We meet with plenty of clients each year who are evaluating a business to buy. The numbers are something we can obviously help interpret and communicate, but there’s more than just numbers in such a major life decision.
In the last few years, I’ve helped clients look at a farm, a post office, a cleaning business, a locksmith, a motorbike shop and even a law firm! There’s always one common element – a passionate person wanting to make a change – take on a challenge, have input into their life, and shape their future through owning a business. We can always review the numbers, and understand an appropriate valuation and payback period, but there’s so much more to the final price. Often these factors are balanced by the long-term goals of the owner – perhaps less money, more freedom, but this needs to be a conscious decision not an error in judgement!
Some of the factors are:
- Environmental – Is there a risk that the business could be impacted by environmental impacts that you can’t control? How can you mitigate this? In terms of the farm there were significant risks and expertise required due to the niche area. As such, our entire first appointment was spent on throwing questions around of what the potential purchaser would need to consider before proceeding – water contamination, temperature impacts and crop care etc.
- Work Life Balance – Does the business allow you to have the work life balance you’d like, or will you be a slave to the business? Take for example the post office, it would require both husband and wife to work largely full time throughout the year – how do you take a family holiday? And what happens if someone falls ill? We all know the saying ‘love what you do and you’ll never work a day in your life’ – but there’s still got to be some balance!
- Buying a Job – We see businesses run that, after a lot of blood, sweat and tears, generates a profit that is equivalent (or less than) a salary the owner may earn from a ‘walk in-walk out, no stress’ job. Importantly, it’s hard to justify a price for a business when you can’t make a living out of it!
- Key Person Risk – Taking on equity in a business can be exciting, but if you are relying on another party there are risks. Take for example a business 50/50, with a co-owner nearing retirement. Diversifying the risk between parties can be beneficial, but how do you solve that succession issue?
- Financing Risk – Consider a business that requires significant financing, to cover the floor plan of a showroom for cars or motorbikes. For a young family that’s just paid off a home, this can become a concern when the amount financed exceeds a nice home. How do you balance this, with ongoing operations?
- Regulatory Risk – Are you licensed to run the business? Is there any training you’d need to do? To become an owner of an Accounting Business, there is a qualification we need to work through, and this is similar with many professional services businesses. Often it just requires a bit more planning before the buy-in can occur.
If you’d like to brainstorm more than just numbers, and understand from an independent party what to consider before you buy into a business, or buy a business, contact us today.
