Why should you buy a business in 2009

For the past few years, the idea of going into small business has become less attractive. What with rising interest rates, increasing petrol prices and a strong job market, there have been plenty of good reasons for people not to go into small business. These factors made it easier for people to stay in their comfortable jobs or indeed seek the extra money on offer by moving to a better paid job. Furthermore, with the costs of doing business going up and labour becoming harder and harder to find, the business option just didn't look pretty.

Now things have changed.

More people will join the queue looking for quality businesses because they just have to or because they see their job options or job security to be diminishing. These are not always the best buyers for small business, we find. We find that the most successful small business buyers are those who come to small business for the right reason. Of course, this reason is to build wealth. Down through history, the people who have created great wealth are those who have chosen to buy or start a business and wanted to set themselves up for the future.

Of course, the small business world is dotted with failure and this is because the buyers or creators of businesses have not done their homework and have made a fundamental mistake in the process of investigating or buying a business. Here are seven tips to ensure that if you buy a business in 2009, you won’t be making one of those mistakes.

1. Buy with a long term view. Everybody is saying that retail is a risk at the moment. And it probably is showing more vulnerability than most sectors right now. However that doesn’t mean you should steer clear of retail. People are getting extra money put back in their pockets right now due to the drop in the price of petrol, interest rates and the added money governments around the world are about to inject into the economy to stimulate economic activity. This money will be spent. And things are wearing out every day. We are a nation of spenders and that trend may slow for a while but will be back soon. Buying a retail business could be a worthwhile move as current owners get out at prices well below their true prospective value.

2. Look for businesses with guaranteed ongoing income. I won’t cover them all but would suggest you look at businesses in the following categories: mortgage businesses, financial planning businesses, real estate management businesses, health clubs, franchisor systems or master franchises, regular maintenance businesses, etc. Also look for businesses that have clients that have dealt with them over a number of years and should continue to do so. The only risk is if the current owner has such a good relationship with the clients that you may not be able to continue that relationship. However there are ways to overcome this, including a gradual buyout over a number of months where you get to pay according to performance.

3. You are buying next year’s income. Look at the past performance as a guide only. You may not repeat the performance of last year in your first year. Hence you will need to research the industry, the market and this particular location or territory to try to determine what is going to happen in this business next year. Nobody has a crystal ball that works every time, but that is no reason you shouldn’t do the research to increase your knowledge. Owners knows a lot about their industry, market and location of territory. You have to do all in your power to even that situation up by increasing your knowledge.

4. Look for genuine reasons for sale in the vendor. Good reasonsareretirement, change of life plans, or ill-health. If the owner is getting out because they can’t make money, then you need to ask your self if you will make money in it. This is a test of your skills. Looking for an underperforming business is OK if you have experience or if the price is reduced so as to drastically reduce your risk. If the business has no future, it doesn’t matter how cheap it is.

5. Hire a competent advisor. An accountant well versed in small business acquisitions may well be the answer, but many accountants don’t know how to value a business acquisition and can’t possibly advise you from their desk just looking at figures. Find an accountant, business broker, or other advisor who has experience with these transactions and who understands the financial as well as non-financial factors that affect business value. This could be the best investment you make in the whole process.

6. Buy the right business. Don’t stress too much about what the asking price is initially. Once you find a business that suits you - even if you pay a little more – you will be better placed than if you pay the “right” price for a business that will not fulfill your needs. You need to find a business that you will enjoy running and that you can easily finance and still meet your financial needs. Then get a valuer to give you an appraisal to ensure you are not paying way over the odds.

7. Be mindful of Murphys Law of Buying a Business. It may cost you more than you think, take longer than you think to get going and could be harder in those first six months than you initially thought. They aren’t reasons not to embark on the project. You will need however to have more money than you thought you needed and will have to rely on your fitness and resolve to get through. Once through you will be well rewarded as you build wealth that you simply could not build by being employed in your average job.

Good Luck.

Tony Arena - Franchise Council of Australia