Thinking about buying a business? Here's how to spot a lemon.

Remember that trip to the second-hand car yard to buy your first car? Remember being drawn to the car with the glossy exterior and shining mags?

It was probably made even more enticing by the balloons and big signs screaming at you “SALE”  “GREAT DEAL”  “25% OFF”... 

It wasn’t until a good mechanic saw the car that you realised there were some pretty serious problems lurking under the hood. Hopefully,  that was before the car salesman shook your hand, gave you the keys and waved as you drove away.

Buying a business is exactly the same.  

The case in point

I recently spoke with a friend I hadn’t heard from in a while. I was thrilled to hear that she and her husband were planning to purchase a business on the coast – something they had been wanting to do for a very long time. It was their retirement plan and they were very excited it was finally happening.

As the conversation progressed, I was quite alarmed to hear they were in the stages of negotiating the purchasing price without having any prior discussion with an accountant – they really had no idea as to what the business was actually worth!

I expressed to them the dangers this could unravel and thankfully, they agreed to complete due diligence before proceeding any further. Unfortunately for them, the news wasn’t good.

We were both shocked to realise that this particular business was only worth a mere 20% of the actual asking price – a staggering $200,000 less than the prices they were currently negotiating on. It is concerning to think they actually thought they were honestly receiving a ‘bargain’ as the seller was willing to drop $70,000 for a quick, hassle-free sale.

Just like with the second hand car – beware of the deal that seems too good to be true.  

Needless to say – they didn’t continue on with the purchase. They are beyond relieved and forever thankful that we were able to save them from the potential heartache they would have endured.

There are many points that are taken into consideration when completing a business valuation:

• Profit levels
• Goodwill
• Client base
• Competition factors
• Future income possibilities
• Value of assets being transferred

Don't be a moth to the flame

It isn’t just the due diligence that needs to be discussed with your accountant when you are looking to purchase a business. It is also a fantastic opportunity for your accountant to run through a list of significant items, such as the business structure you will be using. It is vital to ensure you are trading in the most appropriate structure to ensure you are minimizing your tax liability and also protecting yourself and your personal assets.

On the other side of the coin, if you are a business owner looking to list your property for sale it is just as important to have this valuation completed. The last thing you would like is to sell your business; that your years of blood, sweat and tears have developed, for less than what it is actually worth.

Having the right advice is crucial.  Please don’t rush into anything, especially when you believe you are getting a good ‘deal’, use my friends as an example!

Research actually shows that a staggering 80% of people who do not complete a due diligence on a business prior to purchasing actually pay above the value of what the business is worth. We don’t want this to be you!

The cost of getting a good business advisor to perform a Due Diligence is nothing compared to what a bad business investment will cost you down the track.

You won’t spot a lemon until someone who knows what to look for pops the hood.

Thinking of buying or selling a business? Click here to speak with our team today.