When buying or selling a business, the bottom line comes out on top

By Murray Silby

Apr 6, 2023

**Sales tip:** Business sales consultant with Kevin Hicks Real Estate in Shepparton Kelvin Maude outside one of the businesses he has for sale, Cold Rock. Mr Maude says there are important rules to follow if you plan to sell, or purchase, a business. Photo by Murray Silby

It is the dream of many: to buy or launch a small business and turn it into a big one.

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Kelvin Maude, of Kevin Hicks Real Estate, helps those people who already have their business and wish to sell it, or those who want to purchase one.

He said there was a range of reasons why business sales were generally more complex than regular property sales, and one of the reasons for that was vendors and buyers agreeing on a value for “goodwill”.

“It’s the first real frontier of trying to get to an acceptable price on a business for sale because the vendor will have an idea what their goodwill is worth, and even sometimes the financials will support a goodwill figure, but will a buyer pay that?” he said.

“Will I take the risk of paying that amount of money over and above the plant and equipment and the location and the lease for the privilege of carrying on that business in that business’s name?”

Mr Maude said leases could be another complicating factor, warning the buyer of a business that leases a property could not assume that lease would automatically come with the sale of the business.

“You can’t just assume that a lease will be transferred to the new business owner,” he said.

“There’s a process in the real estate act about approval of a lease transfer, where the landlord has the right to check on the credentials of the new business owner, if you like, and to approve that transfer of lease.

“So that’s a very critical step. The fundamental step in the sale of a business if there’s a lease involved.”

Mr Maude said when it came to valuing a business, its name, plant and equipment were factors, but profitability and the ability to demonstrate that income were always the main contributing factors.

“It’s really about profit, what falls out the bottom line of the profit and loss statement,” he said.

“That’s really the starting point of the discussion of what the business is worth, over and above what you can touch and feel, so plant and equipment.

“Anyone who’s advising a potential purchaser will want to see evidence of that.”

When it comes to borrowing money to buy a business, Mr Maude said a purchaser could expect to have to fund at least half of the price themselves.

“The rule of thumb is going to be you’ll need 50 per cent of the equity yourself, whether that’s equity in your own real estate or your own assets, that you can then transfer into the business,” he said.

“If you’re looking at a half-a-million-dollar business, you’re probably going to have to have equity of $250,000 before you can even start the conversation, and then there’s no guarantee you’ll get a financial to back you for the other 250.”

Despite the complexities of selling or purchasing a business, Mr Maude said his role could be rewarding when bringing a seller and a purchaser together to the benefit of each.

“It is always nice to see a business that’s been built up and has a good clientele that you can say with the hand on your heart, ‘Look, if you do spend this money on the goodwill, the phone will ring tomorrow and the person on the phone, who’s going to be a valued customer of the business, and you now own that customer’,” he said.