Knowing when to hold, and when to fold

Buying or selling a business? Sue de Bievre guides you through the ‘ins and outs’ of business brokering.

There’s always an element of risk when it comes to making major business decisions. Whether you are buying a business for the first time, adding another one to your empire, or settling up and selling, it’s a challenging process that can involve a lot of money and risk. 

As a guide, here are four tips that highlight key considerations when committing to a business deal – four tips to help you decide when to stay and when to walk away. 

1. Buy a business, not a job

If you’re spending your hard-earned money to buy a business, it’s vital that you make sure it is actually a business, and not just a job. 

What’s the difference? Most businesses are priced on their ability to generate profit after all business expenses have been paid. 

Let’s say that the business for sale looks like this:

Sales $200,000

Business Expenses $125,000 (excluding owner’s drawings or salary)

Net Profit $75,000

Business Sale Price $100,000

This looks good, right? But say you find out that you need to work full-time in the business to generate the $75,000 profit. This means you are effectively paying someone $100,000 to earn what you could in a (relatively well paid) job without paying, or risking, a cent. 

This is an extreme example, but I have seen many similar opportunities presented to people. 

The critical thing is to be certain that the profit of the business is agreeable to you after all business costs are met, including your time to generate that profit.

2. Focus on an industry that you know something about

There’s always a lot to learn when you buy a new enterprise. For example, you have to become familiar with the systems, employees, customers and suppliers. This can take a lot of time and energy. 

We’d recommend therefore that you avoid compounding this workload by having to learn about a whole new industry as well – that is, unless you are totally committed to breaking into a new one. 

Instead, find a business that allows you to capitalise on your industry knowledge, as well as your skills, experience and contacts.

So don’t just think about profit; also consider how you can add value. A business with a low profit, and therefore a low valuation, might be worth more to you if there is something specific about it that you can improve.

Maybe you’re a hospitality whizz and the cafe you want to buy is in a great location; but has been run by the Addams family and they’ve frightened off the customers. 

Can you add value by introducing your style and flair to the operation?

Importantly, if you think you can improve a business, make sure you have a plan for this prior to purchase, rather than buying it and hoping you will work out how to make things better later.  

3. Do your homework

When it comes to selling a business, it pays to look at the current market for benchmark pricing.

There are lots of businesses for sale in this country, so take your time looking at what’s out there. Get independent expert advice (i.e. not from a business broker) to help gauge the market value of your business – not just location, but industry trends, employment figures, and what the next buyer will be inheriting. 

For example, when buyers are investigating the market they’ll be looking for a profitable business, stable customer base and a business in generally good shape with repairs and maintenance done, good reputation and in the right place,

It can be hard to determine the ‘right’ or ‘wrong’ sale price (underlining the importance of expert advice). Business valuations are notoriously tricky and usually based on a multiplier of the profit, which is based on risk: the riskier the business, the lower the multiplier. 

For example, a traditionally ‘risky’ business, such as a cafe or restaurant, might have a net profit of $75,000, which then might only be multiplied by two to get the valuation of $150,000.

Conversely, if the business is a commercial property with a 20-year lease, the multiplier will be more like 14 times, as this is a much safer investment.  

In other words, buyers are wary of the types of businesses they buy so it’s crucial that your asking price reflects the underlying risks and rewards.

4. Have an idea of what your next steps are

Handling the sale proceeds, and emotional process of selling the business that you’ve poured blood, sweat and tears into, can be a challenging time. The rapid influx of money from the sale can lead to a poor investment on the other side so it’s important to have a plan and expert advice on your side for the future.

Whether you’re looking to reinvest in a new venture, become an angel investor for the next Google or Facebook start-up, or simply move into retirement – having your ducks in a row and understanding your personal business goals will help you achieve this in the long term. 

Educate yourself about the taxes involved (especially if property was part of the sale) and speak with an expert about maximising your benefits. 

Take your time

At the end of the day, buying or selling a business is just like any other investment. It takes smarts to evaluate the market and find the right option for your needs, but taking your time, doing the research, and getting expert insight will put you on the right track.