Starting a business from scratch and going without income in the initial period can be a daunting prospect, so it’s tempting to buy a business instead.
But before the excitement clouds your objectivity, think carefully — the corporate world is littered with disastrous business acquisitions. So how can you avoid ending up the same way?
This article will cover the ten significant elements that should be taken into account before signing any deals. Understanding these and keeping them in mind will give you the best chance of a successful acquisition.
1. Reason for sale
Sometimes it’s not easy but, if possible, determine the real reason for the business’s sale. Is it a good reason, such as retirement, separation, or the owner’s overstretched? Or is the business heading to the wall?
The reason for sale will undoubtedly influence your justifications for purchasing, and it may also impact the strategy to develop for taking the business on.
2. What are you buying?
Don’t buy the company — buy trade and assets.
Establish exactly what assets you’re buying and how much you need to pay — are they worth it? If you’re buying goodwill, this is not tax-deductible. Is all the goodwill attached to the owner or the business? Goodwill can dissipate quickly, especially if a business takeover is botched.
3. Restraint of trade
Basic stuff, but you’d be surprised how many purchasers try and save money on professional advice and make a hash of it.
A client of mine sold his business and opened up again just a few kilometres away because there was no restraint of trade imposed. Guess what happened?
4. Due diligence
You cannot avoid a thorough review of the business before proceeding. Don’t be fobbed off with limited or restricted information; you hold the whip hand because you are waving your money in front of the vendor.
Yes, this may cost you, but don’t be penny-wise yet pound foolish. In any case, it may not cost as much as you think, especially if you can do some of the work yourself. A good accountant will have a checklist on what to look out for.
A client of mine looking to buy a business is working in the industry right now. You can’t do better due diligence than that; he’s found out all sorts of things!
5. Impacted staff
Staff these days are the number one business problem, especially in a small business where staff numbers are limited because losing even one employee can be catastrophic.
A change of business owner is almost guaranteed to prompt staff departing and, these days, getting the right staff is a real challenge.
6. Real estate
If you’re buying a business with premises, you need good advice whether you’re buying or leasing.
If leasing, how long is left on the lease? Are the premises suitable? Is the location the best? Are there any building maintenance works that will fall to you to make good?
7. The handover
Typically, buying a business where the existing owner is prepared to stay on a while and assist you with getting to grips with the company will command a higher price.
Even a small business can be complex, and there are many things to take on board so that a reasonable handover period can be invaluable.
8. Key relationships
Building a successful business requires establishing and maintaining relationships with people, not just staff and customers but also suppliers. These days, getting things done by tradespeople, professionals, or suppliers of goods and services generally is not that easy.
As a business purchaser, you need to quickly work out the important people you need to get to know and keep on your side. It’s a massive component of goodwill that is often overlooked.
9. Working capital
Many business purchasers underestimate the working capital required to operate a business, and typically, available cash or borrowing facilities have already been utilised in paying for the company.
Get an accountant to prepare a simple cash flow forecast highlighting your peak cash needs.
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10. How much should you pay?
Unfortunately, valuing a small business is notoriously difficult, primarily because of the overriding involvement of the business owner. Take away the business owner, and you often take away the company.
Many pay vast sums of money for a small business to buy themselves a job and end up being worse off financially.
It can depend upon just how much money the purchaser has to spend with many business purchases, which I’ve always thought strange, but it’s just the way things are. There’s no simple answer, so seek the advice of a good accountant and be prepared to walk away, that being the necessary risk of negotiating hard.
In conclusion, while owning and operating a business can bring huge rewards and satisfaction and build wealth, it’s also hazardous. So take your time, do plenty of research, and get some good advisors. That way, you’re minimising the risks and set yourself up for success.
Three keys to saving money when starting in business
A business is a living, breathing thing — an entity that, like a person, you can love, nurture and grow, or neglect and eventually let die. If you own a business, you understand that you must care for it like a newborn child. You must nurture it and carefully provide the essentials, for if you fail, your business will fail as well.
Like starting a family, starting a business takes a solemn financial commitment. If you are like most new business owners, money is tight; every dollar counts, and you have limited resources.
Yet you can start and grow a very successful business by being resourceful with your limited cash and by being clever with your start-up capital. Follow these three keys to saving money when starting a business, and you will run a lean business that will have every chance to grow and be successful.
1. Utilise free marketing
Use social media
Use all the free social media platforms available to publicise your business and everything that you do within it. Set up LinkedIn, Facebook, and YouTube pages to post content to the world about you, your products and services, and why you are different from your competitors. Don’t forget to trawl back through all your contacts, including business cards you have kept, your email address book, and family and friends and add them all to your social media contact lists. Then send friend and connect requests, and invite everyone you know so you can quickly build an online presence for your business. If you don’t blow your own horn, no one else will.
Mention your business
When you meet new people, what your business does and its benefits for its customers, don’t try and hard sell your business or be pushy with people, but make sure that you weave your business story into every conversation. This includes in a social context or when you talk to suppliers and potential customers. Have a business card ready at all times to give to them, and try and get one in return.
Create a cost-effective website
You certainly do not need to spend tens of thousands of dollars, creating a full-blown website with all the bells and whistles. Just create a simple but effective website that tells people about your business, the range of products and services you offer and why you do it better than anyone else. There are plenty of free online website development packages and tools that allow you to create a smart-looking, professional website that can be up and running in a matter of hours, not weeks. Be warned, though: if you make a cheap and nasty looking website, you will send a message to the market that you also have an affordable and ugly business.
Purchase a low run of business cards
Invest in a low print run but a high-quality business card. There is nothing worse when starting for the first time, and having a cheap-looking business card that looks like it was printed at home. Someone once handed me a business card that looked like it had been torn out from a perforated edged sheet of cardboard. It looked tacky and certainly did not leave a good first impression on me. Invest in high quality but the low print-run business card as a cost-effective way of marketing your new business. Online business card providers generally can deliver quality for a great price.
2. Have minimal staff
Pay only for what you need.
Use contractors or part-time staff that are on a casual hourly rate. This will allow you to only pay for staff when you need them. If there is downtime in your business and you are running around meeting new potential customers, the last thing you want is to pay a large wages bill when your staff are sitting idle.
Also, the advantage of having casual staff is that you can roster them on and off to effectively utilise them and only pay them when you need them to help you within the business. If you spend a casual hourly rate, you may not need to pay any holiday leave, sick pay, or annual leave. Please check with your local authorities on this issue.
Ask family and friends to help you with your new business. Spread the word about your business through your network. Often family members, especially those who are retired, will jump at the challenge and opportunity to break the monotony of their day by helping another family member build and grow a valuable business.
Hire offshore contractors
Use offshore contractors for all your infrastructure and support. You can almost get anything offshored today, from manufacturing to a virtual assistant who can help you with your infrastructure without the cost of having a full-time salary and wage staff in your business. From creating cost-effective websites to your products’ complete manufacturing overseas, there is no limit to what you can offshore today. It will save you time and money. The world of business is global, and business back-office support has also grown into a worldwide phenomenon. Embrace it so you can save money when starting in business.
3. Save money on location and equipment
Use your home
To save money, consider running your business from home. This is a money-saving measure that you must seriously consider if you want to run a lean company, especially in those first critical months. With small business technology being more affordable and internet access reaching nearly every corner of the planet, you can virtually run a national or even global business all from the comfort of your own home office.
Share or lease
If you don’t want to run your business from home, then consider a shared office arrangement or look at renting or leasing a serviced office for the short term. Having a shared office or serviced office gives you the professional “shop front” look and feel, which is essential if customers prefer to come to you. Most of these shared office facilities also offer full secretarial support, such as answering the phone using your business name, taking messages and sending the mail. To save money, forget signing up for long-term, expensive office space. Look at sharing an office or business premises, or a serviced office as a low-cost yet professional alternative for your new business.
Rent equipment or outsource to conserve cash
Do not buy costly business equipment; instead, pay for your equipment’s temporary use or lease it. The key to this strategy, especially if you are starting a manufacturing business, is to produce your product without sinking hard cash into large amounts of plant and equipment. You can undoubtedly outsource your manufacturing offshore for almost any product, even with low quantities being produced. Rather than having to invest in capital equipment yourself, lease or rent the equipment or even outsource your production entirely. I know many business owners who have started manufacturing for the first time by finding a more prominent manufacturer to make their products for them. They even get shipping done by someone else as well. This is a great idea and an essential strategy for keeping your manufacturing costs to a minimum.
Don’t make the mistake of running up business costs and burning through your cash when you start your business. Most new businesses fail in the first 12 months because their owners ignore these critical keys to running lean and minimising costs at the start. Save money where you can while starting up.
Five industry sectors ready for new businesses
Growth is not always a reliable indication of industry health in Australia. Still, evidence suggests now is the time to invest in one of these five up-and-comers, writes Patrick O’Loughlin.
Successful business owners have an aptitude for consistently making clever strategic decisions at the right time. Many of them scoff at the prospect of luck – instead, their business achievements lie in careful market surveying and embracing key opportunities before anyone else.
Becoming successful is all about investing in the right place at the right time – and sometimes that may mean moving into an area of business or industry sector you’ve never worked in before.
Why now is a good time to diversify
SME business confidence developed by solid growth in the job market in 2017 has been dashed with NAB’s 2019 Q2 Quarterly SME Survey. The Q2 survey reinforced negative Q1 results, with small and medium businesses experiencing the weakest ongoing conditions overall.
You may have experienced a downturn in profitability due to the slowing Australian economy, especially if your business is related to slowing industries like construction or real estate.
Rather than abandoning your business or slogging it out, the solution may instead lie in looking elsewhere to recoup your money—specifically, one of the select few industries where growth is still occurring.
The industries experiencing growth
According to the employment marketplace Seek’s 2019 Australian Job Market review, five key industries make up more than 48 per cent of recent yearly job ad growth.
In order of total job ads, these industries are:
- Trades and services
- Information and Communication Technology
- Healthcare and Medical
- Mining, Resources and Energy
- Hospitality and Tourism
Considering current uncertainty in our economy and NAB’s report suggesting that a turnaround in conditions isn’t imminent, these are the industries that represent the most viable avenues for new small businesses in the long-term.
To give you a head start on approaching new opportunities and improving a potentially struggling bottom line if you already operate a business, we’ve provided some thought starters below.
Subscribing to this blog’s newsletter is another way to receive regular doses of insight and inspiration for start-up concepts.
Keep in mind that this is by no means a complete list – make sure to do your research and find a niche that complements your interests and business goals.
Trades and services
The trades and services sector represents a massive potential for a new business.
According to Seek employment report, small businesses looking to expand into the trades and services industry should first look to the in-demand automotive and electrical trades.
With trades in permanent demand, regardless of the economy, small businesses can also supply these industries as specialist retailers.
Information and Communication Technology
Rapid advancements in technology make the information and communication technology sector particularly valuable for savvy business owners.
Ample opportunity currently exists in software engineering, security engineering, and business and systems analysis. Still, the nature of this type of work means there’s also plenty of demand for supporting roles in specialist marketing and communications.
The best bit? ICT jobs can primarily be performed remotely, which means this is an area ripe for those seeking to become ‘digital nomads’.
Healthcare and medical
Not only does working in the healthcare industry allow you to improve lives, but an estimated 16.1 per cent growth between 2018 and 2022 means demand is set to rise steadily.
There’s (luckily) no need to go to medical school to start your own small business in the healthcare and medical industry. Instead, you can create a small business with training or expand upon a company you already own by offering services like massage therapy or acupuncture.
These services can also be incorporated into an existing spa or clinic business, or you can travel with them if you’re looking for more flexible options.
Mining, resources and energy
An industry like mining may seem empty of opportunity for small businesses, but many areas in this sector that savvy business owners can take advantage of.
Much of the opportunity that exists in the mining, resources and energy sector for small and medium business involves mining equipment.
Leasing or selling items like power supplies, such as generators, and safety equipment to the mining industry will demand places like Queensland and Western Australia.
Hospitality and Tourism
The slowing Australian economy represents ample opportunity for the hospitality and tourism industry. This is particularly true of the tourism industry, which is forecasted to grow over the next two decades steadily.
Opportunities for SMEs in these industries lie in travel agencies, tour guiding, and opening venues in crucial tourist hotspots. It’s helpful to pay attention to tourism-related trends – knowing when and where tourists are visiting Australia can help you sell certain products at opportune times.
If you want to expand your business into one of these industries, now is a great time to do it. You can quickly fill in any skill gaps with training or study, and exploring a growing industry can be rewarding in itself. So – what’s holding you back?