Buying a Business as an Investment

by Andrew Daniels 21st of November, 2022

Buying a Business as an Investment

Buying an existing business offers a number of advantages from an operational standpoint. You receive established infrastructure, staff, proven marketing and sales strategies, and an ongoing cash flow. But is the prospect still an attractive one when you consider your purchase as an investment?

Founder and Managing Director of Aurelius Advisory, Andrew Daniels, explains how to identify a strong investment prospect and why it could be the best business move you make.

Is buying a business a sound investment?

The soundness of your investment depends on which business you buy, for how much and how effectively you conduct your due diligence.

It may also sound like a given, but ensuring your expertise and experience align with your purchase can be the difference between seeing a healthy ROI, and watching your investment spiral down the drain.

Purchasing a business that’s already done the hard work to get off the ground brings with it less risk. You’ve got a concept that’s proven to be successful and you’ve safely passed the initial one year window where 20 percent of new businesses fall over.

But the hard work isn’t over. Some businesses may require a hefty injection of capital to upgrade machinery, bolster their working capital cycle, systems or software. Others may need a structural rejig that can take months to successfully execute.

It comes back to due diligence, due diligence, due diligence to ensure your investment is the right fit for your goals.

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The advantages of buying an existing business

Beyond what we’ve discussed, there are several other reasons a business could make an advantageous investment. This varies from person to person, here are a few of the most common reasons I see clients looking to strategically invest in a business.

Instant market share

Purchasing a competitor’s company is a highly effective way to increase your market share. You don’t need me to point out the benefits this presents, from the increased customer base, trained staff to the increase in value proposition. You’re simultaneously knocking out the competition while acquiring an established pool of customers. From there you can foster the growth of these existing connections, rather than attempting to establish new ones.

Be warned that the vendor is likely to be aware of the unique value their company poses to you as a competitor. For this, they may charge a premium price.

Similarly, you can buy a business that offers a complimentary service or product to the business you already own. For instance, let’s say you own a mortgage brokerage. A strategic business acquisition may be the purchase of a Property Buyers Agency. The alignment of both businesses would allow you to deliver a holistic service offering to property purchasing.

Easier to secure finance

Lenders look more favourably on the purchase of an established business over funding a new one to get off the ground. It makes sense from the banks perspective - there’s a proven track record of revenue and execution, minimising the risk of the unknown. As a buyer, this can go a long way to helping you secure finance to make your purchase.

What to look for when buying a business

Top level considerations should be the industry, income, flexibility and what fits with where you are in your career and life.

Undertaking robust market research ensures your business purchase is built on solid foundations to generate the strongest return on investment (ROI) possible.

You’ll want to go through the company with a fine tooth comb. Remember, your research should be holistic and dig deeper than the profit margins

Prior to purchase, I would suggest reviewing:

Business operations
Legals - permits, licences and contracts
Financial performance for at least 3 years (including profit, revenue streams, and expenses)
Premises or leases involved in the sale
Stock levels (if applicable)
Customer, supplier and staff contracts
Intellectual property
Assets

What to expect when buying a business

The first thing to note is that an established business will attract a hefty price tag because in addition to the assets you’re purchasing you’re also buying a recurring income. You could buy the individual assets for less if you were starting from scratch but understandably you are paying a premium for the blood, sweat and tears others have invested to coordinate those assets, systems and processes to develop the recurring income. A business is quite a substantial investment, particularly if the business you’re eying has strong brand equity. The upside, however, is that it carries far less risk!

Be prepared for a fixer-upper. Although you’re acquiring an established business model - that’s not to say it’s a flawless one. Under or overstaffing, inadequate processes, outdated systems or tech could pose quite a hurdle the second you get out the gates. While it shouldn’t necessarily be a deal breaker, it’s a worthy consideration to have in mind when negotiating the price you are willing to pay.

Valuing a business can be a tricky process, and different parties may perceive value in different ways. This is made all the more complex by the emotional value many sellers will place on their company. This is, afterall, likely a baby they have poured years of time, passion and self into - that’s a hard thing to attach a figure to.

Be prepared to negotiate and come armed with facts and rationale behind the price you believe the business is worth. Remember, this is an emotional decision for the seller, so exercise an open mind when working through negotiations.

Tags: buying investment

About the author

Andrew Daniels

Founder and Managing Director

Andrew Daniels is the Founder and Managing Director of Aurelius Advisory - an experienced business advisory that specialises in implementing the right ...

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