Buying an existing business is a great option for people looking to break into an industry and ambitious business owners looking to expand their operations.
Research from Industrial and Corporate Change reveals that business takeovers are more likely to survive and are generally more successful than new business ventures:
An established business comes with existing equipment, staff, and customers – all of which take time and resources to build from scratch. But you’ll also take on any problems the business is facing.
That’s why it’s essential to carry out your due diligence and be honest about your capabilities to make the business a success.
To help you navigate the process, we’ve created this guide to walk you through buying a business in Australia, and how you can access the funding you need.
What Is the Best Type of Business to Buy?
You should look for a business in an industry you are passionate about and is a good fit for your skills and experience. Be honest with your assessment. If you have zero background in an industry, consider getting some experience before buying a business.
However, if you have previously worked in hospitality, that doesn’t mean you can’t make a success of a wholesale business. But it does mean that you might need help with logistics, sales, and other areas of the company.
Understand the Industry
If you are unfamiliar with the industry, you’ll need to conduct in-depth research to ensure you have a thorough understanding of how the business works and makes a profit.
Take a look at successful businesses in the industry. What are they doing to thrive?
Depending on the industry, you may want to investigate international competitors. Are there any new products or services being developed overseas that could impact the domestic market and affect profitability?
The Motivations Behind a Sale
It’s vital that you know the motivations behind a business owners decision to sell. This will help you get the best deal possible, but it will also help you avoid buying a failing business.
If a business owner is selling to clear a debt, that’s usually a red flag. If the debt is secured against the business, why has the owner struggled to pay back the sum owed?
The best-case scenario is that the owner is looking to retire or sell because of issues that are unrelated to the business. The current generational shift in Australia is presenting a unique opportunity for potential business owners.
According to the Australian Small Business and Family Enterprise Ombudsman, 61% of employing small business owners are 45 to 59 years old.
As this generation of business owners reaches retirement, there’s an excellent opportunity to buy a well established and profitable business.
How to Assess an Existing Business
Once you have reached an agreement in principle, you will be allowed access to the business’s files to determine whether you want to proceed with the purchase.
There are several key financial documents that you want to examine:
The current balance of the business’s finances.
Profit and Loss Statement
A detailed view of the business’s performance over time.
Cash Flow Statement
An overview of the income and expenditure of the business.
You should enlist professional experts to help you examine the business’s financial documents. A range of professional opinions can help you to identify any concerns or financial irregularities that could impact the business’s long-term success.
A legal review will reveal any issues related to partnerships, contracts, and liabilities. This covers how the business is incorporated and any regulatory obligations, including any product warranties and guarantees provided to the business and its customers.
The legal review should also examine any litigation where the business or the owners were plaintiffs or defendants.
Customers will be your source of revenue once you take over the business. You should examine any major customers, identifying the percentage of revenue they contribute, their importance to the profitability of the business, and what they have purchased.
You’ll also want to determine whether the customer is loyal to the business or if they have an existing relationship with the current owner.
Assets are the most significant contributor to the valuation of the business. They also have a considerable impact on the smooth transition of ownership and the amount of capital you will need to maintain operations.
For example, a food delivery service relies on vehicles to generate revenue, while a retail store depends on its IT system and customer database. You also need to establish whether all of the business assets will be included in the sale.
If the business owns equipment or machinery, Asset Financing can be leveraged to secure funding for the purchase, or as an additional source of finance once you have taken ownership.
Maintaining existing staff is the easiest way to ensure that operations run smoothly after the sale. On average, it takes Australian companies 39.2 days to fill a vacant position – the loss of productivity and on-boarding results in an average cost of $18,982 per new employee. Even for an entry-level position, the average cost is $9,772. If possible, you want to maintain existing staff to help you run the business.
Valuing the Business
Once you have assessed the business, you will need to conduct a valuation to determine if the asking price is reasonable. You can enlist a professional valuer or financial advisor to conduct a formal valuation. The valuer will conduct an industry benchmark for the business, assess future profits, evaluate assets, and intangible assets.
There are three standard valuation models:
This valuation is based on the sale price of similar businesses and the average industry valuation for a business of the same size and turnover.
This approach utilizes the net assets of the company and subtracts the value of the liabilities. The valuation is the figure left after the market value of the assets and liabilities has been calculated.
An income-based valuation looks at the business’s cash flow, and the expected profit the business will generate over time. These future economic benefits are discounted to provide a present valuation.
Financing the Business Purchase
Before you can negotiate a price with the business owner, you should look into how you will fund the purchase. There are several options, with the most suitable finance depending on your circumstances.
Asset Finance & Invoice Finance
The assets of the business you want to purchase are leveraged to provide access to funds.
The loan is secured against your personal assets or the assets of the business.
The loan is issued without any security on personal or business assets.
If you don’t own an existing business, loans and Invoice Financing can be a fast and affordable way to raise capital for a business purchase.
The lending provider will usually want to see a clear business plan and a good credit rating before agreeing to a business loan. Unsecured loans and Invoice Financing are generally easier to obtain.
If you already own a business, you can use your existing assets to fund the purchase of a new business. These assets can include outstanding invoices, debtors ledger, equipment and machinery.
Scottish Pacific can help you to leverage your existing assets and the assets of the business you want to purchase to access a line of credit to fund your business takeover.
Make an Offer
Before you enter into negotiations, make a list of the business assets and place them into two categories; non-negotiables and nice to haves. You should also set a limit of the highest price you are willing to pay.
Give yourself some room to increase your offer by starting negotiations at the lowest justifiable price. It’s always a good strategy to begin with a low offer, and improve it if necessary.
If you agree on a price, arrange for a purchase contract to be drawn up, but be prepared to walk away from negotiations if the asking price is unreasonable.
Once you’ve agreed on a price, the next step is to draw up a purchase contract. This legally binding document ensures that you and the seller understand the terms of the sale.
A lawyer will be able to help you to draw up the purchase contract. The document should list all of the assets to be included in the sale, including both hard and soft assets of the business.
The document should also include contingencies for any unexpected issues caused by inaccurate or misleading information provided by the seller (e.g. if the business has more liabilities than the seller revealed at the point of sale). These contingencies will help to minimize the risk you take on when you purchase the business.
It’s also recommended that you enlist the help of an accountant to understand the tax implications before you sign off on the purchase.
If everything goes through as planned, the seller will agree to the terms of the sale, and you’ll be the owner of an existing business!