Buying a business can at first seem like a dream and it could even look easier than initially setting up a business. However, it does come with its own challenges and you will need to do a lot of research before buying a business. After doing the research about what business you want to buy, you then need to consider finance options and how you would like to purchase the business.
This is the ultimate guide to buying a small business and how to finance it.
Advantages and challenges in buying a small business
One of the main reasons individuals buy an existing small business is because there is less to set up. An established small business will already have a reasonable customer base, ongoing cash flow, internal infrastructure and processes.
There are many other advantages including:
- Jumpstart profit
- Paperwork is done and it is already a registered business
- Existing inventory
It almost seems like a no brainer to just buy a small business, however, every purchase comes with its challenges. Some common challenges to buying an existing business are:
- Hidden issues. Always question – why are the owners selling?
- You will have to honour existing supplier contracts.
- Existing employee incompatibility.
- May need to provide additional investment to make business successful.
How do I prepare to buy a small business?
If you are considering buying a business, you need to be prepared. There are many steps to being business-ready, especially if it is your first time going into a business venture.
Are you business ready?
Buying a business means you will need to be responsible for every decision – you’ll be the boss. You will need to consider if you are ready to crack the whip at underperforming employees, if you will hustle to get a better supplier deal and if you have the right skills to do behind the scenes admin work.
The Department of Business suggests you ask yourself these five questions before researching or valuing a business:
- Do you have the right skills to go into business?
- How much time will you need to invest in the business for it to be successful?
- Are you physically and emotionally ready to deal with unusual work hours and time pressure?
- What are your personal goals and will purchasing a business help you achieve them?
- Do you have the capital to invest in a business for it to be successful?
Researching your business
After you have determined that you are in fact ready to buy a business, you then need to consider what business you want to be in charge of. There are many industries where you can invest and each industry has its own unique set of rules and regulations.
Take time to consider where your passion lies and what skills you have that will help you in day to day practices. For example, it would be unwise to buy a financial advisory if you have cookery skills as you will have very little idea of what is happening within the business.
Other things you should consider when researching is:
- The location
- What expenses will you incur in the day-to-day operation
- If you can retain the current customer base under new ownership
- Externally review the business’s reputation. How many stars does it have on Google?
Value the business
Before carrying out due diligence and putting in a letter of intent get a professional to value your business and evaluate potential growth opportunities. This way you can go into the purchasing process fully prepared.
Carry out due diligence
If you are just starting out in business you may be wondering what due diligence is and why you need to carry it out. Due diligence is reviewing and verifying the information that is supplied by the seller prior to entering an agreement. Some of the documents you should review include:
- Business Tax Returns
- Existing contracts and existing business debt
- Current year income statements, balance sheet and cash flow statement
- Property documents including commercial leases
- Organisation documents including business registration
- Marketing materials
- Legal records including intellectual property and trademarks
When you have completed all of these steps, you are going to need to consider how to finance this purchase before submitting a letter of intent.
How can I finance my purchase of a small business?
When you are considering purchasing an established business, the chances are that you are not a cashed up millionaire. Instead, you are wondering how to finance your purchase and what you need to be able to invest. As brokers and business specialists, that’s where we come in. There are many options available to potential business owners such as business finance, equity finance, secured and unsecured loans and we will help you find the right financing for your new venture. There are a few things that you will need to prepare first.
What you will need to secure financing
To secure financing you will need to have prepared a few documents such as:
- A detailed business plan outlining your intentions, how you are going to stay profitable and maintain current operations.
- A document outlining the valuation including current financials and industry position.
- An outline of how you plan to repay your loan if it was provided and what assets you currently have.
How we assess your potential purchase
We love to get to know our applicants and their dreams for their businesses. But when we assess applications we remain as impartial as possible to prevent providing the wrong advice and lending options. When we get applications to purchase a business we base our decision on: your skillset and experience in the industry; your business plan; the assets you have; the climate of the industry you are preparing to buy into and what lifecycle stage it is in; and your valuation of the business.
These assessments show how ready you are to buy a small business and help us establish the viability of your purchase. Many businesses fail within the first year because of bad business advice and business owners are still required to pay back their loans. We want to make sure that you are set up to succeed and that we are providing you with the best and most suitable lending options.
Ready to buy?
For a confidential chat about potential business loans, don’t hesitate to get in touch with our team. Melbourne Finance have financed everything from small businesses to dairy cows, and we love to help people get started on realising their business dreams. If you are considering purchasing a small Melbourne business, give us a call today on 03 8568 3644.