Time To Buy A Business? 5 Things You Must Consider

INTRODUCTION:

As a business valuer and accountant, I am often asked how to buy a business? This is an exciting time for somebody who has their heart set on a change of direction or an opportunity that looks 'too good to miss'. Here are five tips that I believe are a must before you decide to jump in.

Figure 1: If you want to buy a business be careful of any knockout punch that could be lurking behind it.

1. Find out why the business is for sale

Just like buying a house, doing some investigating about why a business might be for sale can be an enormous advantage for many reasons. Sometimes the answer can be obtained from the owner or business broker but naturally treat this with a grain of salt. Sometimes the answer can be confirmed from other business owners in the area or locals who can give you some inside information.

Is the business being sold because:

• A new competitor is coming soon e.g. a multinational;
• It is in financial trouble;
• The owner is unwell;
• Divorce;
• Lack of supply options and pricing;
• Changes (e.g. new road or highway bypass) rendering the location goodwill to diminish.

2. Obtain financial statements & tax returns for past 3 years

As part of any forensic accounting process, as a minimum it is generally best to get the last 3 years' financial statements and tax returns. Also get the latest set of management accounts in the current financial year and compare to budgets. Investigate and inquire as to any unusual variances from year to year. For example, if revenue or margins have increased or decreased significantly, find out why.

Look at key performance indicators such as:

• Debtor days;
• Inventory days;
• Supplier days;
• Gross profit margins;
• Liquidity ratios;
• Working capital ratios;

3. get a business valuation done by a professional

A good business valuer will generally examine those points in 1. & 2. above when they perform a business valuation. Whilst you don't have to get business valuers when working out whether you should by a business or how much it is worth, given the risk and potential size of your investment it will be money very well spent or what you could see as insurance.

The value of a business is dependent on many things and valuing a business just on the numbers alone is fraught with danger as even though numbers are very important, they do not always tell the full story. Business valuers in Sydney will look for unusual items, add backs and deductions to the recorded profit such as reasonable salaries for the owners, unusual income, off balance sheet items and also check the effect of any related party transactions.

These can all make a huge difference to the price the business is really worth or whether you should proceed at all.

Remember, experience matters and business valuers usually know what to look for and where the pitfalls could be when assessing the business valuation. Also, the report may be a good bargaining tool when negotiating the price.

Figure 2: Beware of any blurry projections or actuals that can't be explained.

4. perform due diligence

Make sure you do your due diligence. This means that the numbers should be checked as being reasonable and have not been erroneously prepared or doctored to be dressed up for sale.

5. consult excellent accounting & legal advice

This point seems obvious but the amount of times I see it happen is way too many. Buying a business and then seeking advice is often too late. Get advice on:

• business structure;
• taxation issues on the purchase price - have these been fairly allocated or are they structured to assist the seller but not you the buyer?
• unrecorded liabilities - will you be left with debt incurred by the vendor? A good buy and sell agreement drafted up will help protect you as well as restraint of trade and any other areas that need to be covered off.
• are you really sure you are well suited to the prospective business? Your accountant and solicitor will usually quiz you about this.

Figure 3: Not getting proper advice is like going to the racecourse and putting the purchase price on a horse.

CONCLUSION:

Buying a business can be an exciting time and your inklings that it could be a good buy are often right. That said, my recommendation of getting advice from the relevant business advisors should strongly be considered for peace of mind. A fresh set of eyes may just be what you need to not only save money in the long haul but ultimately make the right decision.