3 Key Pieces of Advice to Help You Buy a Business

by Vanessa Lovie 30th of August, 2022

3 Key Pieces of Advice to Help You Buy a Business

If this is your first time entering the world of business ownership, you may be wondering where to start. In recent years we have seen a common debate about whether to buy a business or start from scratch. Whilst both have their merits, when you buy a business it’s like you’re 10 steps ahead.

An established business has a number of advantages such as;

Financial history and projections
Established products and services
Experienced team
Systems
Marketing strategies
Lease agreements, potential desirable locations and fit-outs

So when you are looking to buy a business, what exactly should you be aware of? We share 3 key pieces of advice to help guide you.

1. Understand Your Return on Investment (ROI)

Basically, how long will it take you to earn back the money you have invested? Obviously for different-sized businesses this number can have a different effect.

ROI is a term that is rarely seen in business for sale ads, though it is becoming more common in recent years. It is also a question worth asking the seller when you look to buy a business, so you know, that they have considered your financial input and situation.

An ROI less than 30% on net profit is arguably a difficult business to sell:

“Return of investment, the general kind of rule is if the ROI is less than 30%, it’s hard to sell a business and that’s after you’ve paid a reasonable wage, that is the actual profit of the business. After you’ve paid your own wages is there enough there to get a 30% return?” Justin Bunt, MMJ Real Estate

Obviously, every business is different. On Bsale you will find businesses for $30,000 to $12,000,000. When you buy a business you are buying an entire system, all the assets and liabilities. So it is a big picture to consider.

What an ROI allows you to do, is compare similar businesses for sale. If Business A has an ROI of 35% and Business B has an ROI of 22%, why is that? Is it poor management? Is it staff issues? Is it something that can be fixed? Is there more room to negotiate in the sale price when you buy a business?

It's also important to consider the wages of the owner. In this example, Business A may have the owners taking a $100,000 salary whereas business B has the owner taking $150,0000. If you intend to work in the business full-time the actual wages you will earn, need to be taken into consideration above just the ROI.

Whether you are buying a sole trader, partnership or company, how the ROI is calculated may be different. It may be including the owner's salary, or keeping it separate. So it's important to have a solid financial understanding and obtain advice from an accountant or business broker.

Another way to look at ROI is in terms of years. An ROI of 25%, will take 4 years to pay back your investment. An ROI of 33% will take 3 years. So it's good to understand how long it will take to see your money returned.

2. Do the Due Diligence

So many times we hear the story “I have a friend who wants to sell their cafe and they offered it to me. What should I do?”

Well… you should do your due diligence. When you are going to buy a business you are signing onto all the assets and liabilities. You are taking over potential contracts, debts, liabilities and so on. There may be some major issues with that cafe that you won't know about until you do your due diligence.

Due diligence helps you to establish:

Owners income
Tax Liabilities
Business structure
Employee agreements
Lease and rental agreements (such as property or equipment)
Debts, contracts, liabilities
Financial position and forecasts
Suppliers and Customers
Products and services offered
Plus more, depending on the business.

"It is during due diligence that the buyer decides whether he or she is going to finalise the deal. Much depends on what is discovered during this important process. The purpose of due diligence is to assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present and predictable future of the business to be purchased." Dione Mauric, Advantage Business Sales

No matter how well you know the person selling a business, or whether they come across as very trustworthy. Don’t proceed to buy a business until you have conducted due diligence with the assistance of a professional such as an accountant, business broker and solicitor.

Get Advice Buy a Business
Image: Get advice from a business broker, accountant and solicitor.

3. No Matter How Small, Get Advice!

It’s one thing to read forums and articles online, it’s another to obtain professional advice for your particular circumstances. I am talking about professional advice, not from friends, family or work colleagues - professionals.

Business Brokers, accountants and solicitors who specialise in buying and selling businesses should be your first point of contact. If your first thought is “won't that cost me a lot” then your next thought should be “so will buying a business that has debts”. You want to have a solid understanding of what you are purchasing when you buy a business.

The best way is to speak to a professional, allow them to analyse the business and give you a clear picture of its current situation and future potential.

In terms of business brokers, the AIBB is the industry organisation, in a recent article we shared how they are continuing professional development and raising the bar of business brokers:

"We have the best practice course, which is obligatory if you become a member of the AIBB irrespective of the number of years of experience prospective members have, we don’t permit recognition of prior learning, it is obligatory to do that course it is a number of modules and it goes from legal to negotiating to practice management to help people get their foot in the door. It is an introductory course and it is the first bar that we ask of participating members.” Kevin Lovewell, Education and Training Committee AIBB.

We love the help people buy businesses, it's why we built Bsale over 22 years ago, it's why we strive to give solid advice and bring the business broking industry together to voice their opinions.

If it's your first time to buy a business or you’ve purchased before, we wish you all the success in making a good decision and purchasing a business that will thrive. As a fellow business owner, I love to see businesses grow and prosper.

If you need help to buy a business, please let us know and we can put you in contact with people to help you along the way.

Tags: buying acquisition small business entrepreneurs