So you want to purchase a business during a pandemic
Oct 12, 2021
So, you want to purchase a business during a pandemic
Unfortunately, you are not the only one! A recent survey indicates, new business listings are down, average price is up which has resulted in a supply & demand imbalance.
There appear to be several key themes for this;
- Returning expats
- Cash actively looking for higher returns
- Covid-19 has made people rethink their current situation and business ownership is becoming a popular alternative
- Low interest rates, both lending & deposit
Assuming you are still keen to purchase a business, there are 2 main sources of businesses for sale.
1. Off market – you or somebody else knows someone who is selling a business.
2. On market – a business is being advertised to the wider market often by a business broker.
In reality, the purchase of a business is a stepped process from initial idea and scoping through to the final settlement and takeover. This can take a lengthy period, particularly if you are purchasing a franchise. At any given point in the process, always be prepared to walk away from the purchase if it doesn’t meet your criteria. Never believe that you are in “to deep” or past the point of no return – it may have cost you some money to get to this point but don’t throw good money after bad.
Be very aware of the difference between a business decision and an emotional decision.
With this in mind below are several Key Principles to consider when purchasing a business:
- Do comprehensive due diligence. There are many parts to this process, and it is generally after you have made an offer on the business. We use a comprehensive check list to ensure we cover all the bases.
- Work out why you are wanting to purchase a business. Is it to provide a lifestyle - This might be harder to achieve when you own a business than working for wages or a salary.
- Are there any specific skills required? It may be difficult for example for a non-electrician to own a small electrical business and rely on employing electricians
- Be realistic about the amount you can borrow, if required. Most lenders won’t lend against goodwill. Do you want to use your home as security?
- Get professional advice. There are a myriad of things to consider and getting good quality professional advise can make a big difference and avoid some heartache.
- What is a business worth - Surprisingly valuations are getting stronger. Goodwill is still a thing and most business sale include an element of this. The general business average price yield is approximately 29% or an EBITDA multiplier of 3.5. This is stronger than 12 months ago.
- How many working owners and how many hours does the owner need to put into the business to earn the reported surplus?
- Ignore unreported income. This goes without saying, if it hasn’t been reported then it doesn’t exist.
- Beware of the 'desperate seller'. Most times, if something is too good to be true it usually is.
- Asset purchase or share purchase. Are you buying the actual assets of the business or the shares which include both the assets and liabilities (if any).
There are many more factors to consider but this should give a broad outline.
Covid-19 has created some very interesting positions for businesses, some are positive while some have been negative. This is very much dependent on industry & location. We are very conscious of the impact Covid-19 has and that it has created some fantastic trading results, these need to be allowed for when considering the long-term position and value of the business.
A final thought - Profitability is King & Cash is Queen. You need to ensure that the business is generating enough net surplus to achieve what you want. If the potential business is not generating these surpluses or the potential is not very evident, don’t buy it.
If you are still contemplating purchasing a business the team at Malloch McClean has experience in working with clients purchasing businesses and we can provide specialist advice on business valuations. Need help? Get in touch.
Written by Ian Harrington