Buying a Business as a going concern - Things to consider
What is a Business: A complex set of assets which, when put together, form the platform for income generation and wealth creation.
A business purchase can be simple or complex and every business is different.
To confuse you further, a simple purchase can become complex and a complex purchase can be simple.
This generally depends on whether the Buyer and the Seller provide the correct information throughout the selling process from the point of listing a business for sale to drawing up a contract to buy the business.
The parties involved could include the Buyer, Seller, Partners for both, Accountants for the Buyer and Seller, Solicitors for the Buyer and Seller and Solicitor for the Landlord or the Landlord himself. Then there is the Bank or Financier for the Buyer and the Seller, incoming and outgoing mortgagees and securities. There could also be Companies which provide leases on and plant and equipment or vehicles in the business. All this takes time and some parties can push the envelope on time.
People tend to allow too little time between negotiating and settlement which invariably creates a large amount of stress in the transaction and also creates danger periods in which people are required to do things without being adequately advised or prepared.
Before signing a contract you would normally enlist the help of your accountant, financial advisor and solicitor to help analyse the business and its potential and advise you on the risks and risk mitigation strategies and on the Due Diligence enquiries that you should consider in buying a business.
The First Questions that a Buyer should not overlook when Buying a Business
NOTE: These are questions and answers of a general nature. In every business there are many variables that cover dozens of possibilities, situations and scenarios. ROI can also be calculated on all funds invested, profits can be higher or lower, adjusted or not on EBIT, EBITDA, PEBIT, PEBITDA. These answers do not take into account a person’s financial position, work experience or abilities
Does this or can this business offer a Return on Investment (ROI) that I require?
If the Business costs $400,000 and indications are that the business will earn the Owner $100,000 a year and therefor will generate a 25% ROI. Ideally then can this business last and produce an increase on those returns year after year. This is a simple explanation, talking to your accountant will cover what information suits your purchase best.
Will I get my money back and make a profit?
If so then the business should have the ability to continue year on year and increase in value through earnings, systemisation, management, expansion, reduce costs, increase of profits, better buying etc., so that you are able to resell that business and get a capital return or not. Ideally the income and profits each year return your capital investment with interest, you also earn a commercial wages for your time committment to the business. Then a capital gains on the venture.
Will the business operate if I am not on site? Do you want a Business under Management?
Is there a Manager, Supervisor or Staff that is capable of opening and closing plus all the day to day duties? Can the business be systemised, can staff be trained, and can you implement a checking or accountability system so that you can keep tabs on the business while you are away.
Can I utilise my skills to improve Management, Marketing, and Service, Trade or People skills?
When you take over the Business from the Seller, are you able to take over the position or replace them and take this business to the next level with your skills? Do you have a plan?There are many ways to improve a business. Improve Service, increase services, reduce costs, increase margins, reach a bigger clientele or area, increase product range, become more focused in the profitable areas, Improve staff knowledge and training, focus on figures, get a better accountant, have a detailed plan etc etc.
Am I going to do this alone or do I need assistance or structured support?
Build your knowledge of the business and the business market. Knowledge is power; never say you know enough, there is always something to learn about your business. Find a ‘Very Good’ Accountant or Book keeper that can keep you up to date with the financial status of your business and one that is not afraid to tell you what you are doing wrong. Numbers are key. Write out a procedure manual, of policies and procedures, what you do and how you do it. Keep excellent records. Talk to others in your industry, look at what others do, join associations and buy books about your business.
Is this business giving me the lifestyle I want or is it going to get me the lifestyle I want?
Two entirely questions here, some business will give you the life style you want now, these are business that you can see a future with and have long term goals with the income you want.
The other is a business that will position you with experience, allow you to morph the business into a much bigger operation, drive sales and profits, which will give you the weekly or yearly cash or increase the value of the business substantially so that you can resell for a good capital gain.
Has the business repeating on going sales or is it a once off sale?
Does the business sell Coffee or swimming pools? This will depend on your own experience and ability and what you really want to do. It will also depend on the size of the operation, systems, management, and history of the business. If you want a business under management and have the cash the swimming pool company may be better, whereas the coffee business success may lie wholly with the Seller of the business. However, if you are a hands on type of person, the coffee business may be a better purchase for you.
This is why you talk to an experienced AIBB Certified Business Broker or Business Valuer. Get advice from a person who deals with hundreds of different business types each year and who will give you real current information and answer your questions.
Best of all, this knowledgeable advice is free but it could deliver you gold.
Talk to any of the team from Business Brokers Network Australia