Considering the purchase of a business can be an exciting time in your life. At Accru we see clients in various circumstances looking to buy an existing business. In some cases, they have recently been made redundant, or they may be looking for a career or lifestyle change, or perhaps they are pursuing a lifelong passion. In many cases this is the first time the client is seeking professional Accounting advice. Since COVID19, there has been an influx of activity with clients, and new clients, looking at buying new businesses.
In the last six months we have seen a coffee wholesaling business, an air-conditioning business, a porta-loo business, a few financial planning businesses, and many more. Looking at the information a broker provides on the business is a good start, but there is often a mismatch between the financial summary the broker provides and your ongoing position. For example, are you buying yourself a job (and annual salary), or are you buying a business? If you are buying yourself a job – is this what you really want? Can you pay the purchase price back and still earn a decent salary?
Business brokers provide information and asking prices that can be severely overstated and unjustifiable to obtain finance for the business purchase and to repay the loan in a reasonable timeframe. It is the broker’s job to obtain a high price for their client, but the sale needs to work for both parties for the business transaction to be viable. There is much to consider before signing off on any business transaction. For example: What money are you putting into the business? Should the business be paid for fully upfront, or in stages?
As an example of our services, for one of the clients above we provided a full ’buy-side’ advice process. This included an indicative valuation of the business, a terms sheet (non-binding indicative offer), structure advice on running the business, and even assistance with due diligence. The price stated in the information memorandum, in comparison to the price that was accepted for the business (and the indicative valuation) did, however, vary by 40% different. On a one-million-dollar transaction, that’s a possibility of an over payment of $400,000. And to think that the client initially thought it was a ‘good deal’. One million dollars for a business, a recent redundancy, a deal based on passion (and demand) – it was all stacking up.
It’s easy to get excited about future possibilities but you wouldn’t buy a house without having a building inspection, so why would you buy a business without having it checked out too? Talk to your local Accru adviser for assistance in buying a business you can be sure about.