Buying A Business
Published 2:30 am 14 Sep 2020
Starting or buying a business in Australia is a decision that requires careful research and analysis. Here, DG Institute Founder Dominique Grubisa explains:
Buying a business in Australia guide
- Buying a business vs starting one the pros and cons
- How to buy a business
- The importance of business research and conducting Business due diligence
- How to value a business before you make an offer
- Difference between small medium and big businesses
- Buying a business checklist
Starting a business vs buying an existing business
Many Australians are their own bosses, and many more would like to be. If you’d like to be your boss, you have two options:
1) starting a business from scratch
2) buying an existing business.
Both of these options have their pros and cons.
The pros of starting a business vs buying an existing business
- You won’t have to pay an existing owner for business assets, income-earning potential or goodwill. Goodwill can include a business’ reputation and customer database.
- You won’t be inheriting any existing business problems that may exist.
- You can potentially set the business up to how you would like it to be from day one.
The cons of starting a business vs buying an existing business
- Starting a business from scratch can be risky because there is no guarantee that it will be profitable. A profitable existing business, on the other hand, will have an established market and a track record of success.
- An existing business will have the equipment, suppliers, customers, systems, procedures and potentially staff in place. You will have to set these things up for a start-up business.
- A start-up business may not immediately generate sufficient cash flow. A profitable existing business should be able to provide you with immediate cash flow.
- The failure rate for start-up businesses is high. Sixty per cent of Australian businesses fail within the first three years.
We’ll now look at how to buy an existing business in more detail.
→ EXCLUSIVE Webinar Briefing On How Takeover And Turnaround Businesses For Profit – With No Money Down And Minimal Financial Risk
How to buy a business
Buying a business starts with doing some self-analysis. It’s important that you have:
- the right skill set to add value and manage the type of business you want to buy.
- the time and motivation to devote to the business to ensure its success.
- any funds necessary (for example, you might need to take out a loan to buy a business).
enough working capital to invest in the business to ensure its ongoing success.
If you can tick all of those boxes, it’s time to identify the right business to buy. This process involves doing thorough research and due diligence. The term ‘due diligence’ concerning buying a business means confirming all of the financial, legal and operating facts of the business before you decide whether or not to make a formal offer to buy it.
Buying a business: research and conducting due diligence
- Researching a business and conducting due diligence on it should involve finding out:
- the reason the business is for sale.
- market conditions.
- financial records.
- key operational information.
We’ll now look at each of these areas in turn.
The reason the business is for sale
It’s important to understand why a business is for sale. Are the owners retiring or are they selling for another reason? For example, baby boomers own plenty of businesses in Australia, and many are looking to sell and retire.
Or the current owners might be looking to sell because their business is in trouble. If this is the reason, you might be able to pick up a bargain if you can buy the business for the right price and implement strategies to turn its performance around.
Analyse whether the market for the business’ products or services is growing or declining. Ideally, the market should be growing (or at least stable).
Economic factors should be a key consideration in any business buying decision at the moment with the economy having gone into recession due to the impact of COVID-19 restrictions. Some businesses and industries will be more heavily affected than others.
The more competitors a business has, the more potential risk is involved in buying it, especially if it doesn’t have a sustainable competitive advantage. A sustainable competitive advantage is one that other businesses cannot easily replicate. Having at least one helps to ensure ongoing business success.
It’s worthwhile to get professional advice to help you to analyse a business’ financial records for the past three to five years. For example, its:
- tax returns
- business activity statements (BAS)
- cash flow statements
- profit and loss statements
- balance sheets (which outline what assets and liabilities the business has).
Key operating information
Key questions to answer:
- Is the business legally compliant?
For example, does it have any up-to-date licenses or permits that are required?
- What procedures or agreements are in place (and could they be improved)?
For example, will contracts with suppliers or a lease agreement with a landlord need to be renegotiated?
- What is the condition of any business equipment assets?
Ideally, you want any equipment you buy as part of a business sale to be in good working condition, otherwise you could soon be up for costly repairs or expensive new equipment.
- What level of stock will be included in the business’ purchase price? A good level of saleable stock will help to ensure your early cash flow.
A SWOT analysis is a good tool for summarising the information obtained in the research and due diligence process. SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. It’s important to be realistic in a SWOT analysis.
Strengths and weaknesses are internal factors that the business can control. Ideally, a business should have numerous strengths that you can capitalise on while having a few weaknesses that you can either minimise or eliminate.
Opportunities and threats, on the other hand, are external factors that the business cannot control but which they can exploit (opportunities) or mitigate (threats). Ideally, a business should have ample opportunities and minimise threats.
A template for a business SWOT analysis is provided below.
Calculating the value of a business
Once you have conducted your research and due diligence, you should have all the information that you need to calculate the value of the business. It’s worthwhile seeking independent professional advice to help you arrive at a valuation before you decide whether to make a formal offer to buy a business.
There is a range of business valuation methods that can be used, including:
- market value
- return on investment (ROI)
- business asset value
- the cost of starting a similar business from scratch
We’ll now look at each of these valuation methods in turn.
→ EXCLUSIVE Webinar Briefing On How Takeover And Turnaround Businesses For Profit – With No Money Down And Minimal Financial Risk
The market value of similar businesses in the same industry can be used by looking at data on recent selling prices. This information may be available via business brokers. There are a number of business sectors in Australia, including cafes, trades, travel, retail, industry and agriculture. Each sector will have its own business sales data. It’s important to evaluate the market value of a business in light of Australia’s current economic conditions and the business’ future prospects.
The ROI valuation method is based on either your desired ROI or an acceptable industry ROI. An ROI can be calculated using the following formula:
ROI = current net yearly business profit x 100
business purchase price
For example, if you want an ROI of at least 25% for a business that has a net yearly profit of $100,000, you will need a business purchase price of $400,000 or less. The ROI calculation is as follows:
25% = $100,000 x 100
If you can negotiate a purchase price of less than $400,000, your ROI will be higher (and it will be lower if you pay more).
You can also use potential future profits as the basis for your ROI calculation. However, it’s important that your future profit estimate is accurate. It should be based on a thorough SWOT analysis.
Business asset value
The value of a business’ assets can be used to establish an appropriate purchase price. Business assets can include both tangible and intangible assets. Tangible assets include items like business equipment or property. Intangible assets, on the other hand, are things that you can’t see or touch, like the value of an intellectual property, a brand or business goodwill.
It can be difficult to calculate the value of intangible assets, and it’s worthwhile seeking independent professional advice to help you.
The cost of starting a similar business from scratch
As mentioned earlier in this article, buying an existing business is one of two options you have for becoming your own boss. The other is starting a business from scratch. You can use the estimated total cost of starting a similar business from scratch to determine the value of an existing business. Start-up costs could include things like:
- buying or leasing premises
- stock or product development
- licenses or permits
- staff training
Buying a small business in Australia
It’s often said that small business is the backbone of the Australian economy. According to the latest statistics from the Australian Small Business and Family Enterprise Ombudsman, small businesses are those with less than 20 staff, including sole traders.
If you’re looking to buy a small business in Australia, you’ll usually find there are plenty to choose from. These businesses account for nearly 98% of all Australian businesses (there are more than 2.2 million of them across a huge range of industries)! They account for 35% of Australia’s GDP and employ 44% of Australia’s workforce.
You can usually find plenty of small businesses for sale in major Australian capital cities like Sydney, Melbourne and Brisbane. More than 90% of these businesses have an annual turnover of less than $2 million.
Buying a medium or big business in Australia
Medium-sized businesses in Australia are defined as having between 20 and 199 staff. Businesses that have more than 200 staff are classified as big businesses. Collectively medium and big businesses in Australia only make up just over 2% of all Australian businesses. However, due to their size, they account for 65% of our GDP and employ 56% of our workforce.
Again, you’ll usually find the majority of Australia’s medium and big businesses in our major capital cities. There are obviously less of these larger businesses for sale at any point in time than there are small businesses for sale, due to the sheer weight of numbers in favour of small businesses.
Buying a business checklist
Below is a handy checklist you can use to help you buy a business. You shouldn’t buy a business unless you can answer ‘Yes’ to every question.
|Yes/No||Do I have the right skill set to add value and manage the type of business I want to buy?|
|Yes/No||Do I have the time and motivation to devote to the business to ensure its success?|
|Yes/No||Will I be able to access the funds necessary to buy the business?|
|Yes/No||Will I have access to enough working capital to inject into the business?|
|Yes/No||Have I thoroughly researched the business, conducted due diligence and prepared a SWOT analysis?|
|Yes/No||Does the business have a sustainable competitive advantage?|
|Yes/No||Does the business have strengths that I can capitalise on?|
|Yes/No||Can I minimise or eliminate any of the weaknesses of the business?|
|Yes/No||Are there opportunities for the business that I can exploit?|
|Yes/No||Am I aware of potential threats to the business and how I can mitigate them?|
|Yes/No||Am I fully aware of the business’ financial history and current financial position?|
|Yes/No||Have I calculated a business valuation using an appropriate method?|
|Yes/No||Have I accessed independent professional business advice before making my decision to buy?|
Are You A Business Owner?
Are you a business owner that can’t predict the future? Welcome to the club.
Over the past few years, we’ve seen just how unpredictable life can be, and how perilous things can get for business owners.
The reality is that you’ll never be able to predict the future, which is precisely why you need to guarantee the safety of your assets and financial security.
Here at DG Institute, we teach you to do exactly that at our Business Bounce Back Livestream Event.
Not only will we teach you how to safeguard your business and assets against uncertain times, but we’ll also equip you, and your business, to bounce, back stronger than ever.
Frequently Asked Questions
How do you buy a small business?
When buying a business, you should first ensure that you have the necessary expertise and requisite skillset needed to operate in the relevant industry you are targeting for your purchase or at least that you have a plan in place to oversee someone else handling the day to day running of the business, eg a manager .
From there, you will need to source the target business you want to purchase and conduct your due diligence in respect of that business. This will include analysis of its financials, employees, business relationships, suppliers, customer base, relevant licencing, intellectual property, stock in trade, plant and equipment and so on
Finally, if you are satisfied upon completion of the due diligence process you may make an offer to the owner or seller of that business. The ultimate offer that you make may contain terms for example that there will be a handover period or training and that you will release payments upon certain targets being met on conditions precedent.
How to buy a business with no money?
Once you have identified the business you wish to purchase and you have done your due diligence in order to determine the business is likely to make profits, you will need to seek financing.
If you do not have finances yourself, and you have no assets which you can leverage in order to obtain funding from a bank or other first tier lender, there are various alternate avenues open to you to pursue.
These include: crowdfunding, equity financing, vendor financing, a negotiated earn-out structure for the purchase of the business, a joint venture arrangement or perhaps a silent partner in the form of a loan from a friend or family member.
How to finance buying a business?
When pursuing bank financing in respect of the purchase of a business you will be seeking a commercial loan. The bank will look to take security over the business and its assets and will lend based on the history of the business, its past financials and its capacity to scale and grow revenue, amongst other things. They may also look to take a lien or security over assets of the business such as its plant and equipment.
Alternatively, if you are unsuccessful in obtaining bank finance, you can look to attain seller or vendor financing. This is where the business owner agrees to be paid the purchase price of the business over time. In this instance, you might pay a portion of the total business cost upfront, and pay off the rest of the business over the longer term with the profits you generate from the business. Effectively the seller is acting as a lender helping you finance the purchase. With a vendor financing arrangement it is usual for you to pay interest to the seller on tha balance of the outstanding monies.
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