Are you thinking of buying a business? Read this first

One of the options when going into business for yourself is to buy a going concern – a business that someone else has set up, done all the hard yards on, and now (for whatever reason) wants to sell.  Although this might sound like the easy option there are a lot of things you need to keep in mind to avoid expensive mistakes and a lot of heartache.

Finding out who’s for sale

Businesses are usually sold via Business Transfer Agents (BTSs); these specialist companies are effectively estate agents/realtors for businesses.  Like estate agents/realtors their primary aim is to sell the business for as much money as possible for the person they’re acting on behalf of – the seller.  BTAs can take between 6 and 10% of a sale price so will generally want to ‘big up’ the benefits of the business and its potential.  Most are genuinely honest and are looking to create a win:win scenario for all parties with a fair deal but there are the occasional rogues out there (as there are in any profession) so do keep that in mind.

When starting your search for a business to buy you should do as much research on the BTAs as you do the businesses you’re planning to buy. By all means look at their Web site but don’t rely on it; look deeper.  How long have they been in business?  Are they a member of a trade body?  What qualifications do they have?  Do they have any testimonials from previous clients?  As they’re acting for the seller and not you, you’re unlikely to be able to get the seller to change agent but what this research will do is allow you to make a considered judgement on how far you can trust them.

There is one time that you can expect a BTA to be on your side and that’s when the business has been on the market for a long time.  After about 3 months on the market, interest in a business for sale rapidly drops off.  If an agent has lots of these on his books he may be open to a little bargaining when it comes to price in order to allow him to shift it and get his commission.

Why are you planning to buy?

Let’s look at the main reasons why you might be looking to buy a business.
The main reasons are:
•    You’ve just been made redundant, have a pot of cash available and want to start your working life afresh;
•    You’ve had an ‘entrepreneurial seizure’ and decided that you can do better than someone else at running a business;
•    You’ve decided you don’t want to work for someone else any more;
•    You’re downsizing from your hectic job in the city so that you can spend more time with your family/dogs/cats/llamas;
•    You’re a serial entrepreneur who makes a living from buying, building up and selling businesses and are now looking for your next project.

The chances are that if you’re reading this then you’re not the last example above because you’ve done this before, know the routine and have the battle scars to prove it!

If your reasons align more to the other examples shown then you need to read through this document carefully as it will save you many thousands of £££ and much heartache.

Why are they selling the business?

If you had a goose that kept laying golden eggs for you, then why would you sell it to someone else?  Slightly cynical but a good point to keep in mind as you search for a business.

To a true business person, there are two primary reasons why someone should start up or buy a business.  The first is to build it up and sell it; the second is to build it up, put a team in place to run it for you and then you sit back and enjoy the passive income.

Look very carefully at the reasons given in all the ads and be prepared to read between the lines and ask some searching questions.  Many ads simply say ‘retirement’; to me that generally means one of two things:
•    They genuinely are retiring, or
•    They have got to the end of their tether with the business and can’t be bothered to go on any longer.

If they are genuinely retiring then that pricks my ears up and raises my suspicions.  I then look at how long they’ve been running the business and if it’s a relatively small business and they’ve been running it for a significant period the alarm bells start to ring.  I look at how many team members or staff they have working for them.  Very often it’s just one or two or even none – which means they’re deeply immersed in keeping the business running on a daily basis.

So, they’ve been running the business for a sustained period and haven’t got it to the point where it runs without them… they’re not selling a business, they’re selling a job.  That’s not to say there isn’t some latent potential in there somewhere but you might have to work hard to release it.

What do the figures say?

Putting a fair price on a business for sale is notoriously difficult – as is understanding why a particular price has been decided upon.  One of the few areas that can be useful in deciding on a price is, of course, the financial performance.  But even that is not a simple calculation.

First, do not equate turnover to business success.  Some businesses have turnover in the millions but still make a loss because their overheads are even bigger.  What turnover allows us to see is an indication of the size of a business and, to an extent, its’ scalability.

The whole financial element of a businesses success really needs a savvy accountant to look over it to see exactly what’s happening – unless you’re versed in these things yourself (and even then it might be worth getting a third party to do it so that you don’t end up looking at it through rose tinted glasses).

Very few businesses will allow you to see the full financials early in the buying process; during a formal due diligence period they should be available but you may have expended a lot of time and effort by then so use what little information you have as best you can.  Even the simple application of some common sense can help with an early assessment “Established 12 years, turning over £74,000 and supporting a husband and wife team” – hmm.
For some industries it is possible to get average figures for profitability but these are rarely easily available and generally cost money when you do track them down so you don’t want to be spending money on things like that until you’re further down the due diligence line.  In my experience I’ve generally worked on a rule of thumb that the ‘average’ business should be showing a gross profit of at least 40% which should translate into a net profit of around 10%.

So, for example, if I look at a business showing a turnover of £100,000 then gross profits should be around £40,000 once all the cost of sales have been factored in and the business should be able to achieve £10,000 a year back into the pot for growth once all overheads (including salaries and the owner’s rewards) have been taken into account.

When I talk about the ‘average’ business in the paragraph I’m talking about the middle of the road businesses such as retailing, engineering, physical (as opposed to Internet) service industries etc. – the sorts of businesses that tend to come up for sale most commonly.  There are some businesses that do vary widely from these figures but they’re the exception rather than the rule.  For example, a web based business selling online software or a mortgage broker business will not have stock to deal with and may not even have a physical office presence so figures will be skewed.

Taking the example above I would then be thinking about how the other costs will flow out from this.  For example the lease on the premises, number of staff and their approximate level of pay, amount of stock that will need to be held etc etc.

Look to the future – what potential is there for growth?

While you’re looking at why they’re selling, take a look at what the business sells/delivers.  When the present owners started the typewriter repair business 25 years ago there was a lot of potential for growth…  Time and technology marches on so think carefully about how changes might affect business profits into the future.
Many adverts for businesses for sale have comments like ‘huge potential for growth for a dedicated and dynamic new owner’.  This might genuinely be the case but again a little investigation and analysis will determine how much truth there is in the statement.  My initial question would be ‘If there is so much potential in the business then why haven’t the present owners exploited it?’

There are a lot of things to be taken into account when considering the purchase of a business.  With a degree of caution and a lot of research you can find a bargain and make a great success – so go to it!

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