ANZ Senior Financial Adviser, Kelly King, has spoken to many clients who were thinking about launching a new business or buying an existing business. She’s found many aspiring business owners have an idealised image of what running a business involves.
“Many people fantasise about making a major life change and there’s nothing wrong with doing that,” King says. “But if someone is contemplating quitting their job and spending potentially hundreds of thousands of dollars buying a cupcake store or turning their home into a bed and breakfast, they need to ask themselves some searching questions.”
King’s ’Key questions before buying a business’ follows:
1. Do I really want to be a business owner?
King is constantly taken aback by the number of people who say they want to go into business to spend more time with their family and earn more money. “That might be possible 5-10 years down the track, if you’re lucky,” King says. “But running a business usually involves working long hours for, at least initially, not very much money.”
King points out operating a Bed and Breakfast can mean having strangers staying in your home every day of the year. Running an eatery or shop frequently involves working 12-hour days, six or seven days a week.
And, if you’re focused on the non-monetary rewards of having a business, King advises you to be realistic on that front as well.
“People often tell me they want to own a business because it will allow them to express their personality or because they don’t like having a boss,” King says. “For example, someone who’s a ‘people person’ may think they’ll be happier owning a café than being a software engineer. But they may not realise that interacting with people is only part of what’s involved in operating a café. You also need to be able to do things such as market your business, manage staff, negotiate with suppliers, balance the books and solve a never-ending stream of issues.”
2. Have I done my due diligence?
If one thing surprises King more than would-be business owners romanticised visions of business ownership, it’s the lack of due diligence they undertake before making one of the most consequential decisions of their life.
“In most cases, the worst that could happen if you buy the wrong house is that you may have to sell it at a small loss,” King observes. “Yet people will spend months or even years going to inspections and agonise for endless hours about what home is right for them.”
In contrast, King has seen people buy a business after spending a few weeks of looking and after reviewing a handful of tax statements.
“Buy the wrong house and you might end up out of pocket by tens of thousands of dollars. Buy the wrong business and there’s a good chance you might end up out of pocket by hundreds of thousands of dollars and possibly even go bankrupt,” she warns.
King points out that it’s a buyers’ market and that aspiring business owners should take all the time they need to carry out extensive research. She also advises buyers to treat sellers’ claims with caution and to not overestimate their entrepreneurial abilities.
“If a business is making money hand over fist, you have to wonder why the person who currently owns it would want to sell it,” King says. “And if a business hasn’t been doing well, you shouldn’t assume you have the skill set required to turn it around.”
King recommends doing everything possible to gain a deep understanding of both the current performance of a business and its future potential. “I know someone who only agreed to a business purchase after spending six months working in it,” King says. “You don’t need to go to that extreme. But you should err on the side of too much scrutiny rather than too little.”
3. Am I prepared to take responsibility for everything?
The flip side to the autonomy business ownership offers is having to take ultimate responsibility for everything. “Those without much business experience sometimes believe they’ll be able to delegate or outsource tasks that they don’t have the expertise to handle, or that they don’t want to do,” King says. “For instance, some people think they can rely on a business broker to find a solid business for them. That’s not how it works. Brokers earn their commission by helping sellers offload businesses. It’s up to buyers to make sure they are getting a good deal.”
Whether it’s buying, growing or selling an existing business, owners need to accept that the buck will always stop with them. “People sometimes think they’ll be able to hire someone to manage the business they’ve bought,” King says. “And that the manager will then uncomplainingly work long hours and make all the difficult decisions. But, even when hiring a manager is economically feasible, the business owner still needs to stay on top of everything, including managing the manager they’ve hired.”
King isn’t opposed to business ownership; she just worries about people endangering their financial future without knowing all the facts. “We all like to imagine the grass is greener on the other side of the fence,” she says. “That’s why so many business owners may fantasise about selling up and getting a job offering a steady income, reasonable hours, low stress and paid holiday leave.”
King’s final piece of advice for aspiring business owners is to consult with a financial adviser. “Professionals such as solicitors, accountants and business brokers can provide a lot of assistance, but they can’t provide longer-term financial advice,” she says. “Most people buy a business, at least in part, because they want to secure their financial future. So, it makes sense to talk with an expert about how buying a business fits in with your financial and lifestyle goals.”
An ANZ Financial Adviser will be happy to discuss your business plans and financial goals. Find out more and book an appointment.