Buying a business – is it for you?

Record numbers of Australian entrepreneurs are looking to sell up and move onto other things, figures released this week contend.

The BizExchange Index shows that the September quarter saw an 18% increase in the volume of businesses for sale, with the number of private businesses for sale reaching a record level of 29,060 for the quarter.

While sluggish conditions in several areas of our economy are apparently causing business owners to put up the ‘for sale’ signs, there are other factors at play.

As business advisor Marc Peskett points out, more than one in four small businesses are now in the hands of older people who are likely to want a lifestyle change.

As a result, 50% of all owners are actively planning the sale of their business; and 59% would seriously consider selling their business if approached.

This trend can be seen as a positive one for people wanting to own their own business, with an increased range of established, viable companies on the market.

However, if you’d rather buy an existing business than go through the trials and tribulations of starting up, there are several things you need to consider.

Here is the main groundwork you need to put in before you take the plunge and buy someone else’s enterprise:

1. Consider the best fit for your life

Why do you want to own a business? Are you looking for a lifestyle change that will see you into retirement or are you seeking a hidden gem that you can grow into an international behemoth?

The reasons for buying a business, as well as the ventures themselves, are hugely varied. Therefore, it’s important that you identify the right enterprise for your own circumstances.

If you’re looking for a sideline to your family life, for example, it’s best to not take on a complicated, capital and resource-heavy entity that will soak up your time and drain your finances.

Similarly, lofty entrepreneurial dreams may be frustrated if you take on a small shop off the beaten track with no market differentiation or growth potential.

Consider how your life will change by buying a business. Consult your family and friends and seek out professional advice as to your financial situation. Determine who will back you with cash and business and emotional help.

As with any new business, weigh up your own strengths and weaknesses. Are you committed and determined enough to make this work?

If you’re certain you have what it takes to be a business owner, ponder the pros and cons of buying a company as opposed to starting one.

Here a good rundown from Business Victoria.

Advantages of buying a business:

• Existing customers, contracts, suppliers, staff, plant, equipment and stock.

• Acquiring goodwill associated with the name and location of the business.

• Acquiring knowledge of current owner.

• Premises are set up and the lease on the premises already negotiated

• Financiers lend more readily to an existing business with a trading record

Disadvantages of buying a business:

• Customers and staff may leave when a new owner takes over the business.

• Paying existing staff entitlements such as long service leave payments.

• The business may have a bad image which is difficult to change.

• Business may be overpriced or not be easily transferable.

• Premises, plant or equipment may be inadequate or old.

• Difficult getting the lease assigned with existing entitlements, with landlord only prepared to offer a new lease.

2. Do your due diligence

It’s estimated that around 70% of searches for businesses for sale come via the internet, with many prospective buyers taking up to 18 months to select the right fit for them.

Once you find your ideal target, it’s time to do your due diligence. Speak to the business’ owner and employees about what kind of shape the venture is in. You may even want to volunteer to work in the company for a short period, to get to know its inner workings.

Quiz the owner on why he or she is selling up. Establish what contracts, supplier and employee agreements are in place.

Consider drawing up contractual safeguards, such as the transfer of payment for the business as it hits agreed benchmarks. You may also want to include a clause whereby the previous owner can’t start-up a similar business within a certain radius for a period of time.

Crucially, you need to know how the business is performing, as well as its reputation in the market. Ask for all the relevant documentation and use the ATO small business benchmarking tool to ascertain how it is faring compared to industry standards.

Vital items to clarify are, according to Business.gov.au:

• Sales – patterns, trends, customer base, current suppliers.

• Costs – fixed and variable costs, staff costs.

• Profits – analyse financial records, future cashflow and profitability.

• Assets – identify and check all assets, including intellectual property and leasing arrangements.

• Liabilities – outstanding debts, refunds and warranties.

• Purchase agreement – review carefully.

• Tax – GST, capital gains tax, stamp duty implications.

• Legal issues – leases, business structure.

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