Buying a business is often more beneficial than starting one from scratch. As long as the buying process is handled correctly that is.
There are several stages to buying a business, and each stage is important. So let's have a look at these stages:
Determine the sellers motivation for selling the business.
This should be the first question. Just because a seller tells you a reason they are selling the business, doesn't mean you should believe them. A bit of investigation at this stage can save you a lot of pain and grief at a later stage. Often, analysing the financials will highlight the reason if there are trading problems. Most sellers are genuine forthright people, but a bit of checking never did any harm.
Determine what you are buying.
It is very rare in a small to medium business sale, that the buyer purchases the trading entity of the seller. So, instead of buying the company, you are buying the assets, both tangible and intangible of the company. You are not taking over any responsibility for any liabilities that may be outstanding or may eventuate at a later date.
Analyse the financials.
Or get someone who understands the financials to analyse them. If you are going into business, you should have the necessary training to understand financial accounts. However, not all business buyers have these attributes. The financials are crucial in conducting proper due diligence. If a business has been operating five years, then there is no reason why five years full financials aren't available. Nothing rings alarm bells like a business owner not being able to supply financials. Just remember, if you are paying a ratio of 2.5 times net profit for a business, and the profit is overstated by $40,000, you will be paying $100,000 too much for a business.
Research the Industry.
This will give you a much wider knowledge of the business. When investigating the industry section, instead of looking at your business as a self-contained system, you’ll explore the whole industry in which you operate. You'll discover:
1. What is your total industry- wide sales volume? In dollars?
2. What are the trends in sales volumes within your industry
3. Who are the major players and your key competitors? What are they like
4. What are the barriers to entry
5.What technological trends affect your industry
6.What are the main modes of marketing
7.How does government regulation affect the industry
8 Ways are changing consumer tastes affecting your industry
9.Identify recent demographic trends affecting the industry
10.How sensitive is the industry to seasons and economic cycles?
Prepare an offer document
Once you decide to purchase the business the next step is to make an offer to the seller.
There is no standard documentation when buying a business. If you are not using a business broker you are likely to need a lawyer to draw up a legally binding offer and acceptance.
For your own protection make sure all promises and undertakings given by the seller are confirmed in writing. Appropriate conditions should be included in the offer document. This will allow you to withdraw your offer, without penalty, if the seller does not meet these conditions.
Use the correct business structure.
It is very important that the offer document has the correct buying entity. Whether you should be trading as a sole trader, through a company or trust structure or as a partnership depends on a variety of circumstances, such as size of the business, growth and staff to have a share in the business in the future. You should ensure you seek professional advice on what business structure is right for you i.e. which ones will accommodate your goals and future plans as well as being tax effective and flexible.
Have the business independently valued
An independent valuation will confirm that you are paying a fair price. A business valuer will have up to date information regarding the value of businesses and is adept at spotting any unusual practices in the financials. They have no present or prospective future interest in the assets, properties, or business interests that are the subject of the business valuation. Furthermore, the consideration received for making the valuation is in no way contingent upon the value reported or upon any predetermined value. A valuer is completely unbiased.
A couple of thousand dollars spent on a valuation report from a qualified and experienced valuer may well save you tens or even hundreds of thousands of dollars later.
Lee Goldstein is the principle of Business Reports & Values. He has been valuing businesses since 1985 and has conducted well over 400 business valuations for various reasons. The majority of valuations prepared by Lee have been for Judicial purposes. Lee has been the Triennial Certificate holder and Licensee of a Business Broking Company since 1992
Ready to find out more?
Contact Lee today!