Get into business: buying an existing business

The ‘Get into Business’ series by Business Matters started in Edition 17 and has already covered buying franchises and starting your own business. In this edition we look at buying an established business, taking you through the process of buying a business and giving you some pointers on what industries have growth potential and which sectors to steer clear of.

Job security is a hot topic in today’s society which has caused many workers to realise that taking their future into their own hands and branching out on their own may not be a bad option. Instead of working for somebody else and waiting while your job hangs in the balance of current market conditions, why not begin working for yourself? If you have ever wanted to stop working for the man and want to be the man this guide will show you where to begin and help you on your journey.

Starting from nothing is a tough way to get started. Instead of trying to reinvent the wheel, consider taking advantage of an already established business and gain a head start. Harvey Weyman Jones from Weyman Jones Business Brokers and Valuers says there are many benefits to buying an existing business. Buying an existing business can be less risky than building one from the ground up because it has already established a position in the marketplace.

“There is less risk involved as you can see the historical performance of the business and thus be better able to predict how the business will do in the future,” said Harvey.

Buying an existing business can save a lot of energy and time searching for clients and sourcing supplies. Sean Hanna who bought Image Business Furniture in 2008 says having an already established client base has been highly beneficial.

“The main advantage of buying an existing business is that there’s an existing client base to start with,” says Sean.
 
There is also the added advantage of avoiding start up costs and the low earnings inevitably included in starting from scratch. Buying an existing business eliminates the tedious task of developing a comprehensive business plan from nothing, provided you’re inheriting an established infrastructure from the previous owner that has proven to be successful.

“There is the projected future of new business versus the unpredictable future of an existing business,” explains Harvey. “Research has shown that a significant number of new ventures fail within a relatively short time.”

Aside from the benefits of buying an existing business there are some disadvantages to keep in mind. It is important to note that you will be paying in advance for goodwill in addition to company assets. Starting from scratch requires you to build your own goodwill however, you are only paying cost price for stock and assets. Harvey puts it simply, “lower the risk, higher the price.” A disadvantage in comparison to franchising is that you may not have ongoing mentorship from someone who knows the business. The seller usually stays on for a period after the handover of the business however this can be as short as three weeks.

One of the first steps when buying a business is deciding whether to use a business broker. The role of the broker is to act as an intermediary between the buyer and the seller of the business. Business brokers can introduce you to opportunities you may not necessarily find on your own. These advisors can also bring extensive knowledge of the industry and several years of experience to the table. As a buffer between parties brokers bring both professionalism and emotional stability to the negotiation process. While the business broker can put much data into perspective, it is important to remember that they are an agent of the seller, although with a duty of care to you.

Whether you choose to utilise the services of a business broker or go the distance alone, the process is the same. Thus it is important you have a good understanding of what to look for if you are buying a business, there are several things you should know enable to make a well informed decision and avoid mistakes. When buying a business most people think in terms of assets and income but there is another element: rights and trade restrictions. Both should be given a great deal of attention. After all, you don’t want the previous owner of the business creating a new company and setting up shop down the street. Having said that, it is imperative to look at stock and assets to ensure they are not outdated and in good condition.

Employees play an important role in the success of any organisation. Long term team members that have inside knowledge of the company and experience in day to day running of the business are often invaluable. They may have already established relationships with clients which can ease the ownership transition. If staff are well trained, effective and committed their contracts should be reviewed and lengthened to ensure they continue on under new ownership.  

You should consider broader issues within the region and industry the business operates in. Changes in government policies and legislation as well as new competitors entering into the market place may affect your future business environment. Whether these changes are of a local or macroeconomic calibre, the effects could well be profound. Do your homework.
    
While buying your own business is a great way to branch out on your own, the benefit of seeking professional guidance should not be ignored. The procedure used when purchasing a business varies, however a well trained accountant will know the right formula for your situation. By speaking to a business broker or valuer, lawyer and accountant or financier you could avoid making mistakes in the buying process. These professionals should assist you in acquiring the business that suits you, not only financially but also emotionally.

“Seek advice on buying entity, ability to borrow, value, negotiation of sale price and contract terms, due diligence, settlement, bank accounts, credit/Eftpos facilities, business administration, staff, GST and other taxes,” advises Harvey. “Buyers agents can also be contacted who represent the buyer instead of the seller.”

Financiers have tightened their lending criteria as a result of current market conditions; the amount buyers could have obtained two years ago differs from that of today. Now is not a bad time to be searching for a business however, buyers should be more cautious. The global financial crisis has affected the business buying market restricting the number of organisations being put up for sale. Potential sellers believe now’s not the right time to sell, when in reality there are many buyers searching for quality businesses.

“Some may find it surprising but we are in a market where demand exceeds supply for reliably performing businesses,” said Harvey.

Once you have weighed up your options and decided to step into the world of buying an existing business you should consider the type of market you are entering into. Buyers should stay away from industries they have no experience in or know nothing about as owners need to be able to relate to customers, suppliers and staff. Harvey says sectors such as high fashion and new car sales that rely on discretionary income are not doing well. Businesses that provide the necessities of life are doing much better.

“International holidays are not so popular but local travel is doing ok,” explains Harvey. “Lower priced ladies fashion accessories, caravans, tents and camping equipment are selling and bakers and butchers are doing well.”

Buyers should meet with their financier or accountant before looking for a business to determine how much they can borrow. Harvey recommends to sellers they make time available to act as a consultant to the buyer after the settlement date. This helps ease the transition of old to new owner with staff and clients. Sean says that the previous owner of Image Business Furniture stayed on for a six week handover period.

“The previous owner introduced me to staff, clients and suppliers as well as showing me how the systems already in place worked,” said Sean.

A business should be advanced before you consider buying it, buyers should avoid organisations that have been established for less than three years. Businesses that are ten to thirty years old are ideal as they show a greater history of performance and reliability. They also have the added bonus of brand recognition, loyal customers and experienced employees. The downside of buying an older business is the price. Harvey adds that; “long established quality businesses provide lower risk investments but will attract a higher sales price.”

To find businesses that are on the market for sale or to find further information, look for listings on broker’s websites as well as AIBB the Australian Institute of Business Brokers (AIBB) and the Real Estate Institute of Queensland (REIQ). SEEK and Real Commercial are helpful sites. Publications such as the Financial Review, Sunshine Coast Daily and Courier Mail also include businesses for sale.

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