Before you buy a business, check what you’re really getting
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Why consider buying an existing business instead of starting from scratch?
Kielda, I'm Nadine Higgins and welcome to the Prosperity Project.
There's something romantic about starting your own business, having your big idea, building your brand, and hopefully watching it grow. However, there is another way to become a business owner that skips that startup phase: buying an existing business that already has customers, revenue, and a proven track record. But if you are going to buy a business, how do you know what it's worth? And how do you differentiate between a great opportunity and someone else trying to sell you their problems. Sam Harrith is known as the comic accountant. He owns his own business, SH Advisory, and crucially he advises others on theirs. Well hi Sam and thanks for coming to talk to us on the Prosperity Project. Yeah,
hi Nadine. Thanks for inviting me. It's a real pleasure to be here and I'm actually pretty excited to be on national television.
Let's call it that. Let's call it that. What is the appeal of buying a business over maybe starting one from scratch?
Okay, that's a really good question. So I think a lot of people that I've encountered in my in my career as an accountant, right, is that they have this idea of wanting to build something that lasts, you know, wanting to invest money into uh an operation that will generate wealth for them in the long term. And I think for a lot of people The easiest way into obtaining a business is to simply buy one that's already working. Okay. So in the business sales power lens, we've got this term called a turnkey business, right? So you just buy the business, you pay the money, and you put your key in, you turn it on, and it starts, and you know, you don't have to worry about anything else. So that's what a lot of people are are looking for.
And if you look through business brokerages, you often find that they are selling a lot of these turnkey businesses, like, oh wow, um turnkey opportunity, three hundred thousand dollars, et cetera, et cetera. Right. And so the idea is that people just want to buy a business that works already without having to put in all the Mahi to grow it up from scratch.
So it already has revenue. You've already got some systems. Yep. Absolutely. Systems.
Yep. Mm-hmm.
The concept's already been proven. Because we get when you've got a big idea, you don't necessarily know if it's gonna work.
Yep, yep, absolutely. And I think that's the appeal of buying into a business, right? You're someone else has done all the hard work, you just give them the money and then you are profiting for the rest of your life. In theory.
So if you are wanting to take what someone else has built up and take it to the next level or whatever it is, how do you work out what an appropriate price to pay for it is?
Well, I gotta be honest with you, Nadine. It's a very specific science, you know, this uh evaluation of business. No, I'm joking, it's it's all completely made up. So the value of a business largely depends on what we in the industry like to call an earnings multiple, right? And so an earnings multiple is usually an X times amount of whatever the annual revenue of said business is. The setting of said multiple is really up to anyone's guess.
Right. So it's just completely arbitrary. I could say my multiple's seven.
Yeah, my multiple is seven. My multiples three. But I mean there there are factors to consider as well. So, um, for example, what is the annual revenue of said business, right? And then what is the expectation that the business will continue earning that revenue for X number of years? So that's typically things like that that determine the earnings multiple. But in reality, What usually happens is that the current owner of the business will say to the broker, I want to sell it for X price, make it happen. Yeah.
And so do they the broker has to reverse engineer it to try and just
pretty much. Pretty much. So that's typically what happens in the industry. Because I've worked with a client who was looking to sell a business before, right? And so there are a few ways to value the business. One is the revenues times earnings multiple.
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Chapters
4 chapters
1
Why consider buying an existing business instead of starting from scratch?
0:00–4:38
2
How do you determine the right price for a turnkey business?
4:38–12:07
3
What are the main methods for valuing a business (earnings multiple vs net asset value)?
12:07–22:26
4
Should you buy a business’s assets or its shares – what are the tax and liability differences?
22:26–34:29