Purchasing A Business? Avanti Can Help You
3/07/2019 - Avanti
In most cases, buying an existing business is less risky than starting from scratch. When you buy a business, you take over an operation that is hopefully already generating good cash flow and profits. There may be an established customer base, reputation and employees who are familiar with all aspects of the business. And you don’t have to reinvent the wheel; setting up new procedures, systems and policies since a successful formula for running the business is already in place.
However, it can be a more costly enterprise than starting your new business from scratch but it’s easier to get financing to buy an existing business than to start a new one. Bankers and investors generally feel easier dealing with a business that already has a proven track record. In addition, buying a business may give you valuable legal rights, such as patents or copyrights, which can prove very profitable.
Here, Avanti Group share with us the pros and cons of purchasing a business.
The Perfect Business For You?
Buying the perfect business starts with choosing the right type of business for you.
The best place to start is by looking at an industry with which you’re both familiar and which you understand. Consider in depth about the types of businesses you’re interested in and which will best match your desires, skills and experience. Also consider the size of business you are looking for, in terms of employees, number of locations and sales. Is the business situated in a geographical area where you want to own a business? Assess costs of doing business in that area, including wages, travelling, rent, rates and make sure they’re acceptable to you.
Contacting a business broker is another way to find businesses for sale. Most brokers are hired by sellers to find buyers and help negotiate deals. If you hire a broker, he or she will charge you a commission–typically 5 to 10 percent of the purchase price. The assistance brokers can offer, especially for first-time buyers, is often worth the cost. However, if you are really trying to save money, consider hiring a broker only when you are near the final negotiating phase. Brokers can offer assistance in several ways.
One of the best ways to start your research is by talking to people. Speak with customers and suppliers as well as the vendor. They may give you information about the business, or even the market in general, that you wouldn’t have considered checking.
You need to know how healthy the business is. Things to find out include the business’ history; its current performance including turnover and profit; and its finances: debts, expenses, assets, and cashflow.
You should also find out why it’s being sold. If the previous owner has to sell it because of a fall in profits, for example, it will bring the price of the business down.
Apart from the aspects listed above, there are also intangible assets to value. These could include the business’ relationships with suppliers and customers, its reputation or intellectual property. Don’t necessarily rely on the seller’s profit projection figures when working out the business’ value – make your own profit projections. Other factors to consider when evaluating the business include stock, employees, products, premises and competition.
Once you’ve looked at all these factors, you should be able to work out a return on investment. A business is really only worth anything if it can pay for itself over a reasonable period of time. You want to make a profit as soon as you can.
For your own peace of mind, it’s wise to get a valuation from an accountant which could be worth its weight in gold.
Advantages and disadvantages of buying a business
There can be many good reasons why buying an existing business could make good business sense. Remember though, that you will be taking on the legacy of the previous business owner so you need to be aware of every aspect of the business you’re about to buy and where research as already mentioned is so important
- Some of the groundwork to get the business up and running will have been done
- It may be easier to obtain finance as the business will have a proven track record
- A market for the product or service will have already been demonstrated
- There may be established customers, a reliable income and a reputation to capitalise and build on. There will be a useful network of contacts
- A business plan and marketing method should already be in place
- Existing employees should have experience you can draw on
- Many of the problems will have been discovered and solved already
- You often need to invest a large amount up front, and will also have to budget for professional fees for solicitors, surveyors, accountants etc
- You will probably also need several months’ worth of working capital to assist with cashflow
- For a neglected business you may need to invest more on top of the purchase price to give it the best chance of success
- You may need to honour or renegotiate any outstanding contracts the previous owner leaves
- You also need to consider why the current owner is selling up. Think about how this might impact the business and your taking it over
- Current staff may not be happy with a new boss, or the business might have been run badly and staff morale may be low
Should I Use a Business Broker?
Contacting a business broker is another way to find businesses for sale. Most brokers are hired by sellers to find buyers and help negotiate deals. If you hire a broker, he or she will charge you a commission (typically 5 to 10 percent of the purchase price) but the assistance brokers can offer, especially for first-time buyers, is often worth the cost.
A good broker starts by finding out about your skills and interests, then helps you select the right business for you. With the help of a broker, you may discover that an industry you had never considered is the ideal one for you.
The negotiating process is really when brokers earn their keep. They help both parties stay focused on the ultimate goal and smooth over any problems that may arise.
They also know latest laws and regulations affecting everything from licenses and permits to financing and escrow. And the efficient ways to cut through red tape, which can slash months off the purchase process. Working with a broker re-duces the risk that you’ll neglect some crucial form, fee or step in the process.
What Can Avanti Do For Me?
Your accountant will analyse the existing figures and make projections of future profits for you. Cold hard facts are needed to ensure that the enthusiasm does not over-ride common business sense. They will look at Gross & Net Profit Margins, how Cash is generated and can the cashflow be maintained, remember “Cash is King”. Considering how the overheads are broken down, the wage bill, general running & financing costs will assist in seeing if profits can be improved. What are the accounts payable and receivable (Creditors and Debtors). Capital equipment costs and future growth and equipment requirement will also help in the financial decisions.
To get an idea of the company’s anticipated returns and future financial needs, your accountants can show you projected financial statements. By obtaining and analysing the Balance sheets, Profit & Loss accounts, cash flow statements, and tax returns for the past three to five years will be key indicators of a business’s health. These documents will help your accountant conduct a financial analysis that will spotlight any underlying problems and also provide a closer look at a wide range of less tangible information.
Simplistically, an objective assessment of total worth will include a valuation of:
- Goodwill. The reputation, viability and potential of a business represent goodwill.
- Assets. Tangible assets include buildings, land, equipment, stock, fixtures and fittings.
- Work in progress.
- Liabilities of the seller.
- Business profits & anticipated return on investment (ROI)
There are four main methods of valuing a business.
- Earnings Before Interest, Tax, Depreciation & Amortisation (EBITDA)
- Return on investment = net profit x 100 ÷ price
- Asset value = assets of the business + goodwill
- Market value = turnover x industry multiple. (This is rarely used for retail businesses).
A combination of all or some of these is often used to ascertain the value of the business you are considering buying.
If you’re in need of a business valuation, Avanti can help you. Contact Avanti to arrange your no obligation advice meeting.
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