The Australian Small Business Blog

Thursday, October 30, 2008

Buying a Small Business

Q – I want to buy a small business, what do I need to prepare and look out for?

A – The first step is to create three budgets:

  • the capital costs budget (to buy the business),
  • the operating budget (for running the business) and
  • your personal budget to calculate how much you need to live.

Then you need to arrange finance, find the business to buy, check the businesses assets and liabilities and then ask some smart questions.

The capital budget is what you need to buy the business. The valuation of the business will be based on the net assets plus any goodwill (the business reputation and customer base). A net asset is the value of all the assets such as cars, stock, debtors less the liabilities such as car leases, and property leases. The budget needs to allow for stamp duty.

Operating budget is basically the income and expenses of the business, typically this will be income from customers (turnover / sales / revenue) and expenses such as rent, insurance, phones, electricity, wages, stock purchases etc. Be careful to under estimate sales and over estimate expenses, this way you will have a “buffer” for unexpected costs.

Your personal budget is how much you need to live, once you know this you can now calculate how much you need to be paid in wages. For example if you need to take home $2500 per month you will be need to pay yourself $3,333 (and pay tax of $833). Also at the end of the quarter you will need to pay an additional $900 towards your superannuation fund. This means your budget for your pay will be $3633 per month.

Now you have set your budgets you can start researching how to buy and finance the business. Are you going to use a business broker or buy direct? Are you going to borrow money, find an investor or use your savings? Depending on your personal circumstances you will probably need to arrange finance. It is best to get an agreement in principle from your lender before you go looking at businesses. The lender will let you know how much you can borrow which will in turn help you to select the right business for you.

What do you need to look for in the accounts? Always insist on seeing the Financials submitted by the current owners tax accountant to the ATO and do not listen to any stories about “the real accounts” where the owner shows you another set of figures (they will always show a much higher profit).

Analyse the accounts and look at the net assets figure, check the tangible assets in the balance sheet (assets you can touch), and then ensure the assets reflect their true current market value. Next look at the liabilities and ensure they also reflect the current situation, be especially careful of leases to check when they are due to be renewed. You don’t want to buy a business and then find the shop lease runs out in 3 months and the building is going to be redeveloped!

The smart questions to ask are basically finding out the truth about the business without relying solely on the current owners accounts. For example if you are buying a coffee shop take a look at the number of coffee cups in the shop. Suppose he has 40 coffee cups that means he can have 40 customers at once right? No it means he can have about 25 customers at one time, and the remaining cups are being washed or are ready to be used right now. So if the owner tells you that he has 30 customers most days at peak time you can work out the real figures for yourself.

Before you commit any money to the venture appoint a solicitor and an accountant to ensure the purchase is managed professionally.

Stuart Bidwell is the CEO of Oxygen Bookkeeping, a breath of fresh air...

The Australian Small Business Blog

Friday, October 24, 2008

Does Advertising Work?



There has been a lot of controversy about the latest ads from the Australian Tourism Commission by Baz Luhrmann which many commentators say won’t work. These are ads that tie in with Luhrmann’s new film Australia. The general comment is that these fairly depressing ads won’t work, compared with the exciting ads by the NZ Tourism Commission which do appear to work. They are just too arty and self indulgent to actually attract any US tourists to Australia.

I would also suggest that Luhrmann has put one over the Tourism Commission. Think about it. Luhrmann is releasing a film in the US and he has effectively got the Australian taxpayer to pay for cross promotion of his film in a very expensive market place.

Nice. Where do I apply?

The Australian Tourism Commission has form in producing ads that please the Australian film critics, who would be the last people I would call for advertising advice since most the Australian films they praise bomb at the box office. The key in creating advertisements is not whether you like it, or your friends like it, it is whether it causes people in your target market to buy your products and services. That is the only test that matters.

Some critics of this campaign hark back to the wonderful days of the Paul Hogan promotions in the US. (I think Hoges must have been the first to cotton on to the scam of getting the taxpayer to promote his films which I am sure many more saw than will see Luhrmann’s.) However, John Richardson, the former assistant general manager of the Australian Tourism Commission, says Hogan was useless as Luhrmann.

Australia had a salutary lesson with the Hogan campaign in the United States in the early 1980s. That campaign aroused enormous interest in America, awareness of Australia went sky-high and was still high a decade later. And in that decade the growth in tourism from the United States to Australia was the poorest of any of our major markets – by far. Almost all of the growth you referred to came from other markets, where the Hogan campaign was not shown.

Too often, ads are made to feed the vanity of the people who commission them, and also to promote the agency that produces them. Agencies like to win awards with their ads, so they can charge more. Getting pats on the back from your friends is not what you want, unless they are also your buyers, and certainly you aren’t in the business of producing promotion pieces for your advertising agencies.

Awareness of your products or services is only of value if it results in sales. If you can’t measure the sales impact, there probably isn’t any.

The most successful ads seldom win prizes, and for you, the advertiser, it’s not about you or your agency, it is about your buyer. If the ad does not appeal to them, you are wasting your money.

May Your Business Be – As You Plan It!

Dr Greg Chapman

Over to You. What do You Think? Post Your Comments Below.

Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success.

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The Australian Small Business Blog

Tuesday, October 21, 2008

Increase Your Prices by Packaging Value



In any buying decision, this is question that must be answered by the buyer: “Is the product or service worth it?” Or more generally, is the offer made by the seller is equal to the dollars that they are asking for it.

Let’s take a simple example, water. If you wanted a drink of water, and you went to a pub, and they served you water from a tap, what would you expect to pay? It would probably be free. If you went to a kiosk, you could buy bottled ‘mineral water’ in a basic plastic bottle, and it might be $2-3.

If you were at a boutique restaurant, you might be able to get water from the Greenland icecap, presented in a special designer bottle with a stunning label, a bottle that you would like to take home as a souvenir. It might cost you $87.


It is still just water. Only a chemist, with certainty, could tell the difference between the three by measuring the levels of trace minerals in them, (although the tap water may be obvious if it has a lot of chlorine in it).

Is the water from Greenland worth it? Sure there is cost to get it from Greenland to the restaurant in Australia, but the cost of the water, the packaging and delivery might be $10 with bulk production, compared with $0.50 for the bottled Australian mineral water production and delivery. You also have to pay for the restaurant’s overheads, but they usually provide water free anyway. Even if you could you really tell the difference between this water and the water from an Australian mineral spring, how can it be worth $85 more?

So why would people pay for $87 for a bottle of the Greenland icecap water? This water could not even be considered rare, since the Greenland icecaps are 3km thick and contain enough water to raise global sea levels by 100m, but it is novel and ties into the quest by some people for the natural and unusual. It would be for the ‘experience’. To be able to say that they have tasted it to their friends. They have the beautiful bottle on display at home as proof and an opportunity to recount the experience to whomever will listen. Perhaps to impress their guests. There may have been other reasons, but I bet it wasn’t because they were thirsty.

Do you think they would have paid $87 for the water if it came out of the restaurant’s kitchen in a plastic cup? Of course the waiter would have treated opening this bottle in the same way as an expensive bottle of wine, and it would be served in beautiful crystal water glasses. The waiter would have poured it reverently, stepped back while you tasted it, and nodded your satisfaction. In this process, the waiter is acknowledging your good taste and sophistication. This would have all been part of the experience— and the packaging!

While packaging is one of the most common ways to increase prices of a product, it also applies to services. You can either sell your time by the hour or package it and sell the value of your service, at a higher rate. To do this however, you must change your service so it can be offered as a package.

[This is an excerpt from Issue 106 of the Small Business Achiever – Business Owner Brief where strategies for packing your products and services are explained in detail. The Small Business Achiever is your Unfair Business Advantage, where all the steps are revealed.]

May Your Business Be – As You Plan It!

Dr Greg Chapman

Over to You. What do You Think? Post Your Comments Below.

Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success.

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The Australian Small Business Blog

Saturday, October 18, 2008

Small Business Marketing in a Downturn

With all the bad news on TV, everyone is looking at tightening their belts. There is nothing wrong with that, as during the good times, we can all get a little bit flabby.


So is marketing a place where you should start the cutting?

It depends.

If your marketing is working, it will be generating 10 or 20 times its cost in bringing in new business and getting repeat customers. If that is the case for your business, why would you cut it? So the first thing to look at is whether it is working. If it is not, of course you should stop it, but you should do this anyway.

If it is working, should you keep it going unchanged?

It depends.

A recession may mean that your target market is buying less, or even buying differently. While it may still pay for itself, it may be less effective. It is possible that these changes create opportunities for you. By monitoring your marketing results and talking to your customers, you can identify these opportunities.

What often happens in a recession is a buyer who usually will take a premium offer will be more interested in a mid-level offer, and those usually focused on that level, will consider more budget offerings. This does not mean you should discount. A better strategy is to create offers that appeal more to this price sensitivity whilst maintaining your margins.

Look at the downturn as an opportunity to do the housecleaning in your business that you have been putting off because you have been too busy. It is also a good time to work ON your business, to not only bulletproof it against harder times, but also because it is something you should be doing ALL the time.

If all around you are slashing and burning, measured pruning, and focused marketing will allow you to continue to grow by taking your competitor’s share in a weakening market without following them downmarket with discounting. This, of course, does not mean that you should not take advantage of the discounts offered by your suppliers who have no other strategy!

Don’t follow lemmings. If you want different results to those of your competitors, you must do different things, and be different. Do a stocktake on your business today, and plan for where you want to be in the future.

“If you can keep your head when all about you are losing theirs …….Yours is the earth” Rudyard Kipling

If you are unsure how to do this, please use this complimentary Mission Statement Tool.

Your action plan:

• Take some time out,
• Trim the fat,
• Eliminate marketing that isn’t working for you, and
• Use the opportunities create with the new environment.

"In the midst of difficulty lies opportunity" Albert Einstein


May Your Business Be – As You Plan It!

Dr Greg Chapman

Over to You. What do You Think? Post Your Comments Below.

Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success.

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Dr. Greg Chapman is also the author of
The 5 Pillars of Guaranteed Business Success

The Five Pillars of Guaranteed Business Success

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