RSM Australia

Caveat emptor - let the buyer beware

Let the buyer beware - a simple and obvious statement but one which is particularly relevant to business people. 

asset_11.pngThis period running up to the end of the financial year is a popular period for vendors to dispose of their business. If you are considering purchasing a business, it is worthwhile considering a few issues.

Beware that the main indicator used in determining the value of a business will be in historical documents such as the financial statements. Yet these documents can only report on past performance and as an indicator of future performance, they can be very misleading. Management analysis can be useful at this stage instead of just relying on financial data. SWOT, industry and lifecycle analysis to name a few can all help you understand the business and the industry in which it operates.

Do your homework and test the financial data. Prepare a three-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 have 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.

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? Why is the balance between plant and equipment, stock and goodwill important from a taxation point of view? What type of structure 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?

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.