Preparation required before buying a business:
If you have decided it is time to break the shackles of working for someone else and purchase your own business, congratulations. This is an extremely exciting time and it is vital to ensure you do full due diligence before rushing into any business opportunity. No matter how good it may seem and how short the timeframe to act, there will always be another opportunity if the timing isn’t right. Never rush into a decision about buying a business.
Once you have made your decision, contact your financial institution to ensure you understand their lending criteria. Most people are unaware that standard lending criteria to purchase a business is NOT 20% like a residential loan, you generally need a 50% deposit. If you are buying a $500,000 business, you will need to provide $250,000 of equity to secure the additional $250,000 to purchase the business. Find out how much you will be able to borrow, so when the time comes to make an offer on a business, you will know exactly what you can afford.
Contact your accountant and solicitor and inform them of your decision to buying a business (if you don’t have a good business accountant and/or solicitor, Summit can recommend highly professional specialists who can assist you anywhere in Australia). Your accountant will be integral in assessing figures of a prospective business to ensure the books balance and it will be a profitable venture for you. They are the experts and will play a vital role in the operation of your business.
Have a very clear idea of the industry you want to buy into. Work out what you are passionate about and follow your dreams. When you find enjoyment in your work, any effort to build the business will be more rewarding.
Research your industry thoroughly. The more knowledge you have of the industry you are entering into, the better your understanding of the value of the business. Businesses are valued on an industry multiple based on net profit plus add backs (add backs are monies drawn out of the business by the owners). If you understand the industry and the multiple used to value a business, you can make an informed decision on the true value of a business. A basic example. A business has made $120,000 net profit, the owners drew $80,000 from the business, therefore, the profit including add-backs is $200,000. If the industry multiple is 2.5 times, $200,000 x 2.5 = $500,000. The fair purchase price is $500,000 plus any stock at value held by the business. For more information regarding industry multiples or understanding the complexity of add-backs, please contact Andrew from Summit Business Brokers on 0418 676 400.
If the broker will allow you, talk to the owners, spend time viewing their operation first hand. Ask many questions. It is important to understand the business before making an offer. This will allow you to not only assess the industry to ensure it is a fit for you, but also allows you to assess the business to decide if it is a diamond in the rough. There may be small changes you could make to immediately improve profitability, or it may require an enormous undertaking to reinvigorate the business, do you have the energy for this.
- If you need to make a checklist and mark each item off along the way, do so. It is vital to have done your research before embarking on a life changing venture.
- You are now ready to make an offer, good luck with the new venture.
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If you would like to talk to about a business or if you have a business in mind and would like Summit Business Brokers to act as a buying agent for you, please call Andrew on 0418 676 400 or simply email firstname.lastname@example.org