Are you in the acquisition process or thinking of buying a small business? Whether you’re new to business or not, make sure you have all your contact points set up and speak to them before taking the next step.
Here’s a rundown of the people you should have in your Circle of Influence:
- Accountant – Speak to your accountant about entity planning and tax benefits/implications, business valuations and potential risks. Your accountant will help you do due diligence on the business, including the prior financials of the vendor, financial position and other risks. He or she will help you navigate through what the seller is offering and also help you set up your business structure the right way for tax purposes. Your accountant can also help with a business plan including what changes you will make to the existing business and forecast for ongoing revenue and profits to ensure they are in line with your expectations.
- Solicitor – You’ll be signing a contract to purchase the business, plus you may be signing a lease agreement that may already be in place. These need to be reviewed. Speak to your solicitor regarding the formal purchase contract and any premise lease assignments.
- Insurance Broker – Speak to your insurance broker regarding policies and protections you may need to have in place for when you take over the business. You might be new to the field or you may have worked in the industry, but you probably haven’t run a business in that industry before.
- Finance Broker – Speak to your finance broker about the options for small business financing. He or she will assist you in finding the option that’s right for you.
People often think they can do it on their own. You may have gone to a local government small business centre and think you’ve got all the information you need, but they provide very basic information.
So get your circle of influence together, get yourself educated and be prepared!
Structure of Debt / Business Financing Options
Once you’ve got your expert team together then you need to plan and source the finance you need.
Firstly, understand the overall costs and cash requirements of the business. Be prepared with projections and know what you can and can’t do from your own financial position. People tend to think they can use their own money, but don’t understand how much can get ‘chewed up’ in proprietary stuff, fees and acquisition costs.
The seller usually takes all cash out of business, they very rarely leave it. On Day One you take over, and you have to keep buying stock, paying wages etc. before income starts coming in, so you need to know how you structure that.
Cash Deposits? Property Equity?
Often when people buy a business, they think ‘I can do better than the last guy’, but invariably, this requires a cash contingency, no matter how well you’ve done your planning. It’s a bit like building a house, you’ll always go over what you expect so you may need to allow another 20%.
Be aware of the working capital provisions you need, there will be tangible and intangible costs, plus other set up costs.
Will you need to buy new equipment, new premises, a new website, marketing? They’re the things people often conceptualise for running and growing a business. But this leads to the question – how do you finance all that, plus reserve a reasonable amount of cash?
A finance broker will help you identify ways you can borrow the money you need for business financing. Whether it’s equipment finance, unsecured business lending or property secured business lending – a broker can help you decide which finance option is right for you.
A Business Plan + Forecasting?
The first 12 months are the hardest. Make sure your personal position is solid before you acquire a business.
What time and cost is involved in the acquisition of the business?
In a due diligence sense, decipher the seller’s financials, plan for first months of bills, rent, stock and wages. Plus plan for any changes you want to make. Work this out with your finance broker and accountant.
Measure return on investment
If you’ve come out of employed work, what’s your return on equity and cash investment? What return do you want for the risk, pain and stress that goes with running your own business?
With your accountant, measure the profitability of the business, and how much return this gets you on your investment. What return you think is reasonable? If you put $200k in a business, what return do you expect? What do you expect to earn yourself?
Your accountant may say you’ll need 15-20% return because you’re taking this risk. How realistic is it that you can earn the same amount of money as when you were employed? What’s the trade off?
Work in the business
If you can it’s a good idea to work in the business for 3 to 6 months then make an informed decision if you want to go ahead with the acquisition. This is not always possible, but can be done with some sellers. On the flip side, the vendor may want to help with handover of existing client relationships and contracts.
If you’re thinking about acquiring a business, you need to have steps in place to ensure that you can make it a success from Day One. Talk to your Circle of Influence experts before you take purchase it to make sure you have all the information you need. Always do your due diligence and speak to your broker about how you plan on funding the purchase as acquiring a business requires cash flow to finance all tangible and intangible costs.