Are you sure you want to buy THAT business?

Published in CCIQ Queensland Business News, 12/2018

Many of us Queenslanders have felt the entrepreneurial pull of running our own business at one time or another. The attraction of being your own boss can be significant, and there’s no wonder; small business ownership has proven to be one of the most financially rewarding and intellectually stimulating pursuits that you can pursue in your working life. However, owning a business can also be quite frightening if you’re just starting out! We have all heard about the high failure rates for new business ownership; 50% do not make it through the first three years and 70% will be gone after only five years and as a veteran business broker, I believe those statistics are spot on in Queensland.

If you are looking for a business to start or buy, the most important question to ask yourself is “are you sure you want to buy THAT business?”.

Let’s start with the simples facts. Existing successful businesses have a proven track record of profits that will most likely continue long after the business sale. When you buy an existing profitable business, you are less likely to suffer through a long start-up period where you struggle to attract customers. In my seminars, you will hear me talking a lot about the importance of cashflow, and when buying an existing business, you will have established customers for immediate cash flow. Mark my words – turnover is vanity, net profit is sanity and cashflow is King! Although I do not know of any solid statistics that exist anywhere that I can quote, it has been my experience that the vast majority of profitable businesses that are purchased continue to operate successfully for many years to come, and can be sold again. There is no question in my mind that the success rate for new business owners that buy an existing business is much higher than for start-ups.

An existing profitable business has already proven that it is successful. As long as you continue to follow the basic business approach, you too should be able to operate the business successfully. However, the actual process of purchasing an operating business can be a challenging and complicated undertaking and before you make any decisions, you will want to be as fully prepared as you can and gather as much information as possible which will help you to;

a) find a suitable operating business for sale,
b) properly value the business,
c) arrange your purchase financing,
d) successfully conduct negotiations,
e) and finally, to actually close the deal, buy the business and transfer ownership.

The good news is that thousands of small business sales occur every year in Australia with little or no real problems and the new owners and the sellers both realise their goals. But, you must be fully prepared and knowledgeable for this success to occur! Find out if you are truly fully motivated to operate a small business (whether you start it or buy it).

Step 1: Ask yourself these questions:

1. Do you know what kind of business you want to buy?
2. Are you “technically” qualified and experienced enough to run the business?
3. Do you have the temperament to deal with fickle customers, demanding creditors, and difficult employees?
4. Do you have the attention-to-detail that most businesses demand?
5. Can you deal with the bookkeeping requirements of the business?
6. Are you prepared to devote a great deal of time to the business ?
7. Can you deal with adversity without losing your cool?
8. Can you deal with uncertainty without losing sleep?
9. Are you a good people-person who can successfully deal with both customers and employees?
10. Can you accept the potential significant financial loss that investing in a business exposes you to?

Experience proves that your business is more likely to be successful if there is a matching of your skills, experience, knowledge and interests with the business. Your business should build on your talents and be one in which you will remain enthusiastic and aware of your customers’ needs.

Step 2: Determine what your key reason is for buying and operating a business (in addition to the obvious reason of making money):

1. Buying a job to earn a living/being your own boss.
2. Acquiring an attractive lease or other real estate.
3. Buying prestige (many business owners are respected community leaders).
4. Eliminating competition if you already have a business.
5. Buying a hobby or retirement occupation.
6. Seeking self-fulfilment and control of your own destiny.
7. Seeking an opportunity for a child or other family member.

Now ask yourself “What is it that I really like to do?”, and “What is it that I am really good at?” If you have determined that you are a truly motivated buyer and you know the reasons that you want to own and operate a business, then you should begin searching only for those businesses that match what you like to do and ones that match your skills, capabilities and knowledge.

Step 3: Now that you understand what your motivations are for buying a business, you will need to have some idea about how to apply a realistic purchase price. This is no easy task! Remember, the seller will want as much as they can get, and you will want to pay as little as possible. The key is to strike a fair deal for both of you.

Step 4: You will need to start thinking about the structure of your business, and how you will pay for this business.

The three main types of business structure used by small businesses are:

1. sole trader / sole proprietor;
2. partnership; or
3. company.

It is important to choose the business structure that best suits your needs. Your accountant or solicitor can help you resolve this question. One of the most crucial steps in the purchase of a small business is to establish the financing necessary to accomplish the transaction. This issue is of equal importance to both the buyer and seller.

Step 5: Once you have completed negotiating the selling price for the business, the next step is to finalise the sale, take possession of the business, and begin operations yourself. Closing the deal is the hardest to accomplish, but usually the shortest part of buying or selling an operating business. After all, the valuations, due-diligence verification and negotiations are complete and now it is a matter of getting everything into writing in a form that satisfies everyone so that the transfer of ownership of the business can take place.

Well, that’s a snapshot of what it takes to buy an existing business. As involved as it may seem, it is far less trouble than starting a new business, and certainly less risky. If you have an entrepreneurial mind-set and would like to consider getting into business for yourself, even if it is only a home-based business to start, consider buying an existing profitable business. There’s never been a market like this for buying a small business.

Kirsten’s tips for Success

• Learn as much as you can about your proposed business. Ask questions. Join industry associations. Is there a need for the product or service you are going to offer?
• Accept the fact that starting a business always takes more money than you anticipate.
• Study successful competitors carefully.
• Don’t go into business with the sole objective of making a lot of money. Chances are you won’t. But if you put service, quality, and customer satisfaction first – the money will follow.
• Be willing to work harder and longer than you have ever worked before. Forget about the eight-hour-day and the forty-hour-week.
• Keep complete and accurate records for tax purposes, for your banking needs, and most importantly, for your own guidance. Data doesn’t lie.
• Ensure you have the right people for the right job.
• Find a lawyer, accountant, banker, and insurance agent and seek their advice as needed. Now is the time to develop these relationships.
• Run it yourself. Beware of absentee ownership. No one will look after your money, your property and your business like you will. (trust me on this)
• Prepare a comprehensive business plan before investing your money into a business venture.

Planning is the key to the survival of your business.

If you’d like to purchase Kirsten’s “How to Buy a Business” workbook, click HERE.

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