Evaluating A Business

From Booklet: Buying a Business
By: Julia Hartman B.Bus CPA – Tax Accountant
Last Updated: 2005, 15th March

     Eighty percent of businesses fail within the first 5 years. Of course the first year is the most difficult but if you have enough cash you may be able to get past your mistakes. This is not necessarily a good thing. In my experience it is quite often better for a business to have minimal excess funds available to it. Spare cash can quite often only delay the inevitable. Is the inevitable failure? No! The inevitable is push coming to shove and the business owner deciding to toughen up.
     Usually this means getting serious about making money. Particularly, in the service industry people tend to start out trying to help everyone until they realise that at some time during the working day they must make enough to pay the rent. The tyre kickers have to go and you are entitled to remuneration for your time. My favourite way of explaining this is to ask clients how benevolent they would feel towards someone, who was not destitute, yet walked into their home and stole the food off the table, from their children. This puts them in the right state of mind for me to explain that it is their right to choose to spend their time either providing for their family or spending time with their family. Any customer who prevents them from doing this is simply stealing from their children.
     This is not over dramatic. Eighty percent will fail! And it will be their choice to fail, either from lack of planning or lack of self discipline. As for the planning we have a new, scaled down, Buying a Business Booklet available on our website. We also have a disk available (just ring the office) that has a couple of Excel spread sheets on it from which you can build a fantastic analysis tool. Some of the cells are interactive so you can see what effect changes in some of your assumptions can make to your bottom line. Find out what factors have the strongest effect on your bottom line, find your breakeven point and worse case scenario. These spreadsheets are just a template for you to build one for your particular circumstances. Please ask us if you need help.
     You should also read your Buying a Business Booklet before going ahead.