The beginning of the year after a break is great time to focus on the future of your business and its goals, for some of us it’s time to think about buying a business.
If purchasing a business is new to you, or it is something you may be thinking about, we have a series of answers to the most frequently asked questions from first time buyers.
How much money do I need?
Before you begin looking at buying a business the first step is to work out your finances.
There is no point in looking at businesses that are beyond what you can afford.
Calculate how much cash you have available and what other assets, such as property, you could borrow against.
With some types of businesses it can be difficult to borrow money using just the business as security, due to the difficulty a bank may have in securing the loan, e.g. low asset base service industry etc. If you have a house or investment property you may be able to use this as security for a mortgage to buy the business, thereby requiring less cash.
What initial information do I need to gather?
Gathering all the information you need to make an informed decision should start with the basics first.
- PRICE – Is the business within your budget and can you fund the purchase?
- LOCATION – Is the business suitable to you and is it a good area for this type of business? (demographics)
- LEASE – How long is the lease?
- RENT – How much is the rent and other associated outgoings?
- STAFF – how many employees? And what are the current employee’s outstanding entitlements
- INCOME – How much money will I earn?
- TENURE – How long has the business been operating?
What are the ‘barriers to entry’ in other words how difficult would it be for a competitor to set up a similar business.
How are businesses priced?
Businesses are valued on the basis of the amount of money they earn combined with the desirability of the industry and risk factor.
Higher prices will be paid for businesses in more desirable industries that are operating in a market perceived as low risk. These types of businesses are in strong demand. Therefore the value of the business will be greater than for one in a less sought after industry and perceived to have a higher risk factor attached to it, despite the fact that both businesses may make the same amount of money.
What is the ideal business?
Often people ask “what is the perfect business”? There is no perfect business, as each business and industry has its own unique set of challenges for the owner.
It is important to buy a business in an industry that you relate to and in which you can learn and be comfortable. Look for a business with an eye towards what you can do with it, how you can improve it, how can you use your ideas and enthusiasm to make it more profitable and productive?
When can I inspect the business?
A physical inspection of the business should come at a time when you have considered the financial information given to you, are satisfied with this and wish to proceed further.
Remember that the owner of a business will be very sensitive about your visit, on the one hand wanting to provide you with all the information you require, yet on the other hand not wanting staff to know why you are really there. Please respect this sensitivity and have the courtesy not to embarrass him or her.
Why should I pay someone to buy a business when I could start one up?
There are three main reasons:
- There is a large failure rate in new business start ups whereas an existing business has a statistically higher chance of continuing to be successful.
- Financial records on the business are available so you can see if it is making a profit and what spare cash you should have to live off and pay your financial commitments.
- It may be easier to borrow money as the business has an established track record to cover debt servicing costs.
How do I know that what I have been told about the business is true?
When you initially look at a business certain information will be supplied. However, in some cases the owner of the business will be reluctant to reveal too much about the business until an offer is made. Many aspects in the operation of a business are commercially sensitive and confidential, thus a business owner would not be wise in disclosing all until a prospective purchaser has indicated a serious intention to purchase by making a conditional offer.
An offer is normally subject to the purchaser performing due diligence, a process whereby the purchaser requests specific information on the operation of the business. The owner will supply this under due diligence. The buyer must maintain the strictest of confidentiality through this process and must not disclose any information to other parties with the exception of any professional advisors they are using in the process.
The due diligence process is for the benefit of the purchaser giving them time to complete the verification process. If satisfied with the end result the agreement proceeds and you become the proud owner of your new business. If however you are genuinely not satisfied with the results of the due diligence, then the owner is advised accordingly and the agreement comes to an end. The deposit money held in trust is refunded in full.
As with all purchases of this nature it does require a lot of thought and professional advice. We can certainly assist you with any of the structuring, tax and due diligence side of things that are involved in buying a new business. We will also be able to assist with helping you to gain any of the financing requirements that might be needed.
Within our network we can also put you into contact with solicitors for the contractual side of the transaction and business brokers to make you aware of what businesses might currently be for sale that can integrate with your current business or see you going on a new journey.
If you are looking at purchasing a business contact our business advisers. Providing peace of mind for you and your business.