Australia, the Small Business Nation
Written by David Harreveld, CFO / Consultant
Australia really is the Small Business Nation. Almost half of the country’s workforce are employed in small businesses (those with less than 20 employees) and they contribute 35% of Australia’s GDP. They are also literally everywhere – 98% of all businesses have less than 20 employees! So if you’re looking for a business to buy, the odds are you’ll be buying a small business. When you’re deciding if a business is worth buying you’ll need advice from a financial adviser such as an External CFO. A CFO works with owners and managers of businesses to ensure businesses achieve their desired outcomes. We’re often called in to advise on buying and selling businesses by conducting due diligence, helping to plan strategy, feasibility studies, forecasting, helping to obtain funding, and more.
Should you buy a small business?
I can’t stress this enough – if you don’t have a very good reason for buying a business, DON’T BUY IT! Have you always liked eating donuts and that’s why you want to buy a Donut King franchise? The technical term for this is “not a good reason to buy a business”. Other not good reasons include:
- Having no prior experience in the industry – even if you learn quick, it will be a painful and expensive learning curve.
- Wanting to work for yourself – if this is the only reason for buying a business, invest your money instead.
- Not understanding how the business works – this is surprisingly common, especially when buying a franchise.
- Not having a plan for the business – you need to drive the business, or it’s not going to go where you want it to go.
If you have a very good reason for buying a small business, then go for it – Just do your due diligence first!
Due Diligence
If you’ve heard the term due diligence before you probably understand that it means investigating the business to verify what’s on offer. You may be able to verify some aspects for yourself if you have through knowledge of some aspect of the business (eg the industry, the staff, the customers, the suppliers). This is rare though, and you need to be aware that you’re likely to be biased.
What do you do then? The simple answer is, get good advice in key areas. This sounds obvious, right? But it’s worth saying, because often emotion takes over and decisions are made based on things like “a good feeling”, or “trust” … and unfortunately these don’t lead to good decisions being made.
Getting good external advice takes the emotion out of making decisions, by expert advice in areas that you probably don’t have enough knowledge in. For any business purchase this means getting solid advice from:
- Lawyer – legal due diligence means reviewing commercial agreements/contracts the business has (think leases, large customer/supplier contracts, and even staff employment contracts).
- Lawyer – to create the sale contract and make sure that all the specific things you’ve negotiated are included properly. For example, do you want the previous owners to stay for 12 months to handover? Your lawyer will ensure this is in the contract. Want to make sure the previous owners don’t just start a new business and poach your clients? Your lawyer will make sure the contract allows you to enforce this.
- Accountant – financial due diligence will help ascertain if the business is actually as profitable and secure as the seller claims. It will help unearth as many skeletons as possible so you can make an informed decision about buying the business, and help you to negotiate the price.
- Other industry or technical experts – depending on how the business operates and what it does, getting other specialists in will help you understand the pain points within the business, or where there are opportunities for improvement. If the business sells online, you might include an SEO review or assessment of their webshop. If the business is highly dependent on an overseas supply chain then a sourcing specialist may identify opportunities to reduce cost or improve production time. This aspect of due diligence is sometimes forgotten but can actually be the most beneficial.
If you’re thinking of buying a business but don’t know who to trust, reach out for a chat.
Written by David Harreveld, CFO / Consultant
