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Sydney small business accountant advice on buying an existing business

According to recent reports from the Australian Bureau of Statistics, only 60% of small businesses across Australia that commence operations today will still be in business in the next four years if recent trends continue. Therefore it certainly pays to conduct all the due diligence possible before giving up your day job and venturing into the world of small business.

The reasons for business failures are many and varied and not all of them can be eliminated but there is much that can be done to minimise the risks faced by the new small business owner. One way of mitigating some of the potential risks is by purchasing an existing small business, rather than setting sail into unchartered waters, especially if you are a lone yachtsman, or flying solo, so to speak!

Buying an existing small business can have a number of clear advantages over setting up a new business, but of course it is never risk free either, so let’s run through just a few key aspects that you need to be on the lookout for when buying someone else's small business.

Positive Cash Flow

Any start up business always experiences a significant amount of start-up costs that result in negative cash flow. This can often last quite a while as time poor part time entrepreneurs can take up to two years to get a full business operation in place and even after that it can take a number of years to recover those initial losses. On the other hand, buying an existing small business with the necessary infrastructure in place and an established customer base will result in positive cash flow from the outset. When we say infrastructure, we don’t just refer to a shop front, this can also mean an established website, social media branding and all legal and licensing requirements already in place. Provided the customer base remains loyal and your business plan has allowed for it, the cash flow should cover any borrowing costs that were incurred in buying the business too.

Existing Goodwill

Once you go through all your checks and balances and decide on a price for the business to be bought, you will note that part of the price will include equipment and part will constitute goodwill. This amount is basically covering the price of the businesses good reputation and customer base. The whole point of buying into an existing business is to avoid the need to source and set up equipment and attract a loyal customer base. Don’t just check the business numbers, do some footwork in the local area and online searches to ensure the business comes with a good reputation and the location or target area doesn’t have a glut of competitors otherwise the business may be overvalued.

Existing Employees

Taking on an existing business with staff that have been there for at least a few months and know the ropes can be a great advantage. This team needs to know you’re the new boss and to respect your thoughts and opinions and management style. At the same time, don’t drive them away and make sure you take time to get to know them; their knowledge of the business and customers is one of your greatest assets. Customers may well be loyal to a particular employee as in the case of personal services such as hairdressers.

The Numbers

Ideally, you need to spend time with a trusted accountant to analyse the financial statements for at least the past three years. Check that financial ratios all make sense and that the numbers align with what your gut is telling you about the business. Ask for an accountant’s report to show that the business has lodged its BAS forms and tax returns on time; if not it can be a sign of a struggling business. Remember, it will always be in the sellers best interests to make the numbers look as good as possible to get the best price for their business. The businesses net position needs to cover your personal wages as well as enough cash flow to pay off any borrowings you’ve made to buy the business.

Hidden Problems

Issues you need to look out for that may not be readily apparent include outstanding debtors and the average payment times for major customers. Poor relationships with key suppliers will affect your ability to access favourable discounts and payment terms as well as access to special offers. If possible, spend time with the current staff to gain an insight into what it’s like to work for the business and the quality of the team you’ll be employing. Any vendor unwilling to let you talk to current staff may well be hiding something from you. If that’s the case, try spending time in and around the business or have friends investigate the business anonymously.

Buying an existing business can be an exciting time in your life; just be sure the business ticks all the boxes and “fits” into your ideal lifestyle. Remember, the business is there for you to run and grow, don’t let the business run you.

 
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