Take into account the business’s future
maintainable earnings, lease terms, term of
the franchise agreement, condition of plant/
equipment, condition of fixtures/fittings and
future refurbishment requirements (cost,
timing and impact to the business). Also
consider the life cycle of the product or service
to be sold.
The amount paid for the business together
with ingoing costs, working capital etc. will
impact funding costs and loan repayments.
Your accountant and lawyer will be able to
assist.
don’t spend the depreciation
Most business returns are quoted on a
earnings before interest, tax, depreciation and
amortisation basis (EBITDA). Take time to
understand what this means. Depreciation is a
non-cash expense charged against the business
profit. It is used to reflect the ongoing use and
declining value of plant, equipment, fixtures
and fittings etc. In time these items will need
to be replaced.
Most franchisors have specified refurbishment
and replacement guidelines. To fund these
replacements, business owners should apply“Before buying a business it’s critical to
understand what the business is really
worth. Purchasers should seek experienced
independent advice to support their
assessment.”steve seddon | senior Business development manager | westpacthe depreciation values to either additional
debt repayments (to provide a capacity to
re-borrow to replace the assets) or set up a
separate bank account (known as a sinking
fund) to set aside funds to meet these costs.
All too often business owners see the
depreciation as a never ending cash resource
which is often directed towards non business
related expenditure. Examples include using
the depreciation value to repay a loan for
an upgraded house or luxury car, neither of
which add anything to the productive capacity
of the business.consider the future
Business owners need to keep a close eye on
the business environment on both a local and
national basis. Interest rates may increase,
unemployment levels may change, and costs
will increase. Understanding how these will
impact their business will assist owners plan
for the future.
Reviewing budgets and undertaking some
sensitivity analysis will also assist. This means
looking at cash flow budgets and plugging in
different assumptions to reflect what could
happen in the future. As an example, what
would the impact be if interest rates increased
by 2 per cent, or what would happen if a
supplier closed and goods had to be sourced
from a more expensive provider?understand the financial
statements
Business owners must take time to have
a detailed look at their financial reports.
Learning how to analyse profit and loss
statements and balance sheets is time well
spent. Undertaking regular analysis with the
assistance of business advisors should be a
normal part of the business planning process.
Understanding key success factors and how
to calculate a break-even point are valuable
business tools. Without this business owners
are flying blind. The local TAFE or websites
like Westpac’s Davidson Institute (www.
davidsoninstitute.edu.au) are ideal starting
points.