Hi Everyone,
Just wondering what are everyone thoughts on buying an existing business? The owner is selling it due to illness,
I am not sure if it is worth taking the risks buying an existing business. What do you guys think?
Cheers.
Buying an Existing Business?
Yaren24 on 25/10/2021 - 06:29
Comments
Would depend on the business… How much the goodwill is worth, and whether or not you'd keep existing clients/customers
Flight centre, the owner says it does great business and has a huge customer base, but says he has misplaced the sales records from 2020/21
Good time to buy as borders open up.
I know someone selling a heap of 7-11s, but they lost the employee payroll records
They keep payroll records?
Need to consider the following:
- Financials (profit, any debt, any assets etc). I think that small businesses are approximately valued at a 5x multiplier of profit (10x for larger business)
- Are there barriers to entry into the industry? Does the business hold any contracts or licenses that makes it harder for new players
- What is the source of new business? Is it referral or does the business have an advertising and marketing plan. If it's referrals, are the clients attracted to the business or the current owner?
Personally, the main consideration for me would the business system. Does it run effectively? Does it attract customers efficiently? Are the processes noted in a way that a new employee can bolt straight into the business? As long as this is fine, you could overlook other deficiencies.
By the lack of detail in your original post I'm going to suggest that you don't purchase an existing business.
My thoughts too. If you don't know what information to assess and questions to ask, you should probably stay away or ask for professional help.
Thought for the day
The only thing between an exi$ting business and exiting business is your $.
What did your Accountant/Bookkeeper say when you spoke to them and showed them your business plan?
I once looked at an existing cafe.
Looked ok on the surface.
Once I asked to look at their books we realised that:
1) 80% of their income was cash in hand, and wasn't reported as income to the ATO.
2) They only had two employees listed, one was the owner. Even though they had several other staff (cash in hand)
3) They were technically operating as a sole trader
4) A lot of their suppliers for food were operating in cash in hand tooAll of this together paints a pretty grim picture. If you were to do things 100% right, you'd be losing money (and it's not like they were making a lot anyway).
Look at the books, technicalities of the business, etc. You'll find that a lot of businesses are operating on razor thin margins and you're essentially buying a job that will be paying you under minimum wage.
When I worked in accounting/tax, had a client buy a business. Books looked fine, smooth handover, then first payday rolls around. Payroll is run, goes fine, but then the staff start coming to him asking for the "rest" of their pay, which was usually cash in an envelope.
And back to the old owner that client went with a big WTF to ask about.
The other lesson I learned working there, don't ever buy/start a small business unless you have a lot of skills or a very unique market and clientbase that you know will stick with you. So many people go and buy cafes, start small IT businesses and quit their jobs to take their hobbies full time in roles that require basically zero skills and the dream of either "I'm going to be my own boss" or "I can just hire people to do the work and sit back and rake in the cash".
And they all usually wind up working 100 hours a week doing menial labour. Because if they don't, someone else with the same dream will work 100 hours a week and put them out of business.
And back to the old owner that client went with a big WTF to ask about.
Most people don't do reasonable due diligence.
No one sells a goldmine
If the owner did have an illness, then they'd pass on their goldmine to next of kin or whatever
If you're buying a goldmine, you would pay the goldmine price
Yeah they asked half mil
Do you have half a mil to spare? It's difficult to get a loan. Lots of hoops. I ended up selling everything I owned to buy mine, the only bank that would even look at me was ANZ.
for WHAT though?
A lot of small businesses you're literally just paying for the income stream, you aren't paying for any assets. In fact generally the business is leased, so you're just buying yourself a job!
$500k. how long will it take you to get $500k in profit on this business? If turnover is $300k a year and profit is $100k then you'll be taking $50k income for the next decade while you pay off that initial investment.
Are you OK with working 100+ hours a week for $50k or would you rather pack shelves for half as many hours with the same (if not more) salary?
There's a winner here. And it's the guy selling the business for 500k.
If the current owner is paying himself a reasonable wage and registering a profit of $100k then the asking price may be appropriate.
@malich: These are all made up numbers. We have no idea what the actuals are.
In reality most small businesses are below minimum wage for the owners when you look at the hours
@coffeeinmyveins: There's lots of crappy businesses. Lots of great ones too.
My point related to the asking price. If you're investing in a small business you would want to recover the investment in (at most) 5 years. The investment is returned via dividends out of the profit.
The wage is a completely different discussion.
But yes, many crappy business models that for owners into working crazy long hours.
Not true. Maybe there is no next of kin. Maybe the children don't want it. People usually invest heavy into business with a lot of money tied up in them. This is just one way to get out and access to the money for future investments or retirement.
Ask the employees and customer/clients about the business. Its telling and harder to fake.
Not much info here but I wouldn't.
It is a community healthcare service
You've been pretty vague with every reply… adding in little tid bits here and there. We being trolled? I can talk to a small business and profit/valuation and there's plenty of people here who can give you a lot of advice if you provide decent information.
Before I took over my business I worked in it for 3 months, built a spreadsheet and broked down every single cost.
Can I send you a private PM?
Is 'good will' as valuable as it used to be? It used to be a part of the price of the business, but with things like Facebkko and TikTok etc being able to damage goodwill almost overnight is it even worth considering anymore?
I recognize the some businesses build up great customer bases and reputations, but to me it seems such a fragile thing to base value on?
Depends on the industry.
Professional services, as an example, would have great goodwill because their client base is sticky. Businesses don't change accountants every year (as an example).
Spend as much time at the business, like 1-2 weeks and see if the income/expense claims are true.
When my parents bought a business they stakeout couple of weeks near the business and counted the customers which were going in.
The business is in Brisbane, I am in NSW atm, I wouldn't forshadow the experience and see how the business is going
The owner is selling it due to illness
Sounds like the owner has been working in the business. When they leave, without them, you might be buying entirely different business than what it looks now. They could be big part of it.
Generally speaking, goodwill in these businesses is not worth all that much. Typically 2x the annual profit. Get their financial statements, talk to accountant who will do necessary add backs in their P&L to determine true profit (not profit for tax purposes). Multiply this profit by 2, add value of any tangible assets, deduct liabilities and you get roughly what the business is worth.
Doing this exercise, you'd find that so many small businesses are actually worth $0.
Buy Ozbargain ;) How much does everyone think Ozbargain is worth?
Go for it as you are asking with no info supplied, so do it.
Half a mil? Just start up an identical business across the road. Far cheaper entry point.
No information on cashflow, only half mil asking price. What could go wrong?
Not enough info. $500k is perfectly fine if the numbers add up.
How long has the business been operating?
Sales?
Profits?
Assets?
Liabilities?
What industry?
Lease?Etc.
Apart from the books; did you do a PESTLE or SWOT analysis?
Next question from op. What's a swot.
Many good reasons someone might need to sell and benefits to buying a business vs starting your own.
But I’d be asking - what can you do to improve the business? If you have special talents and visions, even drive, then continue on looking into it. If not, move on.
Yeah they asked half mil
$500,000 can buy about 35x Antminer S19 Pro. Each S19 Pro can make $37 p/24h or $13,505 1Y after power.
Start with 5 to 10 and gradually add more.
Where can you buy them for that price?
Bought a business last year.
First time we did it and learner a lot.
Glad we did as we managed to get our money back in a year.
Did all the due diligence and offered a fair sum.
Happy to share our experiences.
What industry made a killing in 2020 around full-time covid? 🤔
Genuine question or you already know the answer ;)
I'd say any food/takeaway business that had a huge take away focus.
Pretty much any retail that was considered essential, no one had anywhere else to go.
We definitely bought a business that was not COVID friendly and had to stop trading during lockdown, but Inspite of this (without govt. assistance), we still managed to get back what we paid for the business.
But that wouldn't have been the case if we paid what the vendors were originally looking to sell for.
We definitely did our DD and applied very basic calculations when it came to a fair valuation.
We also paid in tranches / milestones.
Buying a small business was scary but the vendors kept reasonable books. (Would have been even better if they separated business/personal costs better but appreciate that this is the benefits of a home based business)
We also had certainty that the revenue was real and not a lot of cash business.
We could have set up a similar business from scratch (and had done so before), but it would have taken longer to build the credibility and create the systems from scratch.
Again, it was a great decision.
Really depends on the books of the business.
Could be good as there may be existing customers and goodwill to kick-start your ownership of the business.
May be bad if the business has lots of debt and was not run well.
Look into the books and decide.