One of the advantages of buying a business in Australia is it’s less risky than starting your own. You will take over an operation that is already generating profits and that has an established customer base. You don’t have to create new procedures, systems, and policies. All you have to do is to plan for its greater improvement. However, buying a business could be costlier than starting from scratch so take the necessary steps to make sure that you are buying a profitable business. Listen to the podcast or read on. Carl Allen shares tips on buying a business, important things you should consider, and more.
Key Points:
• How To Determine if a Business Is a Good Buy
• What Type of Business Is Best to Buy
• How Do I Get Money To Buy a Business
Carl Allen is an entrepreneur, the cofounder of Dealmaker Wealth Society, an investor and a corporate dealmaker with almost three decades of experience buying and selling businesses. Started in investment banking, he has analysed thousands of businesses, big and small, in 17 different countries and across 23 business sectors. He has enabled over 300 deals and done $47 billion in deals over the last 27 years.
Why Do Entrepreneurs Buy an Existing Business
Is buying an existing business a good idea?
Carl: Most business owners don’t know the process so most business owners will start a company and then their only way to grow it is to do it organically: more customers, more leads, more products and services. They might do some joint ventures or affiliate marketing with other people but they typically don’t go down the route of doubling their business in a day by essentially acquiring another company.
If you’ve got a $500,000 or a million-dollar business that’s profitable and it’s taken you 5 years to get to that stage, it might take you another 2 years to double it. But if you find another business of the same size, you combine it with the business that you already have and you use other people’s money to close that deal, you can effectively double the size of your business and save 2 to 3 years of your life by hustling to grow it organically.
For the most part, businesses are worth a multiple of their earnings. That multiple increases as the earnings increases, so it compounds. That’s why a small business might be worth three times its earnings. Yet, a public company might be worth 30 times its earnings. The bigger the company, the bigger the profit, the bigger the multiple, the bigger the valuation.
There are tons of businesses for sale out there. People want to retire for a lot of different reasons. They get bored, frustrated, sick or burnt-out, and they decide it’s time to sell their business, which they’ve built and made successful.
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What Type of Business Is Best to Buy
In trying to find a business for sale, would you look to something that’s the same as yours or the total opposite so you kind of own the supply chain?
Carl: If you own a business, there are three types of acquisition that you can do.
For example, you own a software company. You can buy a competitor or you can also buy a company that does very much the same as what you do so you’re doubling down on your market share.
You’re going to get economies of scale if you’ve gone from being a $5 million business to a $10 million business. There are a lot of economies of scale when you double down.
Buying a business within your supply chain is also an option. If you own an engineering business and a big part of your cost base is acquiring raw materials and other components, you can go and buy that business because then you’re doubling down on your margin. Rather than giving a huge part of your margin to a third party, you’re keeping that within your own business and then you can leverage off what that business is doing with its customers.
But the smartest type of strategic acquisition is when you buy a complementary business. If you own a software company, you could acquire an IT services company and then you can sell the software to your IT services customers that you just acquired. You can sell the IT services that you just acquired to your existing software company. As you bring the two companies together, there’s a boatload of financial synergies that you can generate so you’re saving probably on rent, property tax, utilities, maintenance insurance, and all other administrative overhead. You only need one financial controller, one HR person, you can consolidate your marketing budgets.
There’s always value in businesses. There might be an IT company owner out there who thinks the business isn’t worth anything, but for you, that could be an amazing source of new cash flow because you can integrate that into what you’ve already got.
When you do that combination, it’s a one plus one equals three on the revenue side because you’ve got the software revenue, the services revenue and the cross-sell revenue. And then it’s three plus one equals five on the profit side because as you’re scaling the revenues on the top line, you’re stripping out all this duplicate cost. You can 5X the value of your company, just by doing one simple bolt-on acquisition.
How Do I Get Money To Buy a Business
Carl: People think if you want to buy a million-dollar business, you’ve got to cut a million-dollar check. You don’t.
You can get that money for buying a business in Australia from other people.
Seller Financing or Vendor Financing
Carl: First, you can get the money from the seller. You might find this strange but there are some sellers who will sell their business and let you pay for that business over time. It’s called seller financing or vendor financing in some countries. If the business is really profitable, you can pay for that business over time using the profits that the business is generating.
Acquisition Financing
Carl: You can also use acquisition financing. If you find a strong business with a healthy balance sheet and great cash flows, then you can use those as leverage to go and get a bank or an investor to give you financing. You can buy that business, and then you might pay for half of the business upfront, the closing payment using that financing, and then pay the seller for the other half of the business over time.
Venture Capital or Private Equity
Carl: There are instances where you can sell pieces of that deal to an investor—angel investor, venture capital or private equity company—who will partner with you in the deal. They’ll co-own the business with you, but they’ll give you a ton of cash flow so that you can go out and bolt these acquisitions on. The bigger you grow your business, the more profitable it’s going to be.
The bigger you scale your business through acquisitions, the more it’s going to be worth. When you sell it, the higher your net worth and the more money that you put into your own bank account.
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How To Buy a Business
If I decided to grow my existing business by buying another business in Australia, what would be the next step?
Carl: It’s a three-stage process.
First, you’ve got to clearly articulate what the perfect business is going to be for you. The type of business that’s going to move the needle in your empire is going to be very different from the type of business that is going to move the needle in my empire. Ask yourself: what type of business strategy is going to make me take a big leap in terms of the size and scale of my business? Once you’ve determined that, then it’s all about deal flow or deal origination.
There are four primary ways that you can originate deals.
1. You can go public with business brokers. That’s the easiest method because you know the business is for sale as they listed it with a broker. But it can often be the most challenging because business brokers tend to hype up the valuations of the businesses that they’re trying to sell. Nonetheless, business brokers will get you a big strong source of deal flow. Leverage one’s network, whether it’s via social media or your human network, because only 20% of business owners that decide to sell a business actually list it with a business broker. The other 80% will get it passed through their network.
A business owner who decided to sell tap into their inner circle. They’ll talk to their accountant, lawyer, wealth manager, bank or an investor. As the buyer, you can build those deal intermediary networks and leverage them. It not only gives you access to deals but also lets you build relationships with people that can help you close the deal once you find a business to buy. The accountant can help you with the due diligence to make sure that the business is doing what it says it’s doing and it’s in a good place. Your lawyer is required to help you create the legal documents that you need to sign to transfer the ownership of the business from the seller to you, the buyer and the new owner. Once you’ve got the deal flow, you’ve talked to the seller, you’ve got all the information, and you’re confident that this business is going to do for you what you think it will, then it’s all about financing the deal.
Understand the Business Legal Lifecycle
2. It’s all about structuring the deal so that it’s a win for you and it’s a win for the seller. In most deals, you’re looking to pay some of the money at closing and then some of the money over time in seller financing.
3. Once you know how that is going to work, work with financiers to give you the capital to be able to do that. It’s actually the easiest part of the process. In Australia, there are billions of dollars available from bank’s finances and investors to go into the right deals.
Don’t buy distressed businesses. Don’t buy businesses that are instant trouble because you’re just in inheriting somebody else’s headaches. You want to buy a business that’s cash flowing—as soon as you buy it and integrate it to what you’ve already got, its earnings are positive from that very first day. The more the profit, the stronger the business and the more valuable it’s going to be so the easier it is to raise the financing.
How to Buy a Business Without a Business Broker
Carl: Another method of buying a business in Australia is the direct approach. You can leverage free business information databases and generate a list of businesses that are going to fit what you’re looking to do strategically and then approach them. Introduce yourself, introduce your business, tell them why you want to buy the business and why you have chosen their company.
You can talk to them in person, send a letter or send an email. Connect with them and build some rapport.
Building Rapport With the Business You Want to Buy
Carl: We look for them on social media, for example, Facebook. We look at who they are:
- Do they have a family?
- What sports are they interested in?
- Do they drink beer? Do they drink wine?
- Do they go out for dinner or on vacation?
Drop some of that stuff into the conversation to instantly build a relationship. Once they know you, like you and trust you, then they’re going to be in a much stronger position to potentially want to sell their business to you. You’ve got to know them and what’s going on for them and what they do.
When they sit there thinking they don’t really want to work in their business anymore but no one would buy it so they plan to just close it down, you can approach them. The seller would love you to have the business and work something out with you.
Interestingly, the more distressed the seller in terms of their psychology, the bigger component of the deal that they are prepared to put into seller financing.
Learn More About Buying a Business in Australia
Carl Allen offers free training to anyone who is interested in buying a business in Australia or anywhere in the world and wants to understand the 8 steps to go through—from a blank piece of paper to closing a bolt-on acquisition and combining it with what they already do.
Recommended Book: Barbarians at the Gate
What would you suggest someone read to further understand buying businesses?
Carl: Some of the largest companies in the world have been bought and sold through a leveraged buyout (LBO) model. With this model, you find a business you like and you just buy using other people’s money. One of the largest leveraged buyouts in history, is a massive American company called RJR Nabisco. It was bought for $25 billion in the 1980s. The guy that bought it didn’t spend $1 his own money. He’s packaged that model down for the small-medium enterprise. It’s the same process, just on a much smaller scale.
There’s a great book about it called Barbarians at the Gate, a must-read for any wannabe deal maker.
If you enjoyed this, make sure to jump across to iTunes or Spotify and give us some feedback. Stay healthy!
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