Getting started in business is a big leap and let’s face it, there’s a lot of risk involved.
As per the Australian Bureau of Statistics, more than 60 percent of small businesses stop their operation within the first three years of setting up.
There are two main ways of getting into a business.
- The complete startup, building from the ground up.
- Buying an existing business
In this article we are going to focus on buying an existing business.
The main advantages of buying an existing business are the enormously reduced start-up costs of time, money, and energy.
Cash flow is usually immediate due to existing stock or inventory and an established customer base. Having immediate cash flow and a previous track record will also make the business far more appealing to financiers and investors. An existing business will usually have established systems and a relatively stable work force.
As a new owner, you can focus on learning the details of the business and its operations so you can begin developing a strategy for future growth.
However, disadvantages can include that the business has outstanding contracts or has a poor public image inherited from the previous owner.
But you should also question why you want to start a business.
The question many people forget to ask themselves is this one:
What are your personal goals and will starting a business help you achieve them?
Other considerations include do you have the skill sets you need to start a business?
And are you physically and emotionally ready to deal with unusual work hours, financial pressures and time pressure?
You also need to identify the right business, one that suits your needs and interests, as well as one that has the potential to be successful.
After considering this and if you still believe you are ready to go into business, then its time to do your research and due diligence. You may need the help of business adviser and accountant to help you get this right as it’s a vital part of the process.
Here’s some questions to ask
Why is the business for sale?
Are there any risks associated with the business?
What kind of industry does the business operate in?
How many businesses are doing similar things?
Does the business have a competitive advantage?
Does the business have loyal customers?
What does your market want and what are they buying?
How is the competition in market changing?
You may also want to talk to existing customers, employees and neighbouring business owners to get a view on how the business is going.
Valuing the business
You should determine the current value of the business you’re looking to purchase and its potential future growth before committing to buying.
Regardless of the price the seller has put up, getting an independent appraisal is another vital step. Getting a professional valuation of all the assets and liabilities that belong to the business will help determine if it’s a true value.
To conduct due diligence, you’ll need to review these items:
Licences and permits – Are all the correct licences and permits required to run the business available and up to date?
Contracts and leases – Will the landlord agree to the transfer of the lease agreement or will you have to negotiate a new lease?
Agreements – Are there any outstanding agreements between the seller and suppliers?
Status of plant, equipment and fixtures – What kind of equipment and machinery does the business own? Are they in good working order and licensed?
Assets – What assets does the business have? Does it have any intellectual property?
Inventory – Is the inventory on-hand being included in the purchase? How is the inventory managed, stored and distributed currently? What is the current state of the inventory?
Liabilities – Does the business have any outstanding debts? What refunds and warranties still exist for the business? Are there debts owing on assets that are registered on the Personal Property Securities Register?
Financial due diligence
Make sure you examine the past three to five years of financials including:
– balance sheets
– profit and loss records
– records of accounts receivable and payable
– cash flow statements
– sales records
– tax returns
– business activity statements (BAS)
If you are considering buying an existing business, please give us a call so we can help you run an effective due diligence on the operation.
In our next article we look at the traps, pitfalls and advantages of starting a business from scratch.