So, you’re thinking of going into business for yourself, or expanding your current business? There are a number of core areas you need to think about when you are going to buy an existing business.
Confirm you want to purchase an established business vs. starting one from scratch
Before you dig too deep into the details of the new business, stop and make sure that buying a business is actually the right thing to do in terms of achieving your goals. Then work out if it is better to set one up from scratch or buy someone else’s, explains Director, DFK Everalls, Melissa Healy.
Starting your own business certainly comes with its advantages, with the opportunity to choose the right structure – whether that’s sole trader, company or partnership – from the get-go, she says. What’s more, you’re not going to get lumped with the previous owner’s baggage, as you get to create your own procedures from day one.
On the other hand, when you buy an existing business, it’s all set up and ready to go including the customers, equipment, systems and possibly employees. If you do take on their employees, making sure you have the right mix of capabilities in your team is really important, explains Healy, so it’s important to examine the skills and experience you’re buying along with the business assets.
If buying an existing business is the right strategy for you (e.g. you’re hoping to increase market share, acquire a niche or get rid of a competitor), then it’s a matter of reviewing the company in detail to confirm it’s actually the right business to purchase.
Understand what you are buying
There are significant differences between buying a business’ assets and buying the shares in the company that owns the business, says Healy. When it comes to purchasing a business’ assets, it’s reasonably straightforward to evaluate what you’re getting (goodwill, stock, equipment and so on).
When it comes to buying shares in the company, what you’re doing is taking over their whole company including their bank account, accounts receivable, their outstanding bills and all liabilities, says Healy, so it’s critical to ensure there are no undisclosed liabilities such as supplier bills or warranty claims.
An advantage to buying shares is that you don’t have to change bank accounts, ABNs, stationery and customers or supplier contracts, for example.
Valuing the business
Once you’ve established exactly what it is you’re buying, then you can establish what you’re willing to pay for it, which means really understanding what it is worth to you.
In other words, is it a good investment? You need to feel confident that the profit and cash flow that you think can be generated are enough to justify the investment over time.
Establish how you are going to fund the purchase of the business
It’s critical to be certain about how you are going to pay for the business as well as the necessary working capital to get you through the first few months, advises Healy.
“If you don’t have enough cash, there are a variety of ways you can finance different components. It is very important to get the right type of finance for each component to minimise interest and fees and get it paid off as fast as possible.”
Identifying risk areas
Finally, it’s vital that you dig a bit deeper and review all the moving parts in detail so you can feel confident you’re getting what you pay for. This means being clear on risks, as well as returns.
Healy says identifying risk areas comes down to due diligence or risk management.
“We help people develop a checklist of things a potential buyer needs to look into very closely to ensure they get what they pay for with no surprises,” says Healy.
“Areas you need to review in detail include:
- The revenue (Where or who did it come from? Will it continue?)
- The premises (Is the landlord happy to transfer the lease across to you?)
- The equipment (Is it unencumbered? Is it in good working condition?)
- The IP (Are all the operating procedures documented properly?)
- The employees (Who are you agreeing to take on?)
- The suppliers (Will they still give you the same prices/deals as the previous owner?)
In summary, here’s how to buy the ‘right’ business for you:
- Step 1 Consider how a business realistically fits into achieving your goals or strategy.
- Step 2 Make sure you understand exactly what you are buying – what’s included and what’s not.
- Step 3 Work out what the business is worth and how much you are prepared to pay for it!
- Step 4 – Work out how you are going to pay for it including the working capital to keep you going for the first few months.
- Step 5 Review the risks. Look in detail at various areas of the business to make sure there won’t be any nasty surprises.
- Step 6 Make sure settlement day goes smoothly so you can get off to a flying start.
There is a lot to discover, and Healy is going to share her insight in an upcoming webinar covering these six steps in detail to enable you to make a strong, informed purchase decision.
Written by: Thea Christie
DFK ANZ is a national association of 15 independent accounting and business advisory firms. Established in 1991, it has built a strong reputation as leading experts, and is listed as number 22 on the latest BRW Top 100 Accounting firms.