My 2c worth
HA! beat me to it HandyAndy.
The first step to buying any business is to be able to read the financials on offer from the Vendor via the agent.
All businesses have to provide these when they are being sold, and the general rule is the last 3 years' trading. These are usually accountant's statements, so you can't believe everything you read. I always ask for the last 3 years
tax returns when we get closer to the serious stage. If the Vendor won't supply these; I'm walkin'.
My suggestion is to start asking the agents for the financials for a number of businesses - any business will do, but the type you are interested in buying is better. This will give you practice in seeing what's going on. The more you do; the quicker and better you will get at reading the figures and assessing whether the business is right for your purposes and profitable. I have read literally hundreds of these over the past few years. It's boring at first, but must be done, and it gets easier.
If you can't analyse these, you are in big danger of buying a dud that is hidden inside a glossy cover of numbers.
What you need to be able to acertain from the figures is how much you are going to have left over FOR YOU after every single expense has been accounted for - including rent, GST payments to the Gubbmint, loan repayments, wages, equipment loans (if any), utilities etc.
Basically; the nett business profit after tax. Some owners include their wage in the wage expense. This is actually good for you; part of the business expense which would take away from your wage is already covered in this figure, so if the nett profit after all this is healthy, then you are on the right track.
I get nervous when I see no wage for the owner, and the profit is low. It is a fair bet that they are either going broke, or are skimming lots of cash out. Now, this is fine, but they can't have their cake and eat it - you can't ask for high dollars while the business is showing no profit. And, the owner won't be able to prove they are taking out lots of cash. This happens a lot; the agent says there is a lot of cash going out, but so what? I ask for proof, and of course; it can't be done.
For me; the criteria must be that if I can't pull out at least $100k for me each year after the official figures, then why bother? You are taking all the risks, managing staff and so on - why go through all that grief for just an average wage or less? You may as well go work in a bottle shop or something and have no responsibility. Now, when I say $100k; this is based on the level I'm playing at right now. For me, the next level up (double the asking price and turnover etc) will have to return a fair bit more of course.
Even though they are costly, if you have had no experience in buying a business, I suggest using a good business lawyer to guide you through. I can PM you the details of my guy if you wish - very good, but not cheap.
It is adviseable to also have an accountant and an MB who are conversant in business to help you as well.
Next, go visit the business and observe what the volume of traffic is like. Sit out front at all different times and simply watch what goes on.
Check out the location of other competitiors and their size - impact on your business.
Have an exclusion clause added into the Contract that prohibits the Vendor from setting up business down the road for a good number of years. It is easy to get 10 years and 10km's minimum for this.
Lease length must be at least 15 years - 5x5x5. Banks are loath to lend on less at the moment. You need time to get a return on your money if they decide to not renew your lease for some reason.
You need very good insurance to cover the business and yourself.
The contentious issue in what the asking price should be is how many times nett profit as the asking price. To me; 2 times nett profit is enough. I see businesses asking 5 times! Now, if you are borrowing the entire amount (most people will be) on 5 times nett profit, there would be very little left over to feed yourself after all expenses.
Now is a good time to buy businesses. Why? Because Banks aren't lending on them - noone can get finance, so there are no buyers out there.
Expect that the Banks will offer you no more than 50% of the funds to buy right now, so you will need other equity (in property) or cash to buy something.
This is good for you; you can offer lower to get the figures to where you need them to be.
Don't be afraid to offer low. A business came up for sale here in Dromana a couple of weeks ago - asking $215k plus $50k of stock. I spotted it a week or so ago, but by the time I looked at it an offer for $190k was in, and had been accepted by the owner who is retiring.
The agent was away on hols when I heard of the offer, and informed me yesterday after coming back to work that this deal has fallen over as the purchaser cannot get finance. I am going to be offering $200k for the lot including the stock.
The owner takes a wage of $60k per year and it is fully managed. He works one day per month. That's not bad; a ROI of 30% if he accepts the offer.
