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Are you ready to buy a business?

Wednesday, July 8, 2015 · 0 Comments

So, perhaps you have recently been made redundant ... maybe you are just sick of the day to day ‘hum drum’ of your job... Did you retire prematurely and find that retirement left a bit of a void...or ... Do you just desire the challenge of working for yourself, experiencing the freedom and the ability to operate without boundaries that govern when you work, where you work, how much you earn and so on and so forth.

Whatever the reasons, you have now chosen to buy a business, opening the door to endless opportunities.

Usually the first step is to fire up the computer and start searching. There are literally thousands of businesses advertised for sale. You will probably quickly find one or a number that perhaps stimulate a bit of excitement. You click on the enquiry button, pick up the phone and before you know it you have been provided with a profile of the business, maybe even inspected it and spoken to the vendor. Next step is probably a discussion with your accountant and then your legal advisor to look at the ins and outs of financial statements, leases, contracts and all the mechanics associated with the purchase and running of your new opportunity. You may even reach the stage of preparing a business plan, cash flow projections and all sorts of other things.

By now you feel quite comfortable to proceed to the stage of making an offer, but wait, haven’t you forgotten something....

Oh yes.... If your offer is accepted how do you propose to pay for the purchase of the business.

You might be thinking ....”There is some equity in my home and I will probably just borrow the rest” However being in this position of uncertainty normally has a number of drawbacks attached:

  • What if there is insufficient tangible security to cover the amount that you need to borrow.

  • What if the cash flow from the business is not strong enough to give your lender confidence that the business can repay a loan.

  • You have by now incurred cost in seeking professional advice without even knowing if you can pay for your purchase.

  • By not knowing your “spending power”you may be at a disadvantage when negotiating with the vendor.

  • You could even be putting yourself into a position whereby you risk losing a deposit.

One of the most critical items when considering the purchase of a business is to establish what you can afford to pay and this really needs to be done before you embark on the buying process. There are really only two basics to funding the purchase of a business, these being the security offered to the lender and the demonstrated ability to repay the amount borrowed, which of course includes any interest that can vary from time to time.

Most lenders appear to ere on the side of ”safety” and take a conservative approach thereby minimising the risk involved. The manner in which loan applications are processed can vary considerably and often depends heavily on how the application is presented and also the particular financial institution being approached. Poor presentation and making approaches to the “wrong type of lender” can not only result in delays but may also affect an overall ability to borrow should an application be rejected.

A good start could be to establish a relationship with your own bank manager, having a broad open discussion to work out the banks position towards funding a business purchase given your specific financial position. The bank may also be interested in such things as your ability to successfully run a business including any previous experience. Given that (following such a discussion) you probably have a better understanding of how the bank works you might find that meeting with an experienced finance broker (ideally someone specialising in businesses and perhaps the specific industry of your interest) opens up opportunities that you never thought were possible.

In summary the very first thing that you should do once you establish an interest in buying a business is to obtain some professional guidance in terms of your buying power. This will not only put you into a good position to act quickly should you locate the business that meets your needs but it will also enable you to negotiate strongly and decisively. Being able to make an offer that is not conditional on finance approval not only saves time and frustration but can be the difference between having an offer accepted or rejected. 

 

Leigh Cronin

Australian Property Resources

http://www.ausbisres.com.au

View Australian Property Resources current listings

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