Buying a business may seem daunting at first, but with a little forethought, you can bring clarity to the process and make it a learning experience and a chance to ask yourself some big questions. The following are suggestions for an orderly approach, and you may be surprised at how simple this can be with a little preparation and understanding. The best thing you can do is jot down some simple notes around these key points as it will help you get your head around the steps and also get you thinking about why you are buying a business and what is really important to you.
- Why am I buying a business?
The answer to this question will be subtly different for just about every purchaser. Perhaps you are tired of working for someone else, and want to be the master of your own destiny. Many purchasers are looking to be self-employed and have a business that can provide a reasonable income relative to their expectations. Others will be looking at the purchase purely on its merits as an investment and will be focussed on whether the business can be (or is) run under management with limited owner input. Often in the latter case, the type of business is less important than the return on investment and ability to add value in the medium or long term. Other purchasers are looking for businesses to add to an existing business (growth through acquisition) as this is often a more rapid means of gaining market share and/or adding additional services or products. So it is important to be clear about what you are trying to achieve when buying a business. And remember; the perfect business probably doesn’t exist, so be prepared to compromise and decide what are must haves and nice to haves, and be prepared to forego some of the latter.
- What type of business do I want?
If you want the search for a business to be effective and efficient put some thought into this question before you start. You might prefer to approach this from the other direction and ask “what kind of business do I not want to own”? Either way, an important step is to identify your strengths, and identify the type(s) of business that are most suitable. It may be broader than a single industry but should be as narrow as you can make it if you want to find your way through the thousands of businesses available in New Zealand at any one time. Location will always be an important factor, but if this is a lifestyle decision, you might consider moving further outside your comfort zone.
- What can I afford?
This question might be better framed “what do I need to invest”? As it is not necessarily a matter of paying the most you can! The key point is what can you pay comfortably, allowing for any interest and principle repayments, to achieve the outcome you want. This will obviously vary depending on each business you look at and the real or perceived risks associated with each, combined with its historical performance. Again, you need to start with a realistic price band and concentrate your search within these parameters. So many first time purchasers when asked by us how much they would like to invest, reply the same way; “it depends!” Presumably this means it depends on the return you can expect. That’s fair enough, but with when searching for businesses ranging from $5,000 to $50 million dollars, a more definitive price band is needed. So when you start searching you should have a price band that you believe is realistic and affordable. If you are expecting (and can afford) to pay around $400,000 for a business, then we would suggest a search band of $300,000 to $450,000 for example.
- How do I finance a business purchase?
While banks have certainly softened their lending criteria of late and are quick to tell you how much money they have to lend, they are still more cautious than they were pre-GFC (Global Financial Crisis). Banks will often look at the borrower with as much importance as the security, when making their decision. Does the buyer have experience in this industry sector? Do they have management or marketing experience? Has the buyer owned a business before? Who will manage the business? So be prepared to present yourself to the bank in the best possible light and think these issues through beforehand. Banks do not have written guides on the lending criteria as it depends on many factors; the buyer themselves, available security, cash-flow, plant and asset value, industry sector etc. Visit your bank very early on, start making discussions around what you are likely to be able to borrow and what security you are likely to need. Do not leave this to the last minute, you may have some work to do to satisfy the bank and you will also be in a stronger position to negotiate if you are confident about financing the acquisition.
- When do I want to start running my own business?
This is more important than you might think. You must consider current commitments, location, financing, family etc. Be realistic and if you aren’t likely to buy a business within the next six months, you are better off researching available businesses online, and getting clear on your wants and needs. Business brokers will struggle to assist you if you are buying too far out, as the businesses currently available will most likely be gone by the time you are ready to purchase. It is a good idea to register for email updates of suitable businesses, as this will help you to focus on your key requirements and preferred businesses while learning more about values. If you are ready to purchase in the next six months, then start communicating with a broker sooner rather than later.
- Who will make this decision?
If you are married or in a long term relationship, it may be that you will be consulting your partner on this decision. If you are in an existing business, it may be partners, directors or shareholders that you need to satisfy. In all cases, the sooner you start planning the decision and be clear around expectations the better. Make sure significant decision makers are involved in all the aspects discussed here, so you are aligned and working on the acquisitions as a team.
This article was written by Aaron Toresen, Managing Director of LINK Business Franchising.