If you are deciding between starting a business from scratch or buying an existing one, there are several factors to consider. 

Starting a new business involves a multitude of decisions and tasks, and your enthusiasm may wane amidst the complexities of day-to-day operations. Additionally, your capacity to make improvements to the business may be limited. 

On the other hand, purchasing an established business allows you to take immediate control of a relatively stable operation. Through observation and learning, you can gain insights into the business’s strengths and areas for improvement. 

For newcomers, buying an existing business can be a prudent way to reduce risks.

• Reach out with a business broker (business intermediary) to discuss your specific requirements, budget constraints, and personal background.
• Sign a confidentiality agreement with the chosen business brokerage firm.
• Discuss with the broker regarding their recommended listings. Gather pertinent information, conduct screening, and evaluate the businesses that align with your interests.
• Seek counsel from professionals such as accountants and lawyers.
• Formulate and present an offer, followed by negotiations on the terms.
• Finalize the transaction’s conditions and formally execute the agreement.
• Conclude lease arrangements, perform a thorough financial due diligence, and ensure the availability of necessary funds.
• Complete the business acquisition, conducting a detailed inventory audit.

• A Personal Affinity for the Business Your genuine liking for the business you intend to run is paramount. With a passion for the business, you’ll persevere through challenges. Otherwise, years of operation are likely to erode your enthusiasm, leaving you disheartened and ready to exit.
• Assessing the Business Potential Can you identify opportunities to enhance the business? For instance, can you implement different marketing strategies, adjust pricing, or revamp packaging? There must be a reason why someone is selling the business; if you can’t manage it better or have a compelling reason, why buy it?
• Sufficient Capital You must have ample reserve capital after purchasing the business. This is vital for marketing efforts, increasing inventory, and unforeseen expenses. In business, inadequate working capital can lead to a downfall.
• Return on Investment in Terms of Money and Time If the return on investment in both monetary and time aspects aligns with your expectations, it qualifies as a good business venture.

Buying a business involves two critical aspects: the business itself and an understanding of industry trends and competitors. Start by researching industry trends and competitors to ensure you choose a business aligned with your interests and growth potential.

Next, conduct a thorough examination of the business’s financial status, equipment, inventory, and staffing. Beyond relying on financial reports, assess sales records and other vital metrics.

Be well-prepared and seek advice from professionals such as accountants and lawyers to make informed buying decisions. Additionally, consider utilizing a business broker to reduce risks, as they conduct due diligence to ensure the business’s viability.

In Australia, most business transactions, especially those beyond micro-enterprises, are facilitated by business brokers. In New South Wales, business brokers must obtain specific licenses, with stricter requirements compared to other states. These brokers operate under professional ethics and industry standards, dedicated to ensuring fair deals for both buyers and sellers.

Business transactions are inherently complex, and business brokers provide comprehensive documentation and intricate processes to safeguard the interests of both parties. They develop strategies for buying and selling to achieve the best possible prices. Attempting to purchase a business independently can be cumbersome due to limited resources and experience, often resulting in information asymmetry for buyers. 

Business brokers offer a neutral stance, facilitating information exchange and negotiations while helping manage emotions and maintain reasonable expectations, ultimately leading to successful deal closures.

The basic principle for disclosing business details, for both sellers and business brokers, is a step-by-step approach.

Firstly, the buyer needs to sign a confidentiality agreement, committing to maintain the confidentiality of the information they acquire about the business. The seller or broker will provide an Information Memo. If the buyer has further interest, they can ask questions. The seller or broker can assess the buyer’s genuine intent and priorities to determine if they are a serious buyer. Then, a decision can be made on whether to disclose more information, such as financial reports, tax records, staffing arrangements, purchase orders, business records, and so on.

In addition to this process, buyers can also conduct their own investigations, like Google reviews, social medias and online information about the company’s products and services, visit the business location, and study competitors.

Many buyers are reluctant to invest time in reviewing business introductions or conducting on-site investigations. Instead, they often seek a full set of financial data and more business information too early. At this stage, sellers and business brokers may be hesitant to provide such information. IM is typically a summary prepared by the intermediary after compiling comprehensive business information, including financial data, and can provide a basic understanding of the business. When buyers request detailed business information too early, it may indicate a lack of trust in the intermediary or seller, and insufficient research into the business itself.

There are various complex formulas available for calculating a business’s value, primarily considering cash flow multiples and other relevant indicators.

Here, we introduce a straightforward valuation method: multiplying the owner’s actual earnings by a multiplier. Actual earnings encompass pre-tax profits, owner’s salary, and costs used for the owner’s personal expenses. Multipliers can be set based on industry and operational conditions, often taking an average, such as 2 or 3, as a reference.

For example, if the financial report shows pre-tax profits of $50,000, the owner’s salary is $40,000, and personal expenses for the owner included in the company’s accounts amount to about $20,000, then the owner’s actual earnings would be $110,000, multiplied by 2 results in $220,000, or $330,000 if a multiplier of 3 is used.

For precise valuation methods, it’s advisable to consult with accountants and business brokers.

We strongly recommend engaging a lawyer when buying a business.

Buying a business is a complex undertaking involving numerous intricate legal matters. It entails reviewing various contracts, such as the business purchase agreement, leases, franchise agreements, among others. These are challenging to navigate without the expertise of a legal professional. A lawyer can ensure that your intentions and negotiated terms are properly documented in the contracts, mitigating any oversights.

Lawyers play a pivotal role in facilitating a seamless transition post-sale, ensuring the contractual obligations are met, including the inventory and asset count. After the transition, lawyers assist buyers in preparing for actual operations, which includes tasks like changing the business name and obtaining necessary licenses.

It’s unrealistic to expect lawyers to handle everything, especially for small business transactions. Lawyers are there to help you manage risks, but you, as the buyer, remain responsible for making key decisions. Business ownership inherently carries risks that a lawyer cannot entirely eliminate, nor can they run the business on your behalf.

Effective cash flow management is crucial in business operations.Many business failures result from poor cash flow management rather than the inherent quality of the business itself. When it comes to preparing the necessary capital for purchasing a business, thorough planning is essential to avoid financial strain during the initial stages of operation. The capital you need to prepare should encompass several key aspects:

1. The purchase price of the business, including the inventory cost.
2. Costs associated with potential renovations, equipment upgrades, or vehicle purchases.
3. Rental deposits, ongoing rent payments, and utility expenses.
4. Employee salaries, including recruitment costs if hiring new staff.
5. Funds for future inventory purchases.
6. Legal fees for the business purchase, which may also include fees for the landlord’s legal representation.
7. If it’s a franchise business, you’ll need to cover franchise fees, deposits, and training costs.
8. Expenses related to establishing a company and registering the business, such as accounting fees, government taxes, and insurance.
9. Advertising and marketing expenses.
10. A contingency fund for unforeseen expenses.

Properly accounting for these financial aspects ensures that you are well-prepared to navigate the challenges and opportunities that come with owning a business.

Experienced buyers often prefer non-franchise businesses, willing to take on more risk in pursuit of higher profits. For newcomers or those who prefer a less hands-on approach, joining a franchise brand can save considerable effort, although it may limit profit potential. Franchise headquarters assist in store design, handle supply chains and logistics, and provide marketing support, but these services come at a cost to the franchisee.

Joining a franchise brand requires approval from the franchise headquarters, and the same applies when selling the business – approval is needed from the headquarters, making these conditions potentially cumbersome during the business transaction process.