It doesn’t matter if you are buying a business for the first time, have purchased one in the past or acquiring another. Information and reminders are always important.
Some business owners are very upfront when selling their business being very transparent, sharing information and filling in the gaps whereas others perhaps through inexperience or otherwise may miss sharing information properly and there is always a risk that there are issues after the established business has changed hands.
You should have business experience and advisors helping you with your discovery and due diligence but you won’t get to see and asses everything – it is just not possible, so it’s important to focus on what really matters.
What Type of Business Should I Buy?
The whole experience of buying a business can be better if you are self-aware. This means knowing your skills, experience and abilities and then matching these to a business and industry you are also passionate about. Equally, understand your weaknesses.
A type of business may also mean a franchise, an independent business, an office or premises, an online business, a mobile business or working from home as examples.
There is inspiration and mentors all around us. You may have family members, friends or people in your community that have been very successful. Even large-scale examples exist like Richard Branson with his inter-space project Virgin Galactica. His achievements are driven by experience, desire and passion. Once you have established what you are good at and what gets you up each day, then start looking for a business that fits these characteristics.
The reality is that most people don’t know what business opportunities exist or what might suit them. I suggest for those buyers you start looking at a range of preferred business types, locations and price ranges and eliminate what you don’t connect with. Websites like BusinessSales.com.au have excellent search functionality for you to browse listings by keyword, industry, area, price etc
Talking with business brokers can be advantageous as they have experience matching buyers to businesses as a profession. They might be able to share and explore options with you with listings on their books or coming soon that could be perfectly aligned to you but you never thought of or would have considered.
Research, Research rather than Location, Location.
By researching an industry, business types, or specific businesses browsing business for sale websites is invaluable as you can see what is available and get a feel for options, pricing and locations. Sometimes eliminating business types can help narrow down preferences and options.
Be honest with yourself about what you can afford, how far you might travel, how much time and effort you can or will commit to a new venture and what out of hours requirements a certain business might demand from you.
Perhaps ask people in that industry what is happening in the market, what their thoughts are and what has made them successful or what are the pain points. Look for innovations, technology, emerging competition, compliance and other such possible forces that might need to be considered.
The amount of information that is available online these days is enormous and a few well-directed searches in Google will help you understand the pros and cons of the industry and potentially an opportunity that you are currently considering.
Buying a business will always be a risk. Mitigating risk is one thing but be careful not to be stunned by “analysis paralysis” where you cannot move forward at all. Be thoughtful about who you take advice from. Try to find someone who has actually bought a business rather than a “guru” who hasn’t actually purchased a business or makes their money selling courses online.
Whilst some businesses thrive because of their location and position, getting into the right business for you and understanding the business well is of paramount importance. Equally, be sure to pay the fair market price by understanding the return on investment, how the business’s cash flow and business loan repayments may look like and what cash the business needs to keep liquid.
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Where do I Start and What Information Do I Need?
As a first-time buyer, you may not know what to do and how and when to do it. It may be beneficial to ask your accountant and solicitor what they might like to review and how they can assist.
As a buyer write a checklist of questions that are important to you. One of the best ways to start the process is to review a particular business’s website and social media accounts. Research the competition where you can and then prepare another list of questions. Having a meeting and an inspection with the owner at the existing business premises will get the process well and truly underway and your questions progressively answered. Email is often best as you can save your information and recall it at any time if required.
Most private sellers will need you to drive the process. If you are dealing with a Business Broker they will likely have an information memorandum and other information ready for you straight away.
Remember your strengths, experience and skills and be sure to identify these attributes to the business you are now assessing. If the business has weaknesses can your strengths, then add value to the business? If your weaknesses are currently the business’s strengths, can you overcome this skill gap?
Go over the financial data yourself to understand what you can and then get your accountant to check it and go through it with you. You should only be looking at reliable source documents such as accountant-prepared profit and loss statements and balance sheets. You can use these as a reliable source but be sure to have your accountant validate these with Tax Returns and BAS statements in due course before finalising your business purchase offer.
Buying a business that has 3-5 years of financials will show the financial trends. This information will in turn generate questions about any fluctuations and sometimes these are “must-know” things. Some businesses are very seasonal, and this might require extensive cash reserves to manage peaks and troughs. Changes to stock, margins and overheads might be very important to operational changes and impact the bottom line. Other businesses might have had other internal or external impacts that you will want and need to know.
Almost all businesses will have what is referred to as “addbacks” or “adjustments” which are the variations within the profit and loss trading statements. Examples might be other income relating to grants, government stimulus or the sale of assets (these are extraordinary forms of income not derived from the business’s core income stream and usually a negative adjustment from the net profit position).
Expenses such as personal motor vehicle expenditure, personal insurance or additional superannuation contributions are examples of expenses that are not related to the business’s operation and are usually shown as an addition “add back” to the net profit position.
Other examples that might need reviewing and shown as an adjustment might be any shortfalls to rent or superannuation or owner wages and super. For example. An owner might pay themselves $40,000 for a year of full-time work for tax purposes when the fair market wage might really be around $80,000. Therefore, a negative adjustment of $40,000 would be shown.
This is a process of normalising the profit and loss trading statements which should be done by your accountant or sometimes the business broker. Showing an adjusted Net Profit position is what this exercise does.
Other very important aspects relating to the financials might be the amount of debtors (money owned through customer accounts) the business needs to carry at any given time. This is important to know as you might need additional cash reserves to carry the business until you are paid from these account customers.
Some businesses need working capital to manage cash flow and pay all bills until the business is paid from such customers. When buying a business be sure to truly understand any agreed terms and accounts all customers are on.
Other aspects to consider are outstanding gift vouchers, deposits for orders or work in progress and how they are to be managed between the buyer and the seller.
Also when finalising your possible offer consider staff entitlements which may need to be adjusted from the sale price, any leases on assets to be paid out so you then own the assets from day 1, any ongoing costs relating to software, phone/alarm/photocopiers etc.
Buying a business is a transaction that has significant risks if they are not known and addressed.
Risks may include the following examples:
- First check the price is accurate, along with the agreed terms and conditions
- Does the contract have any clauses that may cause problems?
- If I require finance does the contract have “subject to finance” as a clause?
- Do I have my finance approved in the time allowed?
- Are there any penalties for delayed settlement?
- Have any third-party agreements, contracts, or leases been considered and approved?
- Are any liabilities likely to affect me?
- Does the contract include having the staff paid their entitlements by the previous owner or the associated adjustments taken off the agreed price?
- Are all the assets that are included going to be paid out as of settlement and ownership transferred to me?
- What is happening with gift vouchers, deposits and work in progress?
- Will I get my training from the owner?
- Has the contract provided for a restriction of trade on the seller and is the client list and everything I am buying protected?
At the end of the day the variations for each sale can be extensive so make sure you have thought of everything and that you and your solicitor are working well together on reviewing the contract.
Why Is the Business Owner Selling?
Try to get a good understanding of why the business owner is selling. It’s crucial to know the motivations of the seller so that you can do the best possible deal whilst achieving a mutually beneficial outcome.
The most common reason business owners chose to sell their businesses last year was moving. See the Top 5 Reasons People Sell Their Business in 2022 for more information.
Nevertheless, you should try to understand:
- Is there time pressure, do they have to sell quickly – Maybe an illness is forcing the sale
- They may have bought another business and want to move on
- They just be sick of the business and just want to get out at any price
- A partnership or marriage may have broken down so the owners can no longer work together
- Is the business struggling with anything such as cash flow, a poor market share or branding
- The owners may be getting older and just want to retire and don’t have anyone to leave the business
- Many owners will sell because they are tired, frustrated, have lost key staff or cannot make the business financially rewarding.
Buying when the business has had a few years of strong performance makes the business easier to asses and predict plus you should be walking into a well-oiled machine with ongoing cash flow. In these circumstances, whilst you may pay more than troubled businesses the sellers of a well-performing business are likely to be handing you a very successful business, with a great team and provide you with good training and transition. These businesses will often fetch a premium and deservedly so.
Professional Advice Is a Must
Gone are the days when businesses were sold on limited information or on a cash basis (also known as dark money). The information age and technology have helped buyers become more educated and they are more prepared when reviewing and assessing a business.
Buyers can also be emotional, passionate and excited when looking at a business. In almost all cases the buyer’s accountant will be the independent voice of reason when reviewing the business and the financials. Generally, the accountant will have a great overview of their client’s existing position, and income needs and see if the business complements their needs first. Then an assessment of the business from what the accountant can see and the financials is done which may include a list of questions and down-the-track opinions around the asking price etc.
The process of financing a business has never been so challenging, particularly after the royal commission’s findings in 2019. Using a finance broker can be a great way to get independent advice about the various lenders and options. Financial institutions change their preferences for lending by price, and industry and are always assessing their exposure to risk and portfolios.
Finance brokers may be able to place you with current lenders who they think will provide the best offer. Finance brokers will also help you with the process. Don’t think that your existing bank or relationship with a banker will get you the best deal. More often than not the best deal comes from another institution that wants your business.
Buyers are far more risk-averse and more sophisticated. Accountants, tend to offer more services beyond consulting advice with a very professional approach to client welfare which in part is also because liability has become more prevalent. They may also work closely with bookkeepers who can help with tasks within a business. Managing accounts, BAS, and payroll can free up owners, who can spend time in other areas of the business.
If you have a good accountant, solicitor and financier you should be well on track before and during business ownership. If you a buying a business that is listed by a business broker they are representing the vendor/seller but they also have a duty of care to you. All good business brokers will ensure where appropriate that you are buying a suitable business and will share with you their thoughts otherwise.
It is important to find professional advisers whom you can trust and whose approach matches your ambitions.
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