Things to Consider.
Running a business is about making decisions and taking a course of action with an uncertain profit outcome. More risk means the anticipated profit level is less likely to be achieved. It also means less competition from other business buyers for the opportunity. Less competition usually leads to lower prices being offered. Equally, less risk means the anticipated profit level is more likely to be achieved. It also means more competition for the business opportunity from other business buyers. More competition usually leads to higher prices being offered.
Everyone has a different tolerance to business risk. Low business tolerance risk is often demonstrated by procrastination, overly analysing information and delay in decision making in the hope of finding risks and justifying a low- price offer or no offer at all. It usually leads to the business seller turning down such approaches.
Consider your tolerance for business risk before buying a business.
Business is about making decisions. There are good decisions and bad decisions. Generally, the difference between a good decision and a bad decision is how much thought and effort is put into understanding the possible outcomes of the decision. But, when a decision is made, there is progress. Far worse is when there is no decision. Then there is stagnation.
Consider your decision-making ability before buying a business.
Be aware that one of the very first questions a business seller is likely to ask is ‘does the prospective buyer have the financial capacity to buy?’ Without some assurance as to the financial capacity of a prospective buyer, business sellers are not really interested in discussing the matter further.
Consider your financial position before buying a business.
Experience shows us that in present times financial institutions have three primary criteria that need to be satisfied before lending to small business buyers.
A small business buyer will need:
- To provide about 50% of the purchase price. This is referred to as ‘cash’.
- To have experience in business or in the industry. This is referred to as ‘credibility’.
- To provide an unencumbered property to secure any lending. This is referred to as ‘collateral’.
Consider whether or not you have the ‘cash, credibility and collateral’ criteria in place before buying a business.
Generally, experience shows us that most business owners would want to live within 30 to 40 minutes travel of their business premises. The opportunity business buyer is seeking may not be available within their preferred travel time.
Consider whether or not you are prepared to relocate before buying a business.
There are lots of things influencing our lives. Age, family, friends, interest etc. All weight into the decision to buy a business. The business sales market is a market. And, as with all markets, opportunities arise and leave, and prices rise and fall on a continual basis.
Consider your time frame and circumstances before buying a business.
Businesses have private and personal information and documentation. Not only does the private and personal nature of a business relate to it owners, it also relates to employees, customers, suppliers and other 3rd parties such as accountants, solicitors and landlords. Information is usually provided under Confidentiality Agreements.
Consider the private and personal information that you will be asking for before, and the confidentiality commitment you will need to make, buying a business.
There are three fundamental steps that business buyers need to go through in assessing a business.
First – Understand Its Physical Nature and Environment.
The physical nature and environment of a business largely governs;
- Where it has been;
- Where it is now; and
- Where it is going in the future
The physical nature of a business to be investigated includes its demographics, industry, economy, location, premises and lease arrangements, employees, products and services, customers, suppliers, stock levels, competition, compliance and insurance matters, and management structure, systems and processes.
Once the risks that the physical nature and environment of the business have on its future outlook are understood, then the risks associated with it future profit levels can be judged.
Secondly – Assessing Its Present Profit Level.
Our view is that Financial Reports are a record of the previous trading history of the business. They relate to its past. They do not relate to its future. Financial reports can be used as an indicator of the future by assuming that the business will go on ‘unchanged’ into the future. But that can be a very big assumption.
The present profit level is important. It reflects the trading performance of the business at present and is likely to indicate the trading outlook in the near term. What it has done in the past is less relevant. The trading performance of a business three years ago is not likely to indicate its trading prospects three years out.
Financial Reports can indicate two important numbers:
- The immediate past profit level; and
- The total funds invested in the business to operate it normally.
Thirdly – Assessing Its Price.
We believe that the value of a business rests in its future profit levels and the risks associated with those profit levels not being achieved. Risks to future profit levels can be assessed by looking into the physical nature and environment of the business. The likely profit level can be assessed using financial information.
Price being asked should reflect the answer to this question:
‘how much of the future profits of a business are being asked for now in return for gaining access to the future profits, ownership benefits vis a vis the risks associated in owning the business’
That is the key point a business buyer has to decide upon. The decision will reflect the tolerance for business risk of the business buyer. Some will pay more and move quickly to acquire a business opportunity at hand. Some will pay less, and may miss the opportunity. Some will still be analysing the business and never make the decision to buy of otherwise.
If you need assistance of guidance, please get in touch with us. Conversations are private.