Buying a business | 17 min read
If you’re starting out on the business buying journey, it can be daunting to get your head around the process.
To help you on your way, we asked three industry experts some of the most common questions buyers want answered.
- Stephen Giles – a lawyer with Norton Rose Fullbright.
Stephen has significant experience and expertise in business buying and selling.
- Mary Aldred – CEO of the Franchise Council of Australia (FCA).
Mary is passionate about small business, and has been the FCA CEO since 2018. The FCA is the peak industry body representing a compliant, sustainable, and profitable franchise sector.
- Clayton Hickey – a partner at accounting firm PKF.
Clayton has experience acting for both business buyers and sellers during the sales process.
Here’s what they had to share…
Q. Should I buy a franchise, or a privately listed business?
The ‘right’ answer completely depends on the business, and who the buyer is (you!) and what you’re hoping to get out of owning a business. Private businesses give you complete control over the decisions you make. Franchises offer more support, but you have to fit within their structure. You’re also required to pay a franchise fee.
“With a franchise you own your business, but you’re not doing it on your own. You have the backing of head office and investment in continued innovation, marketing and training. You’re not starting from scratch wondering if it will sink or swim,” says Mary.
However she also adds…“If you don’t want to work within a system and particular way of doing things, and want to do everything in your own way, franchising might not be for you.”
Find out whether a franchise or independent business would suit you better here.
Q: How do I know how much a business is worth?
There are many methods you can use to value a business. As a general rule it usually depends on the business and industry.
“The most common method is projecting future income, and excluding income that relies on the current owner and will not continue if the business were sold (known as a normalisation). A multiplier is then applied to these amounts to determine overall value. Multipliers vary by industry and have a significant impact on value. Advice from an accountant who specialises in business purchases is critical to ensure your normalisation and multiplier is appropriate, so that you don’t pay too much,” Clayton advises.
Want to know more? Read our article explaining how to value a business here.
Q: When’s the best time to buy a business?
The best time to buy will vary depending on you; how prepared you are, how confident you are with your business choice, the time of year and whether you have the right support around you to help make it happen.
Stephen says you should buy once you’ve done your research, market sounding, due diligence, and you have the passion and commitment to make it work.
“These last two items are very important – many seemingly successful businesses have failed due to having an owner that was not ‘all in’. You have to love it and make it one of your life’s passions.
“Some of the best advice I ever received in business when making a decision such as this is: if it’s not a definite yes, then it’s a no.”
“Normally it is not a good idea to buy too close to a peak revenue period (eg: Christmas), as it usually takes six months to properly learn the ropes. If you’re not ready to cope with big revenue, you may lose customers or fail to optimise a key revenue period.”
Q: Is it safer or easier to buy a business through a broker?
There are benefits and drawbacks to using a business broker.
A good broker will simplify the process for you, and help you navigate what can be a complex process. That includes helping you find businesses, organise meetings with the vendor, and let you know what to expect. Brokers are often well-connected, and can help you find business opportunities before they’re listed, too.
However, they’re effectively paid by the seller who’s paying their commission, which means they have an incentive to push a sale through. Though they can make the process easier, a good broker does NOT replace a lawyer and accountant who specialise in business sales. You will still need both of those on your team.
Q: Where can I find professional legal and accounting advice?
The best way to find professional advice is through recommendations from friends or connections, from advertisements or internet searches, or by contacting industry governing bodies.
Stephen says that for lawyers, the FCA, legal industry ads, and your state’s law institute or law society should all be able to help.
In addition, Clayton suggests ensuring that they have experience in advising on business purchases.
“Partnering with an accountant and lawyer who have worked together before can also be advantageous,” Clayton recommends.
If you’re purchasing a franchise, Mary says “it’s important to get a professional who practices in franchising every day. Franchising in Australia is about the most heavily regulated franchise sector in the world. You want a professional that is part of the FCA, and that continues to push their own professional development.”
The bottom line is to make sure you’re getting the right advice. Do this by talking to a business sales specialist, not someone with general law or accounting qualifications.
Q: Why should I buy a business, instead of starting my own?
Business owner Tom White has bought and sold numerous businesses, his most recent being an online business selling mobility assistance vehicles and devices. His position is clear:
“Most startups fail. But if you look for a business which has some history, you are buying a business which has been through this difficult start-up phase. It ends up saving you time, risk and probably money in the long run. You can then focus your time and energy on growing a business which is already making money.”
Similarly, Mary from the FCA advises, “all businesses have risks attached to them. However, existing businesses have operated in their field for a period of time, so you’re not starting from scratch, wondering if it will absolutely sink. You’re starting with something with a track record. That’s especially true of franchises.”
Q: Do I have to pay a lawyer or accountant or can I review and negotiate on my own?
The short answer is ‘yes’, you need a lawyer and an accountant.
“If you represent yourself, then you have a fool for a client,” warns Stephen. “With the right support, you will get a far better deal, and you will not end up with a dud business.”
Mary agrees, “nearly every franchisee I have spoken to who hasn’t had a good experience with their franchisor answers ‘no’ when I ask if they sought expert legal and financial advice when they signed their initial agreement.”
When it comes to accounting, Clayton points out that “an accountant is highly skilled in acquisition due diligence. They’ll help with everything from accounting, to financial and taxation issues.” Ultimately, he says an accountant “could have an impact on the end value. They make sure you don’t pay too much.”
Q: How much money do I need to buy a business?
The average cost of a business on SEEK Business is $342,000. They vary in price from $20,000 to well over $1 million. There are franchises and independent businesses in every price bracket and across every industry, so you’re sure to find one that’s right for you.
‘How much’ is less relevant than ‘how much credit can I access.’ Unless you can pay cash, you’ll need a loan. Read more here about how to finance a business purchase.
If the business has little in the way of assets, the bank may also want you to offer a personal asset as collateral. In the case of most Aussies, that’s your house. If that’s the case, you’ll need to ask yourself if you’re willing to sell your house if the business fails and you can’t repay the loan.
Q: What are some financial considerations I should make before I start the buying process?
See above! There’s a good chance you’ll need to take out a loan, and potentially use your own house as collateral. It’s a significant step to take, so you need to be comfortable with it.
Also be aware when you engage a lawyer and an accountant and don’t purchase the business, you’ll still have to pay fees. So only begin the due diligence process if you’re confident about the business.
In addition, it pays to be realistic about the sacrifices you’re willing to make by owning and running your own business. John Prasad runs three coffee trucks, after quitting his corporate job of 30 years to ‘walk on his own.’ He says: “If you’re used to a certain lifestyle, you need to find something that can support it. Find out what the business’s earning capacity is, and ask yourself if you’re able to live off it.”
It’s also important to factor in the costs involved beyond the initial asking price – this includes set-up costs, running costs and the expenses you’ll incur day-to-day.
Q: Do I need to get finance organised before I start talking with sellers, and how long does it take?
You don’t have to, no. But it makes sense to talk to your bank once you start seriously looking (as well as one or two other lenders). They’ll tell you generally how much they’re willing to lend for the types of business you’re interested in, and what strings they’ll attach (such as using your home as collateral). That will give you a rough budget to work with. That’s important, because lots of franchisors or business owners want a clear indication you’re able to pay the asking price.
Bear in mind there are a range of funding options, too. Get familiar with them so you have a basic idea of the financial landscape.
If you start discussing sale prices with a vendor, you can then work closely with your accountant, a financial business advisor, and/or your bank to get funding approval. It can be a complex process, and will differ depending on your circumstances and the type of business. Be prepared for a lot of too-and-fro with the lender.
Q: I’m interested in buying a business for a lifestyle change, is it always as good as it looks?
Yes and no. In time, many business owners are able to structure their business and work hours to suit themselves. If that’s the lifestyle change you’re after, that’s certainly attainable. And you often get to call the shots – if you’re ready to be the boss, that’s a huge drawcard.
That certainly doesn’t mean running your own business is a walk in the park, with breezy hours and the freedom to open and close when you choose…at least not if you want to be successful. The first year is almost always tough, and you’ll need to be prepared to work long hours to get it off the ground. As coffee truck owner John Prasad says, “You have to MAKE it work…or it doesn’t.”
And FCA CEO Mary Aldred says though franchises sometimes offer you a smoother start, they also require a significant investment of time and energy. “It’s the same as if you bought any business, and then went and played golf on the days you had the most customers wanting to come through your doors. You wouldn’t stay open for very long.”
It makes sense to think about what your ‘dream lifestyle’ is, and be completely honest about what it will take to get you there. These questions will help you decide whether owning a business will work for you.
Learn more about how to choose a business for a lifestyle change here.
Q: What questions should I ask in an initial enquiry on a business?
There’s a few key things you should try to find out right at the start. Above all, you want to get an idea what the business ‘feels’ like, whether the asking price is worth it, and what life might be like as the owner.
For a start you’ll want to know:
- Why are they selling?
- How long have they owned it?
- What do they think it takes to run the business or franchise successfully?
- How much time do you need to work in the business?
- What are the biggest challenges?
- How did they arrive at the asking price? And what are the ongoing costs?
- Will they offer any training or ongoing support?
Learn how to go about making first contact with a seller in this helpful guide, more important questions to ask and how to proceed (or not) once you’ve reached out
Q: I’ve sent an enquiry but haven’t had a response. Why is this?
There could be a number of reasons the vendor hasn’t got back to you. Here are a few:
- They’re busy running the business
- They’ve found an interested buyer, and are in the process of selling the business
- They’ve found a reason to discount your enquiry. This may be because of the time you sent it (try to send during business hours), or the nature of the enquiry
As with job interviews, try to make your initial correspondence seem as professional and organised as possible. Make sure you proofread what you’ve written – this also ensures you don’t send the wrong contact details!
Q: I want to buy a business but I’m not sure what type of business I should choose. Where should I start?
Think about your skill set (and what’s transferable), and what type of hours you’d like to work.
For example, if you’re a good talker and you like people, a customer-facing business might work for you…even if you’ve spent most of your career in an office environment.
If you want to be at home with the kids as often as possible, an online business would potentially work well.
Once you have an idea what you’re looking for, take a look at what’s out there!
Q: Why can’t I see the location of the business-for-sale online?
For privacy reasons. Sometimes sellers haven’t told staff yet and they’re worried buyers will visit the physical location, so it’s simply for discretion.
Q: How can I understand the profitability of the business I’m interested in?
Look at the past 3-5 years worth of financials, and compare them to the costs. Also find out how much of the current revenue is dependent upon the owner, or a select few customers. If you’re really interested in the business, you’ll want to get a professional to look at this for you.
“Engaging an accountant to undertake an acquisition due diligence is the most critical element of obtaining this understanding,” advises Clayton. “An accountant will be able to analyse trends, key movements or changes in particular items, and emerging issues which may impact profitability in the future.”
He recommends asking questions that relate to the quality of the business, and sustainability of profitability which is a key driver of the true value of the business. Get started by finding out:
- Year on year profitability, and trends (is revenue increasing or decreasing, which costs are escalating and why, etc)
- Who the major customers are, and length of their relationship with the business
- Does revenue come from only a few customers, or is it spread more evenly across the entire customer base?
- Who are the key suppliers to the business, and what is the nature of their relationship with business?
- Who are the key people in the business? How long have they been with the business, and what are their roles? Vendors have a lot of tacit knowledge rolling around in their heads from having operated a business for years, so ensuring this information is embedded within the workforce or processes is critical
Is the vendor aware of any existing or emerging litigation, workplace safety or other risks?
Stephen agrees that you should engage professionals, and suggests asking: “Are existing figures available? Are figures for comparable businesses available? Does the seller / franchisor expect revenue and costs to be the same in the future?”
Q: I’m worried I don’t have the skills to run a small business. What should I do?
It makes sense to pick a business that fits your skills. That said, you can learn most skills. TAFE or online learning offer plenty of opportunities to fill knowledge gaps, and for some businesses you’ll get on-the-job training.
That’s not what’s most important though, according to our experts. All the skills in the world won’t make up for a lack of drive.
“The most important thing is whether you have the resilience to cope with the inevitable new challenges that will arise. Self-assessment is probably the most important aspect of the purchasing decision,” says Stephen.
Mary suggests asking yourself some tough questions. “Ask yourself ‘what’s the why.’ Why do I want to own my own business? Is this something I am cut out for? Do I enjoy managing a team of people, how comfortable am I dealing with customers? If you are looking at buying a bike shop, are you actually interested in cycling and understand it? If you can answer yes, then move to step two. That is getting legal and financial advice…also bear in mind that with a franchise, you’re in business for yourself, but not BY yourself. You’ll get thorough training before you start.”
Clayton adds, “be confident, and completely honest with yourself that this is your passion, this is what you want to do, and you’re committed in all respects in relation to this. All the other things will not happen successfully without this first being in place.”
In other words, if you have enough motivation and resilience, you can probably learn a lot of the skills you don’t yet have.
If you’re still not certain you have the right skills, it might also be a case of not having found the right business for you. If you need help deciding, learn how to find the right business here.
Q: I’m keen to buy a business sooner rather than later. How long will the process take from start to finish?
You have to find the right business first, a process which can take anywhere from a couple of weeks to a number of years. Once you’ve found a business and a willing vendor, it’s not as simple as signing a contract.
“It can take as short as three months for smaller transactions. Typically, four to six months for smaller to medium transactions. Larger transactions with significant accounting and legal due diligence processes can take in excess of 12 months,” says Clayton.
Q: There are literally thousands of businesses online. How can I find the right one without spending hours and hours trawling?
Having some idea of what you’re after is a great place to start. Then, write down your skills and areas of interest, location preferences, and budget, and run specific searches on SEEK Business to match. You can broaden your searches from there if you need to.
The best way to spend less time searching is to register to get automatic notifications, and set up a SEEK Business profile. Tell us your preferences, and we’ll send you a message when an opportunity comes up that fits the bill.
Ready to see what businesses are out there for you? Search for business opportunities now!