One of the main barriers for selling a business is whether the buyer is able to get the finance to purchase the business. Contrary to popular belief, banks want to lend you money & they want you to succeed. Because when you succeed, they succeed.
So here are my Top 5 Tips on how you should prepare to borrow money from a bank or other lender to buy a business.
Banks & lenders in general, have 2 main criteria when they lend money; can the borrower pay me back & will the borrower pay me back. This month we’re going to focus on the “can”. That is, can you be successful in generating enough revenue to make the regular repayments on the money the bank will lend you?
It’s very important to a lender to know that you understand the business that you are purchasing & the market in which you will be trading; both your competitors & your customers.
Tip no. 1: Know your industry . . . thoroughly!
It sounds like a great idea to leave your stressful job & create the next-big-thing tech start-up. Or perhaps you are over living in an expensive capital city & dreaming of a sea/tree change where you can buy a local restaurant & build a fabulous business with friendly locals & happy relaxed holiday makers as customers.
* But do you know the industry, thoroughly? If you’re buying a cafe, do you have any idea how to make a great piccolo. How many sandwiches will you actually sell on a Thursday? What is BAS?
* If the local hairdresser is more your speed & you’ve worked as a hairdresser for 10 years in a trendy inner city suburb, do you know how to do a wash & set for all the grey nomads settling in your town over the summer months? Do you know how to deal with suppliers? Where do I start with modernising the booking system?
Tip no. 2 tip: Research, Research, Research!
If you want to buy a cafe, hairdresser, mechanic, bed & breakfast etc anywhere but particularly in a coastal or regional town you should research the area over at least 6-12 months.
* Get a sense of the traffic flow, the seasonal changes with tourists, are the locals loyal, will the peak season carry you through the off season.
* Visit & stay in the area at least 3-4 times, use the local facilities, eat at the cafe, use the mechanic, stay at the B&B. Get a feel for the people, get a feel for the business. Does it feel successful?
* Research the local council planning & environment proposals. Is there anything planned that would impact your proposed business either positively or negatively.
Tip no. 3: Know exactly what you are buying
* Invest in a good lawyer & a good accountant to review all contracts & existing finance arrangements.
* Are the current owners retiring, sad to be selling or are they an exhausted young couple who can’t keep up with the hours required to keep their small business buoyant?
* Is your differentiator that you will bring something special that the previous owners had not considered.
* It’s very important that you know what is included & excluded in the sale together with the condition of any machinery or equipment.
* Is the equipment leased or owned outright? When does the lease expire? Does it have a balloon clause that you will need to honour?
* If you’re buying a “bricks & mortar” business, who owns the premises? What are they like? Are they quick to resolve issues or do they fight for every penny?
* Are you taking on any additional debt or liabilities?
Tip no. 4: Cashflow is king!
Make sure you know the numbers; revenue, profit, cashflow thoroughly. Again, invest in a good accountant. The business may look all shiny & profitable on the outside, but why is it being sold?
* Look at the books for the past 5 years. Is the business steady & growing? Is it seasonal? Does it have spikes & troughs; why?
* The no. 1 rule of any business is cashflow. You may be very profitable in some months & struggling in others. If you’re booming in the holiday season from December through February, this wont help if you run out of money in November.
* Are your suppliers reliable? What is your distribution channel? Is it diversified?
* Make sure you can manage that cashflow. Plan with cash projections, arrange for offset & overdraft facilities but make sure that you can pay your staff & your bills through the seasons without needing to live on bread & water to do so.