Buying a business: Advantages and disadvantages

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Buying a business: Advantages and disadvantages


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Old 02-22-2014, 02:41 PM
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Post Buying a business: Advantages and disadvantages

Finding a business to buy

You can find out more about the problems, pitfalls and opportunities of buying a business on the Business Link website (www.business.qld.gov.au > Buying a business > Going into business > Buy an existing business), South Australia Small Business Administration website (www.sa.gov.au > Selling a Business > Start your business > Buy a business) or the relevant country small business association.

These organizations can help you find a business to buy:

• Businesses2Sell (www.businesses2sell.com.au). This site lists more than ten thousand businesses for sale, covering entire Australia by state.

• WorldBusinessforSale.com (www.worldbusinessforsale.com). This site claims to have listings of businesses for sale from 198 countries, updated daily. They did have twelve businesses for sale in Afghanistan, three in East Timor and four in Zaire, which is a pretty fair test.

• BusinessesforSale.com (www.businessesforsale.com). This link is to their database of over 53,000 businesses for sale, covering the United States, United Kingdom, Spain, Canada, Australia, South Africa, New Zealand, UAF and elsewhere. There is a specific section covering Work from Home businesses for sale, including franchise opportunities.

Valuing a business

When you buy a business you are in essence buying an established stream of profits. True, the business may have tangible assets such as stock, computing equipment or machinery. But the value of these hard items will be insufficient to compensate the previous owner for the accumulated time and effort that he or she has spent growing the business to its present state. The amount business owners expect for a business they are selling over and above the physical assets is referred to as ‘goodwill’. The better the business, the more the goodwill costs you. There are several ways of valuing a private business (one not listed on a stock market). The two most common are using the P/E ratio and using the rules common to the specific business sector.

Using a formula known as the price/earnings ratio, a buyer is invited to pay a multiple of a year’s profits by way of the purchase price. For example, buying shares in Marks & Spencer will cost around 16 years’ profits, putting it on a P/E of 16. P/E ratios vary both with the business sector and with current market feeling about that sector. For example, the high-tech sector may have a P/E ratio of 40 or more at times, whilst for high-street banks a P/E ratio of 8 would be more normal.

Advantages and disadvantages of buying a business

Buying a business has a number of advantages and disadvantages.

Advantages of buying a business include:

• Much of the uncertainty of starting up has been eliminated, so you should have fewer costly mistakes.

• You inherit relationships with customers, suppliers and perhaps even financial institutions that would otherwise take years of hard work to build.

• You may be able to pay yourself a living wage from the outset.

• You eliminate one competitor. If there are already two car-cleaning businesses in the small area in which you live, both have been around for years and yet you have decided that this is the business for you, and then buying one out may make economic sense. That way you could get 50 per cent of the market rather than the third you could aim for with three players in the game.


Disadvantages of buying a business include:
• Valuing a private business is difficult (see the next section).
• Finding a business and negotiating a purchase price can take time and may require several attempts before you succeed.
• You will need professional advice from lawyers and accountants as safeguards to ensure that you don't end up taking on hidden liabilities for tax owed, or responsibilities to past and present employees.


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Old 04-11-2014, 12:42 AM
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This is a great insight into the industry, Vishal. Thanks for sharing.

Garth


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Old 04-18-2014, 10:09 AM
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Great stuff!


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Old 04-20-2014, 10:30 AM
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Hi Vishal,

A great post!

To add to your comment about "obtaining professional advice from lawyers", the following is a list of the sorts of things that a business (or commercial) lawyer would look at when advising a prospective buyer:

• Corporate governance – Constitution, Minutes of Meeting, Shareholder Register, etc.
• Business structure and asset protection strategies
• Seller – identity of stakeholders, reason for selling, family disputes, etc.
• Customers – customer list, key customers, credit policy, aged debtors, discounts, etc.
• Suppliers – supplier list, key suppliers, terms of trade, aged creditors, discounts, etc.
• Revenue – revenue recognition, sources of revenue, consistency and quality of revenue, apportionment, etc.
• Expenses – fixed and variable expenses, staff expenses, capital expenditures, depreciation, trends, apportionment, etc.
• Cash flow – quality and consistency of cash flow, operating, financing and investing cash flow, etc.
• Taxation – income tax, CGT, stamp duty, tax losses, etc.
• Assets – tangible vs intangible assets, goodwill, ownership and licensing, encumbrances, market value, plant and equipment, write-offs, etc.
• Liabilities – loans, leave entitlements, outstanding debts, off-balance sheet liabilities, etc.
• Accounts – budgets, statutory records, income tax returns, BAS, management accounts, etc.
• Employment – employee list, key persons, awards, enterprise agreements, bonuses, unpaid entitlements, restraint of trade, complaints, disputes, etc.
• Contracts – employee, management, distribution, supplier and outsourcing contracts, etc.
• Leases – rent, duration, options, zoning, security, charges, “make good” obligations, landlord consent, mortgagee consent, transfer duty, etc.
• Securities – mortgages, charges, guarantees, indemnities, etc.
• Insurances – public liability, professional indemnity, workers’ compensation, business and key person insurances, premiums, past and present claims, etc.
• Information technology – licences, maintenance agreements, etc.
• Intellectual property – list of IP, ownership, registration and protection, domain names, etc.
• Litigation – actual and threatened litigation, complaints, settlements, regulatory sanctions, etc.
• Workplace health & safety – accident reports, investigations, inspections, convictions, etc.
• Superannuation – SGC, superannuation funds, default funds, etc.
• Projects – tenders, quotations, acquisitions and other transactions (past, present & future), etc.
• Environmental – licences, registrations, approvals, inspections, investigations, etc.
• Other – external consultant reports, compliance audits, etc.

Note this is NOT intended to be an exhaustive list.

This is provided simply to demonstrate that there are quite a lot of issues to be considered with each business purchase, and many legal traps for the unwary.

Kind Regards,


Carl Desacola
Director | Registered Migration Agent (MARN 1461661)

Winthrop Mason | Business Lawyers & Migration Agents
P (07) 3303 0843 F (07) 3303 0842

Winthrop Mason Pty Ltd ACN 168 185 886
AMP Place, Level 19, 10 Eagle Street, Brisbane, Qld 4000

Individual liability limited by a scheme approved under Professional Standards Legislation


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