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Buying a business

Category Business

Working for yourself has a lot pros and cons, for a start you arguably have more control of your own destiny. If you’re considering taking the plunge to go it alone but have stumbled over the question of what you want to do; buying an existing business could be an option.  Buying a business also presents a sensible strategy for existing business’s looking to expand into new markets.

Buying a business can be a quick route to expansion, compared to the longer slog of raising market share through organic growth. More businesses are coming on to the market due to the retirement of baby boomer owners, with lower valuations and increased international interest seen boosting merger and acquisition (M&A) activity.

Buying an established business with a successful history provides greater confidence in the reliability of future earnings and makes bank finance easier to obtain, given the immediate access to cash flow, customers and markets. However, “buyer beware” is the general byword, with potential risks including overestimating the value of goodwill and inheriting problems from the previous owner such as poor brand image, inadequate equipment or low staff morale.

After selling his beloved Nine Network to entrepreneur Alan Bond for a record $1 billion, late billionaire Kerry Packer was famously quoted as saying, “You only get one Alan Bond in your lifetime, and I’ve had mine.” Packer bought the network back from Bond just three years later for a quarter of the price.

Due diligence checklist

To avoid your ‘Bond moment’, consider the following checklist for due diligence as suggested by

  • Assets: Review all assets, including intellectual property (IP) agreements and leasing arrangements along with inventory. According to IP Australia, IP and other intangible assets need to be valued, with such assets ranging from copyright, patents and trademarks to business systems and technology.
  • Costs: What are the current fixed and variable costs? How are staff paid and motivated – will you be able to keep the high performers?
  • Legals: Get your lawyer to review any legal issues, including such matters as intellectual property, leases and the business structure. The lawyer should also review the purchase agreement to ensure it provides the best legal protection for the buyer, including all IP assets being transferred into your name.
  • Liabilities: Ensure there are no skeletons in the closet in the form of hidden liabilities. Check all outstanding debts, refunds and warranties.
  • Profits: What is the record of business profitability and cash flow over the past three years? Be careful when examining the financial statements, as the seller may have inflated recent profits to boost the valuation.
  • Sales: What are the current sales patterns and trends? Is the business reliant on a few key customers who could depart with the previous owner’s exit? Who are the current suppliers?
  • Tax: Seek advice from your accountant as there are a number of tax issues with an acquisition, including GST, capital gains tax and stamp duty.
  • Vendor: What is the vendor’s motivation and reason for the sale? Will current management be staying on longer to assist with the transition?

Other considerations include whether there are a number of similar businesses for sale, which might be indicative of an industry downturn, along with the area’s demographics. Also, consider the potential implications of changes in government legislation or the entry of new products or businesses as potential competitors.

Growth sectors for 2013

According to IBISWorld, growth sectors for 2013 include online education and shopping, organic farming, oil and gas production and multi-unit apartment and townhouse construction. Businesses to avoid due to anticipated falling revenues include gaming machine manufacturers, media and telecommunications businesses, according to its January 8 announcement.

When searching for a business to acquire, information sources include business brokers, newspapers, trade journals and real estate agency listings. Information on franchising opportunities is available from specialist media along with the Franchising and Business Opportunities Expo. However, it is important to evaluate your own skills and experience when choosing a business. Ask questions of current operators in the same industry to make sure it is the right fit, and organise your finances to allow for unforeseen expenses.

If you buy at the right time and price, the rewards, as Kerry Packer said, can last a lifetime.

Have you ever bought a business? What was the most valuable thing that you learned from buying a business?