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.