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Are You Buying A Business Or A Job?

November 10, 2016

Thinking of taking the leap and becoming your own boss? Make sure you are actually buying a business and not just purchasing yourself a job. Its easy to get lured into the romantic notion of taking control and being your own boss rather than just cashing a paycheck. However, if after all your risk and hard work the business is only going to deliver you a profit comparable to what you could safely earn by cashing a paycheck, is it really worth it?

 

Whether you are buying your first business or adding another to your budding business empire, it's a challenging process that can involve a lot of money and just as much risk. To help guide you we have compiled a few of our top tips to consider before you take the leap.

 

Buy a Business, Not a Job

If you are spending your hard earned money or leveraging your family's home to buy a business, you need to make sure it is a business and not actually just a job.

 

So, what's the difference? Most businesses are valued based on their ability to generate profit. If a business is going to require you to work full-time and is only going to generate profit comparable to what you could safely earn in the same industry by just cashing a paycheck, is it really worth the added expense, risk and effort?

 

Let's look at an example:

A business with revenue of $200,000 and profit of $75,000 is on the market for $100,000. This looks good, right? But what if you could get paid $75,000 as a management-level employee in a comparable business and you need to work full-time to generate that $75,000 profit, you will essentially be paying someone $100,000 for a job with all of the added risk and stress of running your own business.

 

Make sure the numbers work for you. Maybe you will be earning less in the short-term but can see an opportunity in a business to greatly expand the profit margin and turn a borderline deal into a true, rags-to-riches success story.

 

Do Your Homework

As with any big purchase it pays to shop around. There is no shortage of businesses for sale up and down the country so take your time and make sure that any business you look at is in an industry and location that is attractive to you with a potential workload you can handle.

 

Get independent expert advice, don't just rely on the information provided by the seller or their business broker. If you are looking into a franchise, look at what other franchisees are saying about their experiences, what support does the franchisor offer, what sort of autonomy do you have?

 

Focus on an Industry Where You Have an Advantage

There is a lot to learn when you become your own boss. You all of a sudden have to wear a number of different hats all at once to make sure you have a successful operation. Make life easier on yourself, don't invest in a business where you have no advantage. Buy into an industry where you have experience or insight that will make the day to day work a breeze for you and help to alleviate at least of the stress.

 

Having to learn new skills at the same time as managing cashflows, employees, marketing, etc. will only compound your stress. You can of course outsource a lot of the mundane operational work like payroll and cashflow forecasting to your accountant but this is an added expense that you could easily avoid if you buy smart at the start.

 

Most importantly, look at the overall industry, growth potential and overall impact of the business on you to make sure that any opportunity you are considering is at the right price, in the right industry and offers you the work and lifestyle balance that you are looking for.

 

Determining the Right Price

Purchasing at the right price can be a ticket to financial independence whereas paying too much can create an insurmountable financial obstacle that suffocates your success.

 

Let's look closer at the example we discussed earlier:

The purchase price may have been calculated as a multiplier of the profit, as is the case in a large number of business sales. The average multiplier value usually falls between 2 to 7 times the average profit of the business. Riskier business like cafes and restaurants generally have lower multipliers and safer, stable, long-term investments may have multipliers of 14 or more. The multiplier in our example is only 1.33. This identifies a high risk business and sets some alarm bells ringing. If you have to borrow the full purchase price of $100,000 and need to work full-time to generate the profit of $75,000 then this investment may not be a good idea.

 

The profit we have been referring to is less all of the general operating expenditure like interest on loans, as this will change from one owner to the next. The interest on your business loan will reduce this profit and reduce the benefit to to you. You may also have trouble securing a business loan on a risky venture. This may mean that you need to use your family home to secure the financing, putting your family's financial security at risk. Never enter into a business deal unless you are prepared to accept a worse case scenario and never risk anything that you cant afford to lose.

 

It is crucial that the purchase price takes into account all of the real and potential risks and rewards that underpin the potential success of the business. Getting independent expert advice, not just relying on a brokers valuation, is important to be sure you are paying a fair price.

 

Look for Opportunities to Add Value

There are a number of ways for you to make money in business. Two of the clearest are by generating profit from the running of the business or by adding to the value of the business and making a capital gain when you move on to your next venture.

 

When buying a business, it is important not to just thing about the short or medium-term profits but also how you can develop the business and add value to it. A business that is currently struggling to make a profit may be a valuable investment for you if you can see an opportunity where your particular expertise, ideas or experience could add value and improve its performance.

 

This goes back to what we discussed earlier about buying a business in an industry that you have existing skills and experience in. You might be a world class baker looking to buy a cafe that has been generating a poor profit by buying in all of its baked goods. This is an opportunity to instantly lower the operating expenses and boost the profit. If the cafe has also been run by a disengaged owner, you may also have an opportunity to develop a relationship with your customers by providing friendly service and remembering the regulars and their orders will help to boost your goodwill. 

 

Looking for these opportunities before you buy a business is key. If you buy it in the hope you will find a silver bullet later on or just in the hope that things will magically turn around, be prepared for disappointment.

 

Imagine the Worst Before You Take the Leap

Every business deal has the possibility to be a flaming disaster and lose you everything you have put in. Accepting that this is a possibility is the first step towards developing strategies to avoid this worst case scenario.

 

If you can't handle the thought of losing everything you will need to put into a venture, is it really a business deal worth pursuing? Talk to an independent expert, develop a plan, be prepared. If you do, you will be in the best possible position to succeed.

 

 

This advice is general in nature. Every situation is unique and requires tailored advice. MBP has the expertise to guide you through independent business valuations, acquisitions and help you plan for the future. If you are thinking of taking the leap and becoming your own boss but aren't sure how to proceed, talk to our team today by calling 07 378 6655 or email mailbox@mercerbp.co.nz

 

 

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