A learner’s guide to acquiring a business – part 1

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So you want to leave your job and start a business? Or maybe you have a business, and you want to buy another one? If you have a farm, you may have been advised to diversify. This could be an SME (small or medium-sized enterprise), but how do you do it, and what should you look out for?

I never expected to be running a small business. I have owned real estate and traded shares. I’ve worked on farms and managed and owned one. Been an employee for small and large businesses and been an employer and business owner.

Now my husband Greg and I have a farm, a B&B enterprise, a church candle-making business, and we owned the pizza shop in town for four years. How did we end up here, and what principles and tips did we learn on the way?

Your business is there to give you three things: (1) Money, time and challenge or interest.

That means your business should be working for you to provide you with cash to fund your lifestyle, time to enjoy it, and the fun, excitement, challenge, or whatever that gives you a kick. The balance of these three things will be different for each person and may change over time, but you need to recognise which is essential for you.

Acquiring the Business

RCS Business Fundamentals Workshop

When we bought the Pizza Shop business, we had concrete things it needed to do for us. At the time, we were working in the mines but needed to move home and start living on our property. We aimed to replace one mining income so that one of us would be home full-time. Like most bush areas, there weren’t that many full-time jobs locally that would do that, so our best chance was to buy a business. We compiled a checklist and assessed each of the businesses for sale against it rigorously. This included:

  • It had to be cash flow positive immediately, with growth potential.
  • It had to replace a mining wage.
  • It had to be something we could afford to buy.
  • It had to be something we knew about or could learn quickly.

(2) Surround yourself with smart people who disagree with you. These are your professional advisors, your board and your straight-talking friends. I feel I’m pretty good at analysing figures, but I also know I make decisions based on feelings. Most of us are the same, even those who think they are logical thinkers. We are the stories we create about ourselves, and our logical mind is just a thin veneer of consciousness over our feeling subconscious.  Due diligence isn’t just about analysing the figures and researching markets. Sometimes people buy a business because they like something about it rather than because of all the things they need it to do. If we hadn’t used a rigorous process, we could have ended up with a struggling garden supply business rather than a thriving pizza shop.

For some businesses, the closer we looked, the less suitable they were. So (3) Don’t be afraid to walk away to the next option if it doesn’t fit the criteria. But by the same token, the more we looked into the pizza business, the better we found it to fit. There was also another party interested. So we stumped up the asking price. (4) Don’t risk losing a good opportunity for the sake of bargaining a few dollars.

Our primary aim for the business was money. Time and challenge were less critical in this case. We also didn’t aim to keep the business long term and understood that we could get the time and challenge/enjoyment part we needed elsewhere, down the track.

Purchasing this business was a risk, particularly in a regional area. (5) Small Businesses can be easy to buy but hard to sell. If you want to exit a business in a particular timeframe, it’s essential to understand this risk. I have seen many businesses for sale for months, if not years. We were lucky to sell the pizza business when we wanted, for a good capital gain in price.

(6) Luck is real, but be ready to take the opportunity when it comes.  When we bought the candle business, it had been for sale for three years. Being very small in scale and providing a smaller income, it was essentially buying a part-time job. But, we saw it as an opportunity with expansion prospects to bolt onto our existing enterprises.

  • It had a durable product that we could manufacture when things were quiet elsewhere.
  • It was a mail-order business with no storefront.
  • It didn’t need staff but could be scalable with mechanisation to still be run by just us.
  • It was well established with a good client book of reliable payers.
  • It could still provide steady income not reliant on the factors that affected our farm and B&B business, such as drought and bushfire.
  • It satisfied my interest in developing a better business system.

So it allowed us to get all three aspects, time, money and challenge/interest, which makes for a sustainable long term play.

Want to know how you can tell if a business will suit your needs? Look out for part two of ‘A learner’s guide to acquiring a small business’ from Simon next month.

Author:
Simon Hicks
Small business owner and past RCS staff member
www.donegalfarmstay.com

www.australcandles.com