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Let the buyer beware or ‘caveat emptor’, a simple and obvious statement but one which is particularly relevant to the business.
If you are considering purchasing a tourism or hospitality business, it’s worthwhile considering these 4 key issues:
1. Beware if the main indicator used in determining the value of a business is solely in historical documents such as financial statements. These documents can only report on past performance, however, as an indicator of future performance they can be misleading. Management analysis can be useful at this stage instead of just relying on financial data. To name a few, SWOT, industry and lifecycle analysis can all help you understand the business and the industry in which it operates.
2. Do your homework and test the financial data. Prepare a 3-way budget using the latest available data as a starting point and then test the assumptions. Adjust for seasonality and test for impacts on cash flow, profitability, and the ability to service any debts. Once you’ve prepared the budget it can then be used to determine your return on investment (ROI). Don't forget to pay yourself a commercial wage before calculating the ROI.
3. Understand what you are buying and consider the taxation consequences. Are you buying a business or are you buying shares in the company that operates the business? Are you buying the land or will you need to service a long term commercial lease? Why is the allocation between plant and equipment, stock, and goodwill important from a taxation point of view? What type of structure or structures will you use to purchase and/or operate the business? Will you be able to access the small business CGT concessions if you sell this business in the future?
4. Purchasing a business is a huge financial and emotional commitment and the decision needs to be made methodically and thoughtfully. Don't become emotionally attached to a business you are yet to buy. If the numbers don't stack up, then be prepared to walk away. Yes, it will be disappointing, and the time invested will feel wasted but you will learn from the experience. There will always be other businesses for sale and other opportunities that you can explore.
For more information
For additional advice on purchasing a tourism or hospitality business please reach out to your local RSM office.
