Introduction
As a business broker, I regularly speak with people eager to buy a business—often with limited budgets and big dreams. But what do you actually get when you buy a business at the lower end of the price scale? Let’s unpack what’s really on offer, the risks, the hidden opportunities, and how to make the most of a modest investment.
The Reality of Buying Low-Cost Businesses
Why Are Some Businesses Priced so Low?
When valuing a business, brokers typically use a multiple of the income generated in profit and wages to a working owner, adjusting the multiple based on the business’s attractiveness and potential. However, businesses listed at bargain prices usually come with extra baggage, things such as:
- Incomplete or inaccurate financials
- Outdated fitouts or equipment
- Owners who are tired, sick, or disengaged
- Leases nearing expiry with no intention to renew
Often, owners would rather sell quickly at a lower price than fix these issues themselves. Unfortunately for many buyers, this is the budget you are looking at, and I often watch hope die in people’s eyes when I explain that the $80k listing will not show them a $100k net profit…
Are Low-Cost Businesses Bad Opportunities?
Not necessarily. For inexperienced buyers, these businesses can be daunting and risky—turning around a struggling business is a challenge best suited to those with some experience or a clear turnaround plan. However, for the right buyer, these can be diamonds in the rough, offering significant upside if you’re willing to put in the work.
What Are You Actually Buying?
- An Underperforming Asset: Low-cost businesses are often underperforming and will require investment—of both time and money—to fix. But remember, businesses are vehicles and with good strategic management they can turn around, often quite quickly.
- Lower than a new build: If you are buying at the lower end of the market then you need to recognize that you are getting a bargain and there will be issues to resolve. You should expect to invest hard work in adding value to the asset.
- Existing Customer Base and Brand: Even struggling businesses have some goodwill, customer relationships, and operational infrastructure, which can be valuable starting points.
- Immediate Cash Flow: Unlike a startup, an existing business usually has some cash flow, even if it’s not at its full potential.
The Upside: Turning a Low-Cost Business Around
While the risks are real, there are also significant opportunities:
- Add Value Quickly: Smart, strategic buyers can often turn fortunes around by identifying and addressing key weaknesses—sometimes with surprising speed.
- Lower Entry Cost: Compared to starting from scratch (which can cost $250,000–$300,000 for a café, for example), buying an underperforming business can be a more affordable way into the market.
- Build Wealth: Businesses are vehicles for wealth creation, and buying low gives you more room to grow.
Essential Steps for Buyers
- Do Your Due Diligence Review financial records, legal documents, contracts, and customer data thoroughly. Check for outstanding debts, compliance issues, and the true state of assets and equipment. The way we structure most business sales is an asset purchase. Your company will purchase the physical and intangible assets of the business and you are not liable for the debt that the existing company has. During the sale process a PPSR search will turn up any encumbrances which will be removed so you are getting the business debt free.
- Write a Strategic Business Plan A detailed, well-researched business plan is your best tool. It forces you to clarify your ambitions, identify risks, and map out exactly how you’ll add value and turn the business around. Often the landlord will be aware that the current operator is underperforming and will be looking for an incoming owner who can demonstrate a plan to turn the business around.
- Budget for the Unexpected Plan your budget carefully and include a buffer for unexpected expenses—there will always be surprises.
- Seek Professional Advice Work with accountants, lawyers, and business advisors to ensure you’re not missing anything critical. BUT and this is a crucial BUT, it is your decision to make and as long as the risks are calculated and you are aware of what you are buying you need to stay in control of your decision. Lawyers and accountants perform an important role but they should be instructed and not relied on too heavily.
- Be Realistic About Your Skills If you’re new to business ownership, consider whether you have the skills and resilience to tackle a turnaround. Sometimes, paying a bit more for a healthier business is the smarter move.
Final Thoughts
Buying a low-cost business can be a fantastic opportunity for the right buyer, but it’s not for the faint-hearted. Go in with your eyes open, do your homework, and have a clear, actionable plan. With the right approach, some of the best strategic opportunities really do lie at the value end of the market.
If you have any questions or would like to discuss buying or selling a hospitality business please feel free to get in touch with me directly at r.illsley@gsebrokers.com.au
