Purchasing a business – do you know what you are buying?

This week we were asked by a client to have a look at a business for sale that he’d found out about from a long term friend. On the surface, it sounded like a good opportunity for someone who had worked for the same publicly-listed employer for over 15 years (provided the business was profitable, of course).

The raw numbers

The asking price of $250k with a turnover of just under $1.5m and reported profit of $150k also sounded reasonable.

But when were handed numbers written up on an excel spreadsheet to review with very little explanation behind them, a red flag was raised in our minds.

Physical inspection

The next step was to physically inspect the premises and see how many customers were entering the business and making purchases.

During our two-hour visit, we saw the tills were churning over for customer after customer. After grilling the owner of the business, all the issues we raised were addressed adequately and the business review was running smoothly. Our client was keen to proceed as he’d spoken to many suppliers to the business and customers who rated the business very highly.

The real numbers

Back at the office, I emailed the owner of the business to get in contact with both the accountant and the bookkeeper of the business to get a copy of the financials. The business owner then rang our client to say that he was running the business at a loss and that he would not be providing a copy of the financials. He assured our client that he could make money with the dedicated time, effort and enthusiasm that the business owner didn’t have.

This made it easy for us to provide this advice to our client: DON’T PROCEED.

The moral of the story here is this. Every effort to investigate, review, audit and cross-check needs to be made when looking at buying a business, no matter how creditable a friend’s recommendation or high regard from customers and suppliers. Just because a business has a high turnover doesn’t mean that it’s making enough money to cover overheads, let alone a wage for you and a return on investment.

This is why it’s important to seek unbiased financial advice in these situations. Before proceeding with any business purchase, make sure you know what you are buying.

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General Advice Disclaimer

This article contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs and read all relevant Product Disclosure Statements before acting on the information. Whilst every care has been taken to ensure the accuracy of the material, Paradigm Strategic Planning or Sentry Advice Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.

Paradigm Strategic Planning Pty Ltd is an Authorised Representative of Sentry Advice Pty Ltd AFSL 227748

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