Buying a Small Business

by Stuart Bidwell

Q – I want to buy a small business, what do I need to prepare and look out for?

A – The first step is to create three budgets:

• the capital costs budget (to buy the business),
• the operating budget (for running the business) and
• your personal budget to calculate how much you need to live.

Then you need to arrange finance, find the business to buy, check the businesses assets and liabilities and then ask some smart questions.

The capital budget is what you need to buy the business. The valuation of the business will be based on the net assets plus any goodwill (the business reputation and customer base). A net asset is the value of all the assets such as cars, stock, debtors less the liabilities such as car leases, and property leases. The budget needs to allow for stamp duty.

Operating budget is basically the income and expenses of the business, typically this will be income from customers (turnover / sales / revenue) and expenses such as rent, insurance, phones, electricity, wages, stock purchases etc. Be careful to under estimate sales and over estimate expenses, this way you will have a “buffer” for unexpected costs.

Your personal budget is how much you need to live, once you know this you can now calculate how much you need to be paid in wages. For example if you need to take home $2500 per month you will be need to pay yourself $3,333 (and pay tax of $833). Also at the end of the quarter you will need to pay an additional $900 towards your superannuation fund. This means your budget for your pay will be $3633 per month.

Now you have set your budgets you can start researching how to buy and finance the business. Are you going to use a business broker or buy direct? Are you going to borrow money, find an investor or use your savings? Depending on your personal circumstances you will probably need to arrange finance. It is best to get an agreement in principle from your lender before you go looking at businesses. The lender will let you know how much you can borrow which will in turn help you to select the right business for you.

What do you need to look for in the accounts? Always insist on seeing the Financials submitted by the current owners tax accountant to the ATO and do not listen to any stories about “the real accounts” where the owner shows you another set of figures (they will always show a much higher profit).

Analyse the accounts and look at the net assets figure, check the tangible assets in the balance sheet (assets you can touch), and then ensure the assets reflect their true current market value. Next look at the liabilities and ensure they also reflect the current situation, be especially careful of leases to check when they are due to be renewed. You don’t want to buy a business and then find the shop lease runs out in 3 months and the building is going to be redeveloped!

The smart questions to ask are basically finding out the truth about the business without relying solely on the current owners accounts. For example if you are buying a coffee shop take a look at the number of coffee cups in the shop. Suppose he has 40 coffee cups that means he can have 40 customers at once right? No it means he can have about 25 customers at one time, and the remaining cups are being washed or are ready to be used right now. So if the owner tells you that he has 30 customers most days at peak time you can work out the real figures for yourself.

Before you commit any money to the venture appoint a solicitor and an accountant to ensure the purchase is managed professionally.

Stuart Bidwell is the CEO of Oxygen Bookkeeping, a breath of fresh air...

The Australian Small Business Blog

A Business You Can Sell

by Dr Greg Chapman, MBA

We are told often enough as small business owners, that we must have an Exit Strategy. In fact, it is good practice that you have an exit strategy when you plan your business at start-up stage. But to have an exit strategy, you must have a business that is a Saleable Asset. What does that look like?

These are the key features that a business should have in order for someone to want to buy it. (And conversely, if you are buying a business, this is what you should look for.)

Firstly, does it make a profit? This might seem to be an obvious question, but just because it has a positive cashflow, does not mean that it is making money. Does it give an acceptable return on your investment in time, money and effort, after your wages? If not, don’t expect to receive payment for that from a buyer.

Secondly, would it still make money if you were not there? If the answer is no, what you own is not a business, it is a job with overheads. Unless you can demonstrate to someone else that you can be making money when you are not there, you will be asking a buyer to buy your job. How successful do you think you will be? You need a business model that will enable you to produce an income that does not rely solely on your own efforts

Thirdly, can you give a buyer an Operations Manual that if they follow, that they could expect to achieve the results you achieve, albeit with some training? This is what franchisors are selling. An operations system that dramatically reduces the risks for the franchisee when they follow it.

Fourthly, where are the customers going to come from? You might have a good number of customers today, but what guarantee is there that they will stay when you go? And, even if they do stay, they won’t stay forever. How will they be replaced, and how would the new owner grow the business? If you can’t answer these questions, this will have a very significant impact on the price you will receive. If you can show a marketing plan that the new owner can follow, show examples of past campaigns and their results, and the customer service strategies you use to keep people coming back, the new owner is likely to pay a premium for the potential for this business.

And lastly, how is the business controlled? Could you appoint a manager, and go away, and be sure that the business will continue to be a success in your absence? If you can do this, your business can be replicated, and this will increase its value by many times. This is achieved through a reporting system that lets you know what is happening in all the key areas of your business, even if you are not there.

Successful franchises have each of these elements in place and can charge 3-4 times the annual profit (after the owners’ wages). More sophisticated companies (I am referring to listed companies) regularly charge 15 times earnings and more. But businesses without these elements are often lucky just to get back stock and physical asset value- often highly depreciated, that is a fire sale valuation, with no value from the business at all. But, when you put all these elements in place, you will have a Saleable Asset which will reward you for your invested time, effort and money.

If you would like to post a comment on this article, please click on the Comments link below. Note that the best comment on any article in this blog during March, will receive a Free mp3 Player.

Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is a Business Coach and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems.

The Australian Small Business Blog