The Business of Business – The Books
When considering buying a business this should be the first thing you really take a good look at. The books of the business can tell you a great deal about where the stress points of the business are, where growth areas may be, where you can cut costs and where you can make money.
However all of this information is not as it seems at first overview. Take for instance cost of goods. At first glance we all think we can save money here. We think ‘well I’ll just get another supplier or buy it cheaper.’This is a perilous thought and one that comes with not quite understanding the entire business at this point. Even if you’ve been in the sector for a while and have good relationships with vendors, there is a reason for the cost of goods for the business you are looking at, and it it not necessarily poor management.
What if there aren’t any books to look at?
In my experience this is a big red flag, BUT not necessarily a death knell for the entire deal. A business without books definitely shows poor management but it can also show poor technical skills which does not necessarily translate to poor business skills.
There are many ways to analyse a business books without an entire profit and loss, especially if it’s a small business or cafe. Firstly, ask to see the cash register receipts/reports. Now depending on the system this might be a bit tricky but again, in my experience some type of report will be available. Also you can get the read out from the EFTPOS end of day reports to see exactly what is coming in. So let’s say you’ve seen payments coming in for around $7,000 a week. This might seem a great cashflow. But it doesn’t tell the whole story.
Creditors and vendors invoices need to be seen. Even if these have been recorded in accounting software, you should sight the invoices themselves and also check to see whether they were actually paid. For example if a supplier is left in the lurch by the current owner and has outstanding invoices, they will be very reluctant to work with you once you take over. They may even ask that you settle the previous debt before they supply. It happened to me but I did not settle the debt. Usually there are competitors for all products, especially in the food industry, but I have also noticed that the current suppliers are moving toward world domination and it may be more difficult to find a competitor that isn’t in fact owned by the same company.
Wages are the beast of burden of all business and food business get slaughtered on this expense. Even if you have chosen the ‘cheapest’ award to employ staff, it’s still going to cost you the bulk of your weekly earnings. It’s important to factor in ALL the oncosts into wages and not just the hourly rates of staff on duty. There will be sick days – you will have to pay the staff member and the replacement staff member. There is 9% superannuation. This is where a LOT of small businesses get themselves into trouble. Firstly they don’t factor this in at all as they believe that most of their staff members will not qualify for superannuation guarantee scheme (in Australia) but that is a false assumption. The annual earnings creep up on you and before you know it, you will have to make 9% contributions to a super fund.
Another trap is the group tax. It’s easy to just pay out the net wages each week, but you need to also put away the group tax to be paid. Check the books over to see that this has been done and/or that there is nothing owing to the tax office in this regard. Check the annual wage summary to see what superannuation contributions you may potentially need to consider for the business.
If there is anything substantial owing to the tax office, especially in terms of GST and group tax, this is a HUGE red flag as to the viability of the business. These costs should be able to be covered (and paid) by the business and if there is a significant debt, the business is not viable. This can be particularly true for Franchise businesses so make sure you check this out thoroughly.
Rent is the next killer. I will write in greater detail about the commercial lease, but for this part of the exercise you need to include weekly rent (adding GST) and then outgoings and how they are expected to be paid. It’s not enough to be told that the outgoings are about $300 a week. Find out how these are charged, are there any outstanding amounts that you are liable for, and what happens if you are late with payment. For example I received a bill for $1200.00 for 4 weeks electricity and gas supply and it was due 7 days or the supplies would be cut off.
Find out of the phone system is included. Some office buildings will do this and either charge a flat rat or charge for calls out plus hire fee. This can be tricky as they may also preclude you from sourcing your own phone line with an independent provider such as Telstra. You may be locked into the provider of the building so make sure you clarify this going in.
So there’s a lot to consider and a lot of detail to go through. If the records themselves aren’t available, ask for copies – of everything – and do your own spreadsheet and work out how the business stands. Don’t think though, that you can turn it around, unless the operator has had the business for less than 12 months. If there are problems that extend beyond 12 months they are inherent to the business itself and the purchase should be avoided. Contrary to what you feel, and think there are lots of businesses out there. Be patient and wait for the right one.
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