Buying a business is an exciting venture, especially for those looking to make their mark in the entrepreneurial world. However, it’s not a decision to be taken lightly. As you navigate this complex process, a business accountant can be your invaluable ally, helping you make informed choices and avoid potential pitfalls.
At Piteo Accounting & Advisory, we understand all the challenges and opportunities that come with buying a business. Here’s a comprehensive guide to help make sure you’re well-prepared for this significant investment and join the 2,589,873 actively trading businesses in the country.
Are you ready?
Before diving into the world of business ownership, it’s crucial to assess your readiness. Owning a business requires a unique set of skills and a substantial time commitment.
In a recent survey, about half of Australian business owners are working approximately 50 hours per week, whilst 32% of respondents are working up to 60 hours per week.
Evaluate whether you possess the necessary skills to manage and grow the business successfully. Consider how much time you can realistically dedicate to the endeavour, as owning a business often means long hours and significant emotional investment.
Conducting thorough research
Research is the backbone of a successful business purchase. Begin with market research to understand industry trends and the competitive landscape. Analysing the market will help you gauge the business’s reputation and potential. Talk to current customers or clients to get a sense of their satisfaction and loyalty, as their continued support is crucial for future success. You can find out more about market research here.
Valuing the business
Determining the value of the business is a critical step. A professional valuation will provide an accurate assessment of the business’s tangible and intangible assets. This includes everything from real estate and equipment to intellectual property and brand value. Additionally, consider the business’s potential for future growth and profitability. Understanding the true value will enable you to negotiate a fair purchase price.
‘The valuation of a business is the process of determining the current worth of a business, using objective measures, and evaluating all aspects of the business.’
There are a number of methodologies to use when it comes to determining a business’s value. They include:
- market capitalisation
- times revenue method
- earnings multiplier
- discounted cash flow (DCF)
- book value
- liquidation value
Conducting due diligence
Due diligence is perhaps the most crucial part of buying a business. This process involves a comprehensive review of the business’s financial records, legal documents, and operational efficiency to make sure you are aware of any carried-forward losses or risks.
Scrutinise financial statements from the past three to five years, including tax returns, balance sheets, and cash flow statements. Ensure all legal documents, such as contracts and leases, are in order and understand any obligations you might inherit.
‘Processes for due diligence are:
- gathering and reviewing documents alongside accountants and advisers using resources and computer programs
- storing and sharing information through emails and file-sharing systems
- setting up a ‘data room’ that the buyer and seller and their advisory team can access (e.g. shared online application)
- preparing requests for information (RFIs)—RFIs are formal documents used to seek information during the due diligence process, which allow the buyer to ask for specific information from the seller to help with negotiations and decision-making.’
Evaluating the business’s operational aspects is also essential. Check the condition of the equipment and inventory and verify that all assets are accurately represented. Identifying any outstanding debts or liabilities will help you manage risks effectively.
Onboarding a professional business accountant to help you with all of these processes is a wise step that can help mitigate any poor choices that could affect you for the rest of your life. Getting the right accountant on your side could mean the difference between long-term financial freedom and stress.
At Piteo Accounting & Advisory, we offer expert guidance to help you navigate the complexities of business acquisition. With our support, you can make informed decisions, manage risks effectively, and achieve your entrepreneurial goals with confidence.
