Thinking About Buying a Business? - Consider This

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It’s a very romantic concept owning your own business, being an entrepreneur, having the freedom to make your own choices, the excitement of nurturing and building something.

But the reality can be completely different if you buy the wrong business or pay too much for it.  It’s one of the biggest decisions in your life, take the time to research and investigate it so you know what you are taking on.  Here are a few thought starters to get you going…..

1 How is it Running? - Sometimes looks can be deceiving, you need to understand how the business is running and more importantly what you will need to do to scale and grow it.  Does the business have a clear strategy & goals and an understanding of the products/services it provides?  Is the target market identified, is there a marketing plan which outlines how to reach and influence that market, are leads tracked to see the effectiveness of campaigns and is there a clear conversion process?  Does the business have a strong profile on social media?  What is the level of automation like, are there lead to invoice workflow tools with integrated accounting packages and allocating and tracking of jobs/projects?  What is the capability of the business like, do you have the right people or will you need to provide training, hire new staff or outsource expertise?  What is the profitability of the business like, does it have a strong cash flow, what are the major expenses and can these be optimised, are there any large increases about to occur such as a rent uplift or a new software system?  What is the revenue base like, is there a high concentration of customers in one industry, are they all happy or are you about to lose some of them?  It’s OK to take on a business that has potential as long as you understand the risks and have factored in the necessary time & funds to make the changes.

2 What is it Worth? - Typically you value a business based on three buckets, these are goodwill, stock and business assets.  Goodwill is based on an industry multiple applied to the current profitability of the business factoring in any known future changes to this profitability such as new contracts won or increases in major costs.  What you need to be careful of is any inflated forward projections of revenue that are not backed up by clear evidence they will come to fruition.  Stock is the amount of product which has been purchased but yet to be sold, putting a figure on this can be done by conducting a stock take then factoring in any discounting on aged stock which may need to be discounted to clear it.  Next are the business assets which are owned by the business and help produce revenue, this may include vehicles, computers & software, office furniture, owned premises or equipment.  Make sure the asset list doesn’t include expensed items and has been fully depreciated to reflect the age of the asset.  The value of the asset is not what the new price was but what it would be worth today if you were trying to sell it.

3 How do I Finance it? - Business or commercial finance is a specialised area and it pays to find a trusted advisor who can navigate this for you, providing advice on how to best structure it, minimising the amount of interest expense and helping it get approved with the lender.  Some of the different mechanisms include releasing equity in the family home, asset finance, vendor stock funding, a private loan from family & friends, bank loan or overdraft facility.  Make sure you also allow for a working capital buffer which allows you to meet the day to day cash flow shortfalls and unexpected business changes.  Having the business valuation and funding mechanisms decided and pre-approved will put you in a very strong negotiation position when it comes to the sale.  It will also give you a reality check on the do-ability to repay it, if it doesn’t stack up or is outside your risk profile walk away.

4 What About a Franchise? - As the 2018 franchise senate inquiry has revealed there are some very disturbing and numerous stories about people pouring their lifesavings into a franchise business only to lose everything due to centralised decisions made by the franchisor which they are contractually obliged to carry out.   There is no doubt there are some appealing aspects of buying into a well-established and supported brand but if you are thinking about this I would be extra careful about your due diligence.  Things to look out for are the limitation of using the brand to do your own marketing, requirements to set up costly “shop fronts” within a certain time of signing up, the types and quality of leads being generated by the franchisor, the franchise fees and being locked into sourcing raw materials from the franchisor.  The best way to check this is to thoroughly read the franchise contract yourself or have your legal advisor provide you with a statement of advice.  Also make sure you interview at least three owners of that franchise to get the real story of how things are.