whether it will have a psychological impact on investor’s views of the value of a retail business. There are many people in this country – and I am one of them – who believe that the valuations placed on unlisted retail businesses (by current owners who are looking to sell those businesses) are holding back the transition of ownership that is necessary to breath new life into the Australian retail industry.

There is no doubt in my mind that once an owner loses passion for a business and/or becomes an absentee owner – perhaps moving to the South of France and dialling in once a month – the business will start to flounder. As the Chinese saying goes “A fish stinks from the head”. A leadership line is crossed once an owner of a private company disengages and passive ownership – no matter how astute the management team – creates a declining productivity curve.

Privately today there are many prominent Australian retail businesses, on the surface projecting a successful trading image, which are on the market with vendors only waiting for offers which match their arguably over-inflated valuations. Certainly over-inflated if you look at some of the leasing penalties that would need to be funded to right-size the store networks that are increasingly draining their productivity.

It is a hope for many of us that perhaps the adoption of lease liabilities onto the balance sheets of these businesses will force vendors into adopting more realistic valuations enabling an expedited transition of otherwise salvageable businesses to new, passionate and innovative ownership. It is always easier to re-ignite an existing business that has good bones than it is to start from scratch.

A smart, capable, experienced team willing to try new ways to achieve better results, supported by good systems and a solid value chain often only need a new vision and leadership that is prepared to entertain well thought through risk to get them back into strong growth and good returns. But at the moment, many privately owned, former stars of the industry, are mired in defensive strategies aimed at propping up meagre income streams for members of the families that founded them.

A slow death does not serve them, the Australian consumer, the retail industry or our economy well. Realistic valuations are what we all need before these businesses get into a position where they do become unsalvageable. Bring on the accounting changes and bring in the new blood!