Do I need a broker or advisor to buy a business?

Posted by James Price | JPAbusiness on 03-Jul-2019 02:00:00

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I strongly advise anyone looking to make a substantial investment in a business to consider independent external advice, whether that comes from a business broker, business advisor or accountant, or another specialist.

That advice might be in the form of:

  • providing a sounding board as you determine exactly what your own aims are in buying a business
  • objective advice on whether the business or businesses you’re considering actually meet those objectives
  • providing an independent view of the value of the business you’re looking to buy
  • assisting you in the purchase negotiation process
  • conducting the due diligence process.

However, this is where my answer gets a little tricky, because not all brokers have the same level of experience, and some offer a form of service I don’t endorse.

Experience is cheaper in the long run

When choosing a business broker, it’s important to do your own ‘due diligence’ to determine their level of experience and expertise.

A good broker or advisor will understand the market, industry and type of business you are looking at, without having to use your money to undertake ‘research projects’ of their own.

By research project, I mean spending time – and, therefore, your money – investigating aspects of the business that are not critical to its value proposition, but which they need to research because they aren’t familiar with the type of business or industry you are considering.

Below is a very simplified example of how experience can pay off in a due diligence:

You are purchasing a high-asset manufacturing business. The business is heavily automated with few staff members.

You have engaged a broker/advisor to conduct the due diligence at a cost of $10,000.

Where would you want your broker to prioritise that investment to confirm that everything appears to be in order?

An experienced broker may say something like:

“Okay, this is a manufacturing business that takes raw material and makes something, so the ‘making’ part of the business is where the value is created and that is the key element to test.

“The business has few staff, so rather than spending too much time digging down into the management ranks, let’s focus on plant and equipment:

What’s the capacity of the P&E?

How is it being utilised, and what is the difference between utilisation and capacity?

What’s the maintenance and certification history on the P&E?

Does the P&E require any expenditure over the next one to five years that might need to be factored into your purchase price, in terms of major maintenance or upgrades?”

The advisor will also look at risks around customers and suppliers.

Let’s say the business has $50 million in annual revenue, with 50 customers who all average $1 million revenue per year.

The advisor might say:

“There doesn’t appear to be a concentration risk here, so let’s not do a whole research project on customer concentration. Let’s move on to where we can add value.”

When it comes to suppliers, however, the advisor sees there are only two: one is an overseas company and one is an Australian company. There is no alternative ‘like’ supplier anywhere in Australia.

Having looked at suppliers from this higher level, the advisor says:

“There seems to be a supply risk here. We need to drill down further and test the supplier relationships.”

Good advisors don't just identify problems – they offer solutions

An experienced advisor will be able to direct your investment into the right areas to give you value in terms of testing those risks and understanding their potential impacts.

And if they’re very experienced – and this is where you need to do your due diligence when choosing them – they will also have solutions and recommendations on how to deal with these issues in the deal terms and in the contractual arrangements to purchase the business.

It’s one thing to identify a risk, but a good advisor will also provide advice on whether it can be mitigated and, if so, how.

Beware the 'success fee'

At JPAbusiness our services to business buyers are provided on a retainer, or consulting fee, basis.

Some business brokers and advisors offer business purchase services on a ‘success fee’ basis: you buy the business and you pay the broker a success fee for getting the deal over the line.

We don’t offer that fee structure, we never have and – whilst ever I am leading the business – we never will. The reason is that I believe it puts the broker in a very conflicted position.

Effectively, if the client doesn’t buy the business, the broker doesn’t get paid. Therefore, their advice about whether or not their client should buy the business in question can hardly be independent.

If I was looking to purchase a business, I would be very wary about engaging a broker on a success fee basis. You need to be sure you’re going to get the best, independent advice.

 

Buying a Business eBook | JPAbusiness

 

If you would like support or advice about any aspect of buying a business, contact the team at JPAbusiness on 02 6360 0360 (Orange) or 02 9893 1803 (Parramatta) for a confidential, obligation-free discussion.

 

James Price 2018 smallJames Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.

 

Topics: Buying a business, business advice, Business advisor, business broker, JPAbusiness, business basics, Parramatta, Orange NSW

 
Disclaimer: The information contained in this blog is general in nature and should not be taken as personal, professional advice. Readers should make their own inquiries and obtain independent, professional advice before making any decisions, taking any action or relying on any information in this blog. 
 
 

 

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