FOR those people starting out in small business, buying an existing operation can save a lot of time and money in building up goodwill. But there are some important factors that need to be considered.
These include: the business’s trading record over at the previous two years; a list of its assets and their valuation; details of stock the owner wishes to sell and how it will be valued; and, if the premises are leased, a copy of the lease agreement.
Wholesale, recruitment and Australia Post franchises are the most sought after business types at the moment.
Joseph Charles Learmonth Duffy principal Radar Luttrel said goodwill was the difference between starting up a business and buying an established one.
“It takes you three years to establish a business,” he said.
“For those years you’ll be running at cost and in a no-profit situation.
“You’ll also be spending a lot of money on promotional activities.
“By the time you allow for that, in most cases that’s probably equivalent to, or more than equivalent to, the cost of goodwill in an established business.
“When you buy an established business you’re buying its cash flow.”
Cash flow is one of the most important things to consider when buying an established business.
Goodwin Mitchell O’Hehir managing partner Graham O’Hehir said cash businesses were best for first-time buyers.
He said they were easier to manage than those that traded on debt.
“If I was a first-time business buyer I would not want to be waiting 180 days for payment,” Mr O’Hehir said.
He said first-time buyers should look for businesses that had a good track record, a good profit history and one that was in an industry that people needed regularly.
“I would prefer to be buying a post office than a luxury goods store,” Mr O’Hehir said.
“If the economy goes bad people won’t be heading to the luxury goods type places but they will still be needing the necessity type businesses.”
Mr O’Hehir said government or semi-government licensed businesses were a good place to start for first-time business buyers because they had the perception of security.
However, those businesses also come with a premium cost.
John Garland International principal and former Small Business Development Corporation chairman John Garland said people considering buying a business should employ an independent accountant to act on their behalf.
“If you are buying privately, it can pay to employ a business broker for third-party advice,” he said.
“However, you should not rely on their analysis alone.
“There are commonsense things to be assessed, such as the level of competition.
“If, for example, you are buying a deli, take a drive around the neighbourhood to see how many other delis there are.
“Equate the goodwill to the accepted benchmarks in the relevant industry.”
Mr Garland said it was also important for first-time business buyers leaving full-time employment to realise that going into small business would not reduce their working time commitments.
“If you’re not working 60 to 80 hours a week you are not working enough,” he said.
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