5 Signs A Small Business For Sale Is An Absolute Bargain!

INTRODUCTION:

There are many reasons to want to buy a business. It could be that you are sick of working for someone else or maybe you are up for the challenge of building your own empire. Whatever the reason, despite the risks involved, there could be some hidden gold out there where if a business valuer looked at some of these opportunities, you might be able to just get a feel for what is great value.

So what are the top 5 signs that you might have stumbled onto a bargain?

Figure 1: Looking for a business can be a roller coaster ride!

1. Risk Versus Return Multiples

As with almost any investment, it's all about risk. A business with less risk will usually shower a higher multiple of profit before interest and tax. So if you need to invest $1,000,000 for a business that is making a profit of $300,000 (a multiple just over 3) then you are expecting to get your money back in just over 3 years. If a business can prove that it has very low risk through:

• good spread of customers;
• less owner reliance;
• plenty of supplier options;
• foreign exchange exposure;
• strong systems;
• fewer competitors.

Then, a multiple less than 3 with most small business valuations would generally tend to indicate a cheaper price.

It's very important to understand what the adjusted profit is when assessing multiples. This profit figure is after making adjustments for unusual income and expense items moving forward and takes into account arms length transactions such commercial salaries for the owners and their families, market rates of rent etc. This figure is then reviewed to see if it's likely to be sustainable (or realistic over the next few years).

Figure 2: It's all about risk versus return.

2. The Business Is Showing Upward Trends

You really should only base your numbers on what has happened previously and be very wary of buying a business for a price of what it 'should do'. That said though, if there are encouraging trends and you have paid a price based on what it has done so far but can see there is tremendous upside then you by performing reasonable projections (including three way budgets) then you should be able to work out if you are getting a bargain or not.

3. Industry Research Points To Positive Times Ahead

By doing your research, a business might be struggling at the moment but changes in government policy, the Australian dollar, the industry and technology etc., it might be a great time to get in at the bottom.

Have a look at some current industry research through IbisWorld which most small business accountants and business valuers Sydney should have access to.

This will give you a better idea on what outlook certain industries may have and which ones would be less risky to invest in given the research available.

4. The Business Is Profitable But Has No Cash

Business valuers will always discount enterprises that struggle for cash. Have a look at some of the key performance indicators such as:

• debtor days;
• inventory days;
• supplier days;
• working capital ratio; and
• quick ratio.

By having a plan with either your small business accountant or small business advisor, changing a few things to improve the cash, you may get a bargain for somebody who needs to get out because of debt and a lack of cash flow.

5. New Plant & Equipment

Sometimes a enterprise might have gone too hard too early and invested in a lot of new plant which is placing it under pressure while it waits for things to improve. If there is little or no goodwill, review the asset values but be careful that you only pay what they are worth as part of a going concern as if everything stopped tomorrow, who would want to buy these and realistically how much would they pay?

CONCLUSION:

If you are  out there looking to buy something, follow these 5 tips to see if you might have a bargain. Always perform due diligence and also always consider getting a business valuer to give you their opinion.

Good luck!