As with any purchase, it pays to shop around.
There are loads of businesses for sale in this country, so take your time looking at what’s out there and weigh up the pros and cons of each prospect. Get independent expert advice (i.e. not from the seller or business broker) to help ensure you’re buying something that is right for you, in ways that matter to you. For example, on top of the financial stuff, you could also assess the location and potential workload.
Most importantly (to accountants like us, at least), make sure that you buy at the right price. Paying too much at the beginning can create an uphill financial battle that may prove too steep in the long run.
For example, going back to the fictitious firm, let’s say that you’ve bought it with a business loan for $100,000. You’re now working full-time in the business to earn the $75,000 ‘profit’, and you have to meet repayments for your business loan. Obviously, in this basic example, the price is way too high.
In real-life, though, it can be hard to determine the ‘right’ or ‘wrong’ price (underlining the importance of expert advice). Business valuations are notoriously tricky and usually based on a multiplier of the profit, which is based on risk: the riskier the business, the lower the multiplier.
So for a traditionally ‘risky’ business, such as a cafe or restaurant:
If the Net Profit is $75,000, then that might only be multiplied by 2 to get the valuation = $150,000.
Conversely, if the business is a commercial property with a 20-year lease, the multiplier will be more like 14 times, as this is a much safer investment.
In other words, it’s crucial that the price of the business reflects the underlying risks and rewards.