The time has come for you to buy a business and you’re ready to look at your options. One of the biggest deciding factors is how you will handle the financial aspects of the sale from obtaining capital to assessing profitability to the potential tax concessions.
Here are 6 financial aspects to look at when its time to buy a business;
1. Ensure you Buy a Business That is Profitable
If you’re looking to buy a business, there’s many factors that come with it. Whilst a building may look pretty when you first walk inside, it may be the most popular Cafe on Instagram or have the coolest collection of handbags but that’s not the point. The most important is that you buy a business that has a stable financial history and is profitable for the owner. You need to ensure you can earn the right income.
When a company is placed for sale the owner will usually have obtained an appraisal or valuation that is used to set the price. This is usually based on a multiple of the EBITA (or Earnings before interest, taxes, and amortization). Though there are various methods to performing an appraisal, when you are looking to buy a business you can get a quick sense of the owner’s income from the price, though you will need to dig deeper.
The goal of any seller is to obtain the best possible price for their sale. On the other hand, the aim of the purchaser is to obviously pay a fair market price. If better, you should get a good deal.
So, when you look at the price you are paying to buy a business, you should always get a good understanding of the profitability of the company. This is how much the owner is taking home and what you can expect to earn.
2. Understand your ROI
It’s important to understand how long it will take to repay the money you are using to buy the business. A ROI (or return on investment) may be displayed as a % or in terms of years to re-make the money you have invested into the company.
Say for instance if the opportunity is $200,000 but the owner is taking a net profit of $50,000, the ROI is 200,000/50,0000 = 25%, in terms of years it will take 4 years to recoup your investment. The seller will have calculated a value for their opportunity and it’s important to understand how that value and your ROI was calculated.
When you buy a business you are outlying capital, so you want to know how long it will take to get that money back and you can then start to earn an income. If you are purchasing a smaller opportunity such as a takeaway for sale, you will probably want to see an ROI of 1-2, which means it will take about one or two years of running the company to get your fund returned.
The ROI is often impacted by the type of service and stability of the company. If a company is more stable and profitable it will generally have a higher ROI.
3. How you will Find the Funds to Buy a Business
There are many options when it comes to financing the purchase of a company. You could use your personal savings, obtain a loan from a bank or second-tier lender, vendor finance or another source such as family or friends.
Determining how you will buy the business, the interest rates and the repayment schedule should all be factored into the purchase. Becoming an owner involves a level of risk so you need to ensure you can handle the risk and the repayments.
4. Current Debts and Liabilities
When you buy a business you need to be aware of all of its current debts and liabilities. This may include things such as car leases, equipment leases, bank loans, credit cards, tax debts, contracts with suppliers, and other financial debts. That is why it is very important to conduct thorough due diligence when looking to purchase an opportunity so you are aware of the obligations you will take on when you buy a business.
5. Stock at Value
If you are looking to buy a business that has stock as a separate value such as a supermarket for sale, you will want to ensure a full stocktake is conducted and you are only paying for the correct products. Shops may be holding excess stock or items that are dated and they are struggling to sell or move, you need to have a good understanding of what stock you are paying for and whether it is a fair price. As a buyer, it is not your responsibility to purchase old stock and struggle to sell it.
6. Are you Selling a Company? Consider the Tax Offsets.
Did you know that the ATO has a small business concession that allows you to use the profit of selling a company and rolling over when you buy a business to reduce your tax obligations? This is how some entrepreneurs scale and continue to build. It’s important to speak with your accountant before you look to buy or sell so you can get a better understanding of your tax obligations and how to reduce them.