Is buying a business worth it?

Sometimes. Buying an established business is worth it when three things are true: the earnings are real, the price is built on numbers that have been tested, and the deal is structured so a surprise does not sink you. When any of those three is missing, you are not buying a business. You are buying the vendor's spreadsheet at a multiple. This article is about how to tell the difference before you sign.

What you are actually buying

An established business hands you things a startup cannot: revenue from the first day, trained staff, working systems, supplier terms and customers who already know where the door is. You are paying a premium for the risk someone else already survived. Whether the premium is fair depends entirely on whether the earnings underneath it are real.

The case for buying

• Cashflow starts before your first loan repayment does.
• A trading history exists, which means a lender can finance it. Banks fund evidence, not projections.
• Staff, systems and supplier relationships come with the keys. Recruiting and building those from zero is slower and more expensive than most founders expect.
• Demand is proven. The most expensive question in business, will anyone buy this, is already answered.
• You can test everything before you commit. The records exist. Whether anyone tests them is a choice.

The case against

Every argument against buying is really the same argument: the price is built on the vendor's version of the earnings. Small businesses are priced on adjusted profit, which is the accounting profit plus a schedule of add-backs the vendor says a new owner will not incur. Some add-backs are real. Many are not. At a three-times multiple, every dollar of overstated earnings costs you three dollars of price.

• The owner may be the business. If customers, suppliers or the trade licence walk out the door with the vendor, part of what you paid for leaves too.
• The vendor's wage is often missing from the accounts, or added back in full when replacing what they actually did costs $85,000 a year.
• Deferred maintenance and aging equipment can hide a capital bill that lands in your first year.
• The lease can quietly reprice the deal. Related-party rent below market in the accounts becomes market rent, or above, the day you take over.
• Revenue concentration: two customers making up half the sales is a different business from fifty customers at one percent each, at the same headline profit.

The all-in cost, illustrated

The purchase price is not the cost of the deal. Here is an illustrative budget for a $900,000 acquisition of an owner-managed business, funded with a commercial loan.

Notice the proportions. On a $900,000 deal, testing whether the earnings are real costs about half of one percent of the price. The item it protects is the other ninety-nine and a half.

So when is it worth it?

• The earnings survive testing. Revenue reconciles to BAS lodgements and bank deposits, the add-backs are evidenced, and the owner's replacement cost is priced in.
• The price is a sane multiple of the tested number, not the advertised one.
• The business runs without the vendor, or the transition is contractually locked in.
• The deal structure protects you: contract conditions tied to what due diligence found, and a completion adjustment for working capital.
• If you are borrowing, the debt still services when the numbers are stressed. A deal that only works at the term-sheet rate is not a deal.

How to answer the question for a specific business

In general, buying a business is neither smart nor foolish. For the specific business in front of you, the question has a factual answer, and it is knowable before you sign. Testing the numbers is a specialist job and we no longer do it ourselves, so what it costs is theirs to quote. The introduction is free. If the analysis says the deal is good, you proceed with evidence. If it says walk away, it will be the cheapest bad news you ever bought.

We get paid the same whether the analysis says proceed or walk away. That is deliberate. You are paying for the answer, not for a particular answer.