How to: Buy a business before it’s on the market

We all know the scenario. We happen to walk into a business, look around and think: “Gee I would love to own this, I wonder if I can buy it?”

It can be a tempting thought, particularly if you see shortfalls that can be remedied quickly. But how should you go about approaching an owner when you want to buy their business?

First ensure you have sufficient finances in place. The best way to gauge this is to see what similar businesses are trading for and what metrics are used to set the price.

Now that you know what you’re up for, it is time to approach the owner – or, even better, engage a broker or adviser to act on your behalf.

realcommercial.com.au spoke to two experts and the first, John Higginbotham of The Collins Street Consulting Group told me: “It’s a more common story than you might imagine. I often tell people that 90% of businesses listed for sale are not worth having, the best buys are those that aren’t formally up for sale.

“You have to start with extensive research to find out what the business is really like, who the owners are and what their motivations for selling might be.

“If you approach an owner with a genuine interest in their business and an understanding of what may motivate them to sell, the majority are happy to have a conversation. Indeed for some it may be a deliverance.

“But I would counsel anyone to remember that introducing price into your first conversation can prove fatal. You’re simply shooting in the dark unless you have the right information and that will only be passed over to you once you have established trust.”

Rod Russell, the Principal of Queensland Business Sales, acts for clients right across the Sunshine State. He told realcommercial.com.au that while the bulk of his business is acting for vendors, the buyers’ agency side has been increasing in recent years.

Russell was adamant that homework, skill and tact are essential to be able to buy a business at the right price.

“We often approach a number of similar businesses and we let the owners know this – otherwise they will rub their hands together and think Santa Claus has arrived with a bag full of cash.”

I asked what could go wrong when buyers approach owners directly and he told me: “We occasionally see this and mistakes come when buyers have their heart set on a particular business, which can lead them to overlook the essentials.

“One of the most common mistakes is not having Tuition of Business in the written agreement. A lot of buyers haven’t been in the industry and can struggle to make the transition. We always ensure a seller remains around for a period of time so that they can pass on their advice on how to run the business.

“Another common omission is Restraint of Trade. If this is not included in the agreement there’s nothing to stop a seller of a business setting up around the corner with a similar name and taking key clients and staff members with him.”

Many business sales, especially in the $3 million or more range, are structured on an ‘earn out’ basis, where a profit mark is set and term payments over a period of years include a bonus in years above the profit mark and lower payments if the business underperforms.

Higginbotham says: “This is a particularly useful process for term sales, as it allows greater certainty for both parties and motivates them to do the right thing.

“Many owners who genuinely want to sell their business can remain involved. It gives them something to do and provides some income while ownership is transitioned to the new buyers. It can also be structured in a tax effective way for the individual exiting their business.”