Business purchase in Australia.

Business purchase in Australia.

By Graham Nankivell

The business organization from scratch not always the best way to begin business.
It is much more advantages to success, when you buy
operating business. And that is why …
The fact is well-known that a set of again organized businesses come to an end with failure within the first five years. Lack of finance and time and too much uncertainty are usual reasons. In comparison, purchase of existing business has much more the best prospects:
– authentic history of receiving arrived, instead of assumed from plan business
– immediate cash flow
– the settled credit relationship with suppliers
– the trained workers on a place
– the established list of repeating clients
– licenses and permissions are already ready
– assistance of the owner of business in training of the new owner.

In most cases, the risk of purchase of the founded business is minimized and, depending on features of business, often there is no need for additional expenses.
If you have the paid share of own house and/or other real estate, it can be used as means of financing of all-round price of viable business. Practically the majority of the bought businesses were completely financed without attraction of available funds. Nevertheless, you should check the following aspects if you intend to finance business by debt funds completely.
You should satisfy bank or the financier that the declared net profit of business can serve completely the credit, and after payment of a salary by you there is a reasonable part of profit as the buffer. The buffer is necessary to cover seasonal tendencies on sales, loss of clients, increase in a rate of Reserve Bank (that will affect the price of your credit) etc.
The analysis of the example given below, distinctly shows that the smaller risk exists in purchase of business of "B" because of higher rest of made profit whereas return on the enclosed capital for 20 % is lower.

Example "A" Business "B" Business
Price of $70,000 $250,000
Plus stocks of $30,000 $100,000
Total cost of $100,000 $350,000
Net profit of $60,000 $140,000
Return on вл. capital of 60 % of 40 %
Minus loan cost – payment only percent (without the principal) – 10 % of $10,000 $35,000
Minus salary of a vl-ets of $45,000 $45,000
The profit rest – буф. $5,000 $60,000

In addition because business of "B" has $60,000 the rest of net profit, payment of a loan can be restructured to include payment of the principal so that business is capable to pay itself or, on the other hand, the salary of the owner can be increased. "B" business also reflects smaller risk since it can resist to loss of clients until the profit rest completely will come to naught.
The dilemma for the buyer is will decide on a choice of business which best of all suits features of your profile. The business is stabler and more reliable, the its price is higher. Everywhere accepted method of definition of the price of business is based on return on the capital enclosed directly in business (return on investment – ROI).
In other words, return on the enclosed capital is a net profit (after its clarification from the added or taken-away sums connected with the identity of the owner, such as his salary, payment of personal expenses, payment of the credit or any financial operations directed on reduction of the taxation), expressed at the percentage of the price business purchases.

% ROI = Net profit x 100 / Price
Price = Net profit x 100/ROI %

Bозврат on the enclosed capital (ROI) can be a miscellaneous depending on the industry, and also from such factors, as risk degree, number of working hours, competition existence, equipment cost, the working capital. The true price finally becomes function from profit. For example, the business generating net profit at a rate of $200,000 c by established return on the enclosed capital of 50 %, will reflect sale price of $400,000, including the equipment, stocks and Gudvil (Goodwill – intangible assets, essence of the business).

Primary base decisions
Whether you wish to mortgage the house for business financing?
You should be sure that your second half involved in this process, supports you. Solve and carefully count, how many to cash (cash is does not mean that money in bags in the form of banknotes, cash is any money on any accounts which are ready to payment) you in a condition to provide for direct payment, and from the greatest possible money for a loan you are ready to use what part (your possibilities of access to the extra capital are always limited to existence of assets at you for its providing), leaving, naturally, in two sources of financing a certain "emergency" stock. You are going to take what sum of the personal income from business? Whether you want partners? It will increase your financial durability, but will limit your independence. Make these decisions before you begin business search.

Exit to a track
On each business for sale is available two or more serious the buyer (20 – if to count simply dangling). Be not disappointed, if you did not find business which look for, published in advertisements in the newspaper. The majority of businesses do not wish to waste time, talking with dangling, and do not want a flow of the buyers giving trouble to the personnel and clients.
It is very important to decide on the skilled broker. The more it has experience in that sector of business which you prefer, the quicker you will find high-quality business at reasonable price. The good broker will make the report at least on 20 pages on any business provided to you. And then, when you will be presented to the owner, you will be well informed. The report will give you a basis not only for communication with the owner, and as with your auditor and the financial adviser who are an integral part of process of decision-making.
You keep time and money since you will be quickly capable to estimate and filter businesses which answer your criteria. If you the serious buyer, business the broker finds to you the corresponding business even if for this purpose it is required to get business which was not exposed yet on sale.

Finding of the type
You will avoid losses of time and will increase probability of a successful choice if you begin process of creation of a profile of the buyer in yourselves. Begin with viewing of your previous life and professional experience, your hobby, your strong and weaknesses. Compliance of your strengths to needs of business will simply add values while acquisition of new experience of the independent businessman by you has bigger value for you. On the other hand, if your weaknesses where in business hardness, then you and the seller simply dreamers is necessary.
Be defined that it is pleasant to you and that is not pleasant to you. You would like to become a roznichnik or the wholesaler? Extract from the broker the list of various types of business and estimate them from the point of view of your preferences. The telephone directory of Yellow Pages is an excellent place to examine various types of business. The directory index just describes each category of business, and you can easily select 40-50 businesses in which you became interested, from this huge list.

Further solve, what your sector of the industry will be:
Wholesale trade
Production
Service
Retail
Be not too concerned, if you enter into absolutely other business. Within 70 % of percent of buyers finish purchase of business which very much differs from their last occupation, and the majority of them work successfully.

Dig deeply
The majority business of brokers and owners will demand, that you signed the contract on confidentiality before providing you information. It is reasonable to assume that some private information will be held until the price and terms of sale are coordinated properly.
At this moment research begins. Your care in an approach to research will raise your rating in the opinion of the seller and will keep you from expensive disappointments which the buyer who has unfairly approached to research of the purchase faces.

The main questions can include the following:
Find out the real reason of sale of business by the owner.
Who is key workers and what their spirit concerning change of the owner?
Find out history of turnover of staff.
Check product/service and their market.
See monthly sales, comparing their level in the current year with a year previous.
The gross the income increases or decreases?
Whether the annual turnover is subject to seasonal fluctuations?
How the product is on sale and how many is spent for advertizing?
Who major customers and what their plans? Whether they are stable financially?
What percent from an annual turnover is made by the biggest client?
Extract the list of competitors and compare them to your business. What their product in comparison with yours on quality, delivery, the price.

Financial questions
Viewing of the financial report will generate a set of good questions. Not колебайтесь to invite your accountant at this stage. Study records on profits and losses, trying to see tendencies and sudden jumps. Be sure that you analyze the official tax report, instead of losses and the losses which have been unpacked from the computer of the owner.
Whether large expenses during the next period are required?
On what the profit and how you can increase it specifically becomes?
Be sure that you received the list of the assets offered on sale where all included equipment is really necessary for production of the declared profit.
Carefully check the lease contract of a room (lease agreement)
Whether there corresponds location and the size of a room to business development plans?
Whether members of the family of the owner work in business? If it so, whether is available possibility, proceeding from financial calculations, to pay a salary to the worker employed instead of the relative?
As soon as you are satisfied with answers, dispose, that your accountant finished the report on cash flow. Your financier as will demand a copy of this report before approving financing of your business.

Reasonable price
Do homework by independent calculation of the price. Time invested in this process, will help to save up for you big money and to add reason during time and after sale. Ask your business broker of the proof of last sales. If your broker cannot provide you the previous experience in sales, it means not the expert in that sector of the market which you prefer.
As it was mentioned above, the simplest method of an assessment of net value of business is to consider it from the point of view of return on the enclosed capital.
You should consider, what profit remains for you, as for the owner of business. You should define true operating profit which is generated by business irrespective of the fact how the owner operates the financial affairs. Such calculations clear a true picture of the income and the expenses of personal character connected with minimization of the taxation or which not repeating, i.e. are unusual to this business. They are called by add-backs.
The most usual add-backs which to you are necessary for considering at calculations of true net profit for the purpose of business estimation of cost, are the following:
The expenses connected with financing
Financing expenses (percent on the credit, the expenses connected with a loan, leasing collecting) should be added to profit. The new owner will have other methods of financing of business. He can pay all sum itself or occupy 100 % of purchase price. Subsequently expenses of financing can will change considerably depending on personal aspects of management of the budget. Nevertheless, you will need to consider your own expenses of financing to be sure that there is a sufficient profit, and your business can be considered as reasonable investment.

Automobile expenses
Those expenses which are connected with car use for personal reasons, can be added to profit. Expenses of $5,000 – $7,000 a year it is possible to consider average cars normal. Expenses over this sum can be added to profit.
Pension fund and insurance
The pension fund and the insurance connected with personal needs of the owner, should be added to profit.
Repair
Any repair which is not usual or individual, for example such as engine replacement in the truck, or such works which could be considered as capital expenditure from the point of view of accounting, should be added to profit.
Equipment employment
If business acquired the equipment which previously leased, means these expenses should be added to profit since those any more will not be.
Salary of the owner of business
For business of the small and average sizes the salary of the owner (one owner) is added to profit. The majority of small businesses are on sale on a basis the owner/operator, instead of under management. Businesses of the bigger size ($500,000 and more) are usually on sale and estimated under management.
Equipment and equipment sale
Any equipment and the equipment sold with profit or losses, should not be taken into consideration. Any profit on it should be taken away from the income, and losses are respectively added.
Personal expenses
Personal expenses, such as house accounts for an electricity, phone or expenses on the private trips paid by business, should be added to profit.
Tenancy (rent)
If the room is in possession of the owner of business (freehold), and it reserves this room, in this case the corresponding sum of rent should be taken away from business profit.

Purchase contract
Final stage – the contract relations between the owner and the buyer – should be fastened. This contract is connected by both parties conditions and obligations on certain unforeseen circumstances. As soon as your offer (offer) is accepted, you should have access to all remained information according to a special condition of the "due diligence" necessary to finish your assessment of business.
And here you at last on a way to control and end of your vital purposes, the provided career, financial independence, personal awards and freedom which comes from management of your own business.

Graham Nankivell

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