Self Employment & Business

The surprising advantages of buying an existing business

There may be a lot less obstacles and a lot more advantages to buying an existing business.

From demographics alone, a lot of baby boomers headed for retirement are keen to exit their businesses. Many of these solid bricks-and-mortar profitable enterprises are in industries (including manufacturing and engineering) that are simply not as attractive to younger buyers as emerging technologies. There are also not enough business buyers to go around.

Unfortunately, these businesses also don’t fit the criteria of corporate investment, which requires a business to have more than $1.5 million in yearly profit. Together, this results in a large proportion of quality businesses that remain unsold every year. These can be profitable businesses with assets such as plant and machinery and often even property.

Consequently, it is not uncommon to find businesses that have been on the market for more than two years. Many business owners do not have family interested or capable of taking the business over, and they are not seeing any buyers with a reasonable offer. While business brokers tend to woo business sellers with a potentially high selling price, the reality is that these estimates are rarely achieved. The oversupply of businesses available for sale compared to potential buyers has reduced their value to often little more than one and a half times last year’s net profit. Two and a half times would be regarded as a great deal.

As a result and often due to their personal circumstances and their overwhelming desire to exit their businesses in the near future, business owners may possibly be open to serious discussions with any genuine buyer that include the following arrangements:

  • The owner allows a portion of the purchase price to be paid off over a period of time
  • The new owner can mortgage the plant and machinery and use that as a deposit
  • The new owner can sell or mortgage any real estate property the business owns and use that money as part of the purchase price
  • The new owner can use some of the cash in the bank (less money for working capital) and include that as part of the purchase price

It is about structuring a deal that the business owner will accept. A desperate business seller will be more open to considering your proposal if:
a) they like you and have a rapport with you
b) they think you are good for the business and will keep the existing staff and
c) if they tell you they want $1.5 million for their business, you then show them how you can find the $1.5 million that they can take home – even if means getting all this capital from the business’s own assets.
Expert tip: don’t tell them the business is worth less than what they want if it is a realistic price and the business’s assets are funding the purchase.

These are strategies that some business investors are currently using and desperate business owners are more than happy to accept. From experience, these investors usually choose businesses that are more than ten years old with no more than three directors. If a business broker is involved they choose not to begin the negotiation process. Business investors have the mantra that a business is only worth what someone is prepared to pay for it.

It is recommended that you consult a commercial lawyer and accountant before proceeding, but only work with them for a fixed fee (rather than by the hour), to avoid unpleasant bill surprises.