I am interested in finding out more information about what to look for in purchasing businesses. Are there any good books or articles that relate to this issue? Has steve developed a due diligence program for businesses? What is the general % that banks will loan regarding a company?
Have a great day all
Michael Collins
I know banks are more willing to lend to franchises (up to 70%).
Asfor what to look for, you should be looking at 3yrs of figures for a business (and it should show all the revenue and the business expenses – don’t listen to the old one liner about tax!, unless you know exactly how much the business is making). Also I saw a little book in a newsagency that gives you the figures for the average business (debt levels, income, etc) so I would pick that up (I cannot remember the name). Lastly ANZ has some good buiness calcs to help you out (http://www.anz.com/nz/calc/busfintools/default.asp)
Also check out http://keystothevault.com/ Keith Cunningham has raised a massive amount of money for his companies and has taken two of them public. He courses come highly recommended.
Rgds.
Lucifer_auHi Michael
I advise clients on this stuff …often retrospectively!
IMO the process is exactly the same as being in property.
Through research is essential to avoid
the pitfalls, of which there are many.
Most common issues I come across are:
1.Owner knows nothing about the business they are buying.
2.The ‘ask’ on the price of the business is double its value.
3.Prospective owner has no idea on how they intend to add value to the business.
Business is just like a house…you wouldn’t sell for the same money or less…but they do.
4.Business must be cashflow positive or can be in a very short time…max.3mths.
Otherwise for an underfundered SME will just chew working capital real quick.
5. Most small businesses have no value in the balance sheet…no retained profit after they have paid themselves…which means it is of no value to a buyer or the bank as a funder.
6.MUST understand the financials…ROI, working capital required, cashflow and have daily KPI’s.
7. MUST have a great team that work together which includes business coach / a management accountant / book keeper and mortage broker.
Your tax compliance accountant has an entirely different focus.
My experience is that owners surround themselves with various advisors that all operate in isolation to each other which is not helpful.Hope this helps
Chris Gray
chrisgray.com.auMichael
just one further comment on franchises.
Franchises offer no guarantee of business success.
In very many cases they have the same basis flaws
as most small businesses…just duplicated!
It is imperative that as an owner/ intending owner you understand the financial fundamentals
A franshise can be an expensive way to to find you and are they don’t have them.
This is not to say that there are no very good franchises…there are….more importantly you need to know what you are looking and to be asking the right question…due diligence.Chris Gray
[email protected]Michael,
I have a booklet on buying a business on my web site http://www.bantacs.com.au under free publications.Julia Hartman
[email protected]
http://www.bantacs.com.auThank you I will be looking at this information tonight.
A tip or buying business that sell produts such as a retail outlet…
Always ask to look at the past few years PURCHASES!!!
Sales figues can be boosted in the months before selling a business by getting family and friends to come in. Purchases are harder to forge as receipts would need to be created. Sales figures can be determined from looking at te puchasing receipts.
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdYou can purchase a booklet on the legal aspects at http://www.lawcentral.com.au
And have a look at some of Brad Sugars’ books such as ‘Billionaire in training’.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
Click below to email meTerryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I have also been looking for a small business for at least 6 months now. I am in the lower price range and it seems that all the businesses i have looked at have only been operating for 1 year or so. And not making much or any money. It is a very dissapointing process.
The best time to get into a business is when it is still new/has the greatest potential, so your enrty costs are still low, and you can use your talents to add value to it, while making a very healthy cashflow, and pass it on down the track making a nice gain…….Just like Real Estate!!
fraruss – Thats fantastic but I am guessing if you don’t have experience in managing/owning a business it would be quite hard to determine whether the business will be a success.
Thanks though.
Good Luck!
I have seen and heard of so many cases of retail owners cooking the books as to their real sales. However I am aware of one effort by the Tax Office many years ago when a fish and chip shop owner did not seem to be getting much income and so paying little tax. They put an investigator outside the shop and counted the number of “parcels” coming out of the store in a typical time period and multipled this by the price for your average f & p pack.
They got their tax! Something as basic as this for a retail outlet especially food- sitting and watching -is worth the effort yet I’d suggest not many do it!I also heard that one investigator spent one day spying on a porter at the hotel across the street from the ATO office in Sydney. He then made an estimate of how many tips the guy received.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
Click below to email meTerryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I don’t think they would do anything like this unless someone was living beyond their means… ie: had 6 houses, 3 cars, a yacht, etc and were declaring $20,000 gross income per annum.
_____________________________________________
The poster formally known as The Mortgage Adviser
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