Practical articles to help small business owners when selling and buying small businesses.

Advice on leaving your job to buy your first business.

Michael Kerr - Thursday, September 26, 2019

Moving from Employee to Employer. Yes, it's officially ok! 

You can buy yourself a business that is just, more or less, a job.

If you do its definitely a head start on a ‘proper’ business, if that’s what you want. 

It’s also very much ok if that’s not the plan. 

Most importantly though buying a business that is just a job might be an enabler of you;

  • Losing your current boss,
  • Having more flexibility,
  • Moving to a new location (a sea or tree change),
  • Having a mid-corporate-career break,
  • Have a crack at building some wealth,
When you talk to your friends and family and your advisers you are sure to get some advice along the lines of “why would you do that?” or “why would you pay someone for their job?”. 

You need to tell them why you are seriously considering buying a job i.e. because you ;

  • Are an unsatisfied employee, or
  • Have limited traditional employment opportunities, or
  • Are considering starting a new business from scratch but thinking an existing business might be faster and easier, or 
  • Are wanting to relocate but there are no jobs there so the only way to make the move is by buying a job.
While I am a big fan of the idea of buying yourself a business as a way to secure your own job i also know that finding and buying the right small business, especially the first time, involves considerable effort, focus and risk to your hard earned capital (read my earlier article on the advantages of buying an existing business rather than starting up)..

And no doubt you have  questions such as;

  1. Where do I find the best businesses?
  2. What do I pay?
  3. What type of business should I buy?

6 tips to help employees considering buying a business.

1. Running a small business isn’t for everybody. 

So work out early if you are suited. Start with honestly assessing your own skills and experience base. And then talk to as many small business owners and operators as you can. 

Ask them what it is really like. Ask them about the best and worst parts of being your own boss. Ask them what are the most important skills and qualities needed for success. 

2. Understand that buying the right business is a major project.

If you want to buy the right business you’ll need to look at lots. 

So a lot of time and effort will go into identifying potential businesses, talking with owners (and their advisors), analysis and drafting offers. 

Expect the process to take a lot of time and anywhere up to 2 years. 

3. Know where to find businesses for sale.

Before you set out on a mission to find a business it is important to understand the following;

  1. A very high percentage of businesses listed for sale are food and retail related (about 65%), and
  2. The advertised market only represents a small percentage of the businesses that might actually be for sale.
To find the right businesses you will have to go ‘hunting’. It is highly unlikely that your ideal business (at your ideal price) will be neatly packaged and advertised for sale just as you start the search. 

As a result you need to be prepared to make direct approaches to the owners of businesses you think you’d like to buy. Many ‘’off-market” sales already happen like this because many business owners want to sell but just don’t get around to starting the sale process or know who to talk to.     

4. Know what to pay for a business.

There is a lot of conjecture and confusion around business valuation, even with the “experts”. Don’t let this put you off but also recognise that if you are  going to buy a business you need to become proficient in some financial basics. 

In simple terms your financial analysis is about determining;

  1. What’s left for the owner after everyone else is paid?,and
  2. How sustainable is it?
You can establish the above by getting a hold of 4 or 5 years worth of financials and asking lots of questions. 

Remember that in small private companies the financial statements very rarely reflect what actually happens in the business. There can be many reasons for this. 

As an example the owner normally has personal and discretionary expenses in the business – these will understate the real business profit and so need to be added back .   

The process of adjusting or normalising business profits can involve some more complex items (e.g. advanced depreciation of assets) so it can be very worthwhile to get some professional advice along the way. 

If you read this earlier article on analysing financial statements you'll find it a lot easier.

5. Know when to get professional help.

Professional assistance  and expert advice will be critical at particular points of the buying process. 

And getting the right advice is an investment rather than a cost. 

The key is knowing who to ask and when.

In some cases your current advisors may not be the most suitable. Please don’t just assume they are. 

Ask them if they have up to date experience.

Ask them when you should check in with them and what that might involve from a time and cost perspective .

And finally be clear if you are asking for advice or their opinion – there is a very big difference.  

6. Understand your financing options.

Your capacity to fund the business purchase needs to be considered very early on.

From my experience it remains challenging for many to borrow for the purchase of a small business.

To increase the chances of finding funding it might come from a mix of some of the following;

  • Bank debt secured by real estate (possibly some unsecured),
  • Specialised financiers of plant & equipment or working capital (debtors, stock),
  • Seller (Vendor) finance, or
  • Friends & Family.
In applying for any funding you will need to demonstrate a strong business case and supporting financial projections. This is mandatory for most financiers but will also really help you to validate the investment you are contemplating.

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