Steps to Buying a Business
Buying an established business can be a big commitment of time, money and energy. You need to consider all options before making your decision.
The following steps will guide you through the common aspects that need to be considered before buying a business.
Step 1: Should I buy a business?
There are many advantages and disadvantages to buying an existing business and these must be considered before the final decision is made.
Some of the advantages of buying a business are:
- Initial setup & ground work has been done for you
- Established client base
- Already existing market for the products & services
- Accessing finance can be easier due to a proven financial record
But some of the disadvantages with purchasing a business are:
- Honouring outstanding contracts
- Existing staff can become uncooperative
- Additional finance may be required to make the business successful
Step 2: Finding the right business to buy
There are many avenues you can explore to find the right business to buy. Once you’ve found a business you also need to consider how it will fit with your lifestyle and family.
Some of the main things to consider when deciding on a business are:
- Are you physically able to perform a majority of the business tasks?
- Is your financial situation agreeable to the equity and cashflow requirements?
- Is the business and market security appropriate to the level of stress you're willing to incur?
- Do you have the necessary skills, experience, connections, networking and time to make the business a success?
Listen to this excellent video by the Australian Taxation Office that elaborates on the topic a little further.
Step 3: Analysing the business
Now that you’ve found a business to buy you need to conduct due diligence to confirm that the business meets all claims made by the seller. This is where Umbrella Accountants can provide much-needed independent advice so that you make a sound business investment.
Some common aspects of the business that need analysis are:
Financial Viability - You'll need to understand what the fixed and variable costs are, so you can calculate the Break Even Points for various products and services, not all products or service may be viable. You may also need to understand what the industry Key Performance Indicators (KPI's) are to measure to gauge the financial health of the business by monitoring changes in certain activities called KPI's.
Commercial Leases - If the business is in a commercial building the terms and conditions of the lease are of vital importance.
Stock - Are you sure that the rate of stock turnover is in line with industry practice?
Assets - Do you know exactly what you are buying and not buying? Are there lists of assets and have you checked them?
Equipment - Is the equipment in good repair? Is it efficient? Is it in danger of becoming obsolete or difficult to service? Are parts available? Could it be sold easily?
Existing Employees - What are the contracted agreements with existing staff?
Taxation Requirements - Is the business structured correctly to prevent additional tax costs?
Step 4: Making an offer
Fair Market Value?
What is the Fair Market Value of the Business, are their industry rules of thumb used - (ie) 3 times net profit with add backs for owner expenses such as interest, depreciation, usual high owner wages, travel expenses, etc.
Business Plan & Cashflow Projections for the Bank
A business plan provides direction, keeps you on track and is usually a requirement when you seek finance. Depending on your business type, your plan could include the following sections:
- Business Summary: A one-page overview written after your business plan is finalised.
- About your business: This is typically called the management plan or operations plan. It covers details about your business including structure, registrations, location and premises, staff, and products/services.
- About your market: This is the marketing plan. It should outline your marketing analysis of the industry you are entering, your customers and your competitors. This section should also cover your key marketing targets and your strategies for delivering on these targets.
- About your future: This section covers your plans for the future and can include a vision statement, business goals and key business milestones.
- About your finances: The financial plan includes how you'll finance your business, costing and financial projections.
When you decide to purchase the business you need to present an offer to purchase to the seller which they may choose to accept or reject. If your offer is accepted you need to have the business transferred into your name.
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