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.

NZ Business - - CONTENTS - SUE DE BIEVRE IS CEO OF BEANY, AN ON­LINE AC­COUN­TANT SER­VICES AND BUSI­NESS SUP­PORT AGENCY. VISIT WWW. BEANY.COM

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

“Buy­ers are wary of the types of busi­nesses they buy so it's cru­cial that your ask­ing price reflects the un­der­ly­ing risks and re­wards.”

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.

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