Buying an existing business or joining a franchise might be less daunting than setting up your own business from scratch, but you still need to consider all the costs involved beyond simply the vendor’s asking price.
With a franchise for instance, there may be upfront fees (e.g. shop refit) as well as ongoing costs (e.g. royalties and marketing fees) that you will need to consider, not to mention the cost of your own time and energy.
Start with a business plan
A business plan is more than just a “nice to have.” According to Geoff Watson, of Wollerman & Associates, many franchisors will not accept an application from a prospective franchisee unless the buyer prepares a business plan.
Your business plan doesn’t have to be “war and peace” but you should be able to clearly identify your revenue sources, marketing strategies, margins, and of course your cost items, Geoff says.
An essential first step is to ask to see the business seller’s financial statements – this may include cash flow forecasts if you’re lucky.
You should also research the industry you intend to enter, and your competitors. A good business broker will know the benchmarks on a wide range of businesses.
“Right from the beginning you need to be across what is going in and what is going out,” says Geoff. “I always advise our clients to draw up an exit strategy at the same time as writing their business plan”.
It sounds counter intuitive but Geoff says it’s a good idea to run your business from the outset as if you’re getting it ready for sale. “Many business owners don’t do this and find that they have to sell their business under pressure and/or at a loss because they don’t have their fundamentals in order”.
What can money buy?
Geoff says businesses can be purchased from as little as $20,000 right up to millions of dollars, so there’s something for every budget.
Low (less than $100,000)
According to Geoff, $20,000 is about as little as you can spend on an initial investment. Businesses in this price bracket are typically small owner-operator businesses such as car detailing, cleaning, and lawn mowing businesses. “You might be able to get a franchise lawn mowing business for around $15,000 but I would suggest $20,000 – $30,000 is about as little as you would want to spend”.
Even at this low entry level, there will be a lot of work to do to increase profitability to a level which gives you just reward for time spent, Geoff adds.
Medium ($100,000 – $600,000)
Businesses in the medium price range include a bit of everything, particularly restaurants, cafes, and food outlets (everything from donuts to salads). Other service orientated businesses, small manufacturing and retail operations (including Tatts outlets and post offices) are typically considered medium price range investments.
The sky is the limit when it comes to buying at the top end! Businesses around $1- $10 million tend to be things like quality high-volume petrol stations, larger supermarkets, large manufacturing, some engineering businesses, even accommodation and other well-established businesses making substantial profits. Often those in the $million+ bracket have a lot of physical assets (land, equipment, technology, etc.) and/or are very well established (existing network and customers, high turnover, location, etc.).
What costs are there on top of the purchase price?
Regardless of how big or small your business is, buyers need to be across all the costs of buying the business. For example, franchises often have entry and exit fees in addition to the purchase price. Make sure you get the proper disclosures from the franchisor upfront.
Typically, there are two types of costs that would-be business owners should consider – set-up costs and ongoing or running costs, as well as the personal investment of your own time and energy. Read more about these other costs here.
For those wishing to buy a business, Geoff also recommends talking to industry associations and finding as many business experts and mentors as you can before you make any commitments.
“Get assistance from experienced business owners. Government agencies are another great source of information and often offer tax and other incentives to help new businesses – so it’s worth looking into this before you commit your own funds,” Geoff says.
Keep reading and find out about the other costs to consider when buying a business.Tags: Due diligence, Business buying checklist, Buying a franchise, Buying a business, Finding the right business