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Many of us 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 and its operation has proven to be one of the most financially rewarding and intellectually stimulating pursuits that you can follow in your working life. And, you have the opportunity to be a master of your own financial destiny.

But, 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. There are many reasons for this including; insufficient working capital, poor leadership or management, an unworkable business concept, inability to develop a strong customer base, and just plain old bad luck. It would be great if these potential problems could be eliminated or at least minimized for you as a new business operator Well, if you follow the Zoom in Business tips, they can!

Existing successful businesses have a proven track record of profits that will most likely continue long after the business sale. The best part of buying a business is that you get to apply your new ideas, expertise, and renewed energy to take the business to even higher profitability, rather than cutting your teeth on everything new.

You’ll hear us talking a lot about the importance of cashflow, and when buying a business, you will have established customers for immediate cash flow. No suffering through a long start-up period where you struggle to attract customers to your business. So you can use these customers as a building block for future business growth.

Although I do not know of any solid statistics that exist anywhere that I can quote, it has been my experience and that of my many business broker colleagues in Australia, that the vast majority of profitable businesses that are purchased continue to operate successfully for many years to come. 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 those who start a newly formed business. This makes good sense. 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 you will want to be as fully prepared as you can. You need to gather as much information as possible which will help you to; find a suitable operating business for sale, properly value the business, arrange your purchase financing, successfully conduct negotiations, 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!

1. Getting Into business:Don’t Start It, buy It!

Buy, Grow, Value,

Sell... a business

Buy an existing profitable

business instead of trying to

start one from scratch

In this 4 page special lift-out, Zoom in Business will provide you with an overview of each aspect of successfully buying an existing profitable business.

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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.

There are many sources of businesses for sale and quite a few businesses can be relocated, but to maximize your opportunity of finding the right business for yourself, you should be prepared to relocate to the business’s location if at all possible. Some good sources of information about businesses for sale include:

• Newspaper classified advertising under Businesses for Sale and Business Opportunities

• The internet: www.realbusinesses.com.au. www.bizrich.com.au

• Word of mouth through friends, family, and colleagues from all walks of life

• Magazines (see our back pages) and other periodical publications

Determine what your key reason is for buying and operating a

business (in addition to the obvious reason of making money):

• Buying a job to earn a living/being your own boss.

• Acquiring an attractive lease or other real estate.

• Buying prestige (many business owners are respected community

leaders).

• Eliminating competition if you already have a business.

• Buying a hobby or retirement occupation.

• Seeking self-fulfilment and control of your own destiny.

• Seeking an opportunity for a child or other family member.

Step 1

Step 2

Step 3

Do you know what kind of business you want to buy?

Are you “technically” qualified and experienced enough to run the business?

Do you have the temperament to deal with fickle customers, demanding creditors, and difficult employees?

Do you have the attention-to-detail that most businesses demand?

Can you deal with the bookkeeping requirements of the business?

Are you prepared to devote a great deal of time to the business ?

Can you deal with adversity without losing your cool?

Can you deal with uncertainty without losing sleep?

Are you a good people-person who can successfully deal with both customers and employees?

Can you accept the potential significant financial loss that investing in a business exposes you to?

Find out if you are truly fully motivated to operate a small business (whether you start it or buy it). Ask yourself these questions:

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Next, you will need to start thinking about how you will pay for this business.

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.

There are many sources of financing available to the purchaser of a business and frequently the buyer will use not just one of these sources, but a combination of several. The most frequently used sources of funding are:

By far, the most frequently used funding sources at the moment for the buying small business are a combination of all three funding sources, both conventional and unconventional.

In most sales of small businesses, there is usually some amount of seller financing of the purchase price. If the business has been fairly valued, there should be enough cash flow from the business operations to cover the payments the buyer must make to the seller. The business must be able to pay itself off through the business’s cash flow over a reasonable length of time. The interest rate is a key factor in determining whether the business can afford to pay for itself. To give you an idea of the difference that the spread of interest rates can make in an amount amortized over ten years, consider the following:• $500,000 for 10 years @ 4% is $5,062 monthly • $500,000 for 10 years @ 7% is $5,805 monthly • $500,000 for 10 years @ 10% is $6,608 monthly

The time period of loan is also a key factor when considering the financing of a business sale.

Now that you know what your motivations are for buying a business and where to find a good business for sale, 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. Remember that buying a business is fundamentally a financial investment for most of you and consequently the business is worth only as much as its ability to generate profits. If you are going to work in the business as most people do, then the business should also pay you a fair wage in addition to the profits. The best way to determine a business value is to work backwards from the available profits that a seller can prove.

For example, let us say that a business has a total of $100,000 EBIT (earnings before income tax for the latest full year of operation). A fair wage for the work if you were to hire someone to do it, or do it yourself, is $50,000. But don’t forget to deduct the income taxes that you will have to pay, plus other personal factors (figure at least 30%). That gets you down to about $42,000 of profits left to be able to either pay off the business loan or to provide you with a reasonable return on your cash investment.

So, when you do the math to determine the value of $42,000 in yearly payments for 5 years at 10% interest, the amount turns out to be about $165,000. This is the approximate total value of the business and a good starting point for negotiations. If the business has inventory, and/or real estate, and/or accounts receivable (or other current cash assets) that are to be transferred as part of the sale, their value will have to be added to the overall calculated value of the business. The actual sale price will then be negotiated between the buyer and the seller.

This is of necessity a simplistic example of a fairly complicated process. There are many other issues associated with valuing a business and you as a prospective buyer should read as much information on this topic as possible. And of course before you actually proceed with a purchase you should seek the advice and guidance of competent legal and accounting professionals.

$100,000 EBIT

- $50,000 (fair wage)

- $8,000 (tax)

$42,000 Profit

Step 4

Step 5

Buyer’s Personal Capital, Business Seller Financing, Commercial Bank Loan

Once you have completed negotiating the selling price for the business, the next step is to finalize 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 investigations 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.

The best situation for all parties is to follow an orderly buying and selling process that will move things along in a business-like manner. The major element of the business purchase and sale process is to complete the Business Sale Contract.

At the closing, the actual legal instruments of transfer are signed and filed, money is exchanged, and the buyer becomes the new owner of the business. Once the contract has been signed by both the seller and buyer, and finance has been approved, the contract becomes unconditional, and there is an excellent chance that the sale will actually take place.

Step 6

The buyer’s and/or the their

solicitors responsibilities will

include:

• Finalising financial arrangements.

• Reviewing/assigning any necessary leases.

• Applying for licenses and permits.

• Preparing any additional legal

documentation required.

• Stocktaking inventory of finished

goods and WIP (Work in process)

• Final inspection of the business

assets.

The seller’s and/or the business’s solicitor responsibilities will include:• Preparing the lease. • Providing for an inspection of the business and a stocktake/inventory count by buyer. • Preparing any additional legal documentation required. • Complying with any other provisions in the contract

The business broker’s responsibilities will include:

• Ensuring buyer/seller responsibilities are carried out.

• Arranging necessary information from both parties.

• Acting as a go-between.

• Handling buyer/seller anxiety.

• Participating in the closing.

It may seem obvious, but I’ll state it anyway because there may be more to it than you think. The first thing the buyer does after the closing is to take possession of the business! This may include the following considerations:

Change the locks on the business property

Formally notify the employees

Notify the suppliers

Notify the customers (if appropriate to the type of business)

File all new legal paperwork with the proper authorities (titles, licenses, etc.)

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 small business.

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This four page lift-out does not take into account any person’s or business’ particular objectives, needs or financial situation. This information was prepared as an information service and without assuming a duty of care. It contains general information only. Before you proceed with buying a business you should seek the advice and guidance of competent business broker, legal and accounting professionals.