Buying a business

Buy an Existing Business or Start one up from scratch?

For most people, buying an existing business is a better option than starting one from scratch. This is simply because someone else has done much of the legwork for you, such as establishing a customer base, hiring employees and negotiating a lease.

However ,even though you are looking at an established business, you still need to do some thorough research to make sure that what you see is what you’ll get and that you do not end up getting any nasty surprises when you take over the business.

What Type of Business Should You Buy?

Look for a business that has some connection to either the types of work you’ve done in the past, or the skills you’ve developed.
It’s often a mistake to buy a business you know little about and do not have the skills to run, no matter how good it looks.
Try to choose a business that you have a strong interest in or passion for. It’s much easier to succeed in a business when you enjoy the work you’re doing.

Establish how much you wish to Invest

The level of investment available will obviously depend on a buyers own cash resources and assets available to secure borrowings against. Experienced Business Brokers (or buyer’s bankers) can assist in establishing what a reasonable level of investment is, given a buyers own resources and the level of annual profits a buyer wishes to achieve from their business purchase.

Finding a Business to Buy

These days one may look online when looking for a suitable business but another alternative is using a Business Broker. Business Brokers can advise on a number of matters including market prices of businesses, what to expect in the process of buying a business & preparing a sale and purchase agreement.

Research the Business’s History, Profitability & Finances-Carry out a Thorough Due Diligence

Before you seriously consider buying a particular business, find out as much as you can about it and its competitors.
Thoroughly review copies of the business’s financial records, including cash flow statements, balance sheets (particularly, debtors & creditors to determine how much working capital is needed on top of the purchase price), details of employees (employee agreements, length of service etc) major customer & supplier contracts, leases, as well as any past lawsuits and other relevant information.

This review (called “due diligence”) will not only help you understand how the company works, but will alert you to potential problems.
For instance, if a major supplier’s contract or a lease prohibits you from taking it over without the landlord or suppliers permission, you will want to make getting that consent a condition to be satisfied before going unconditional. There are many traps for the uninitiated buyers to watch out for and this is where good advice is vital & invaluable!

Don’t be shy about asking for information about the business, and if the seller refuses to supply it, or if you find any misinformation, this should put you “on enquiry” and might be a sign that you should look elsewhere for a suitable business.

There are many questions you’ll want answered before committing to a purchase and everyone should seek professional help with due diligence.

Good due diligence assistance is really very cheap insurance-just like when buying a house, it is wise to obtain a LIM report (land information memorandum) and getting an AA (Automobile Association) check when buying a vehicle.
There many things to carefully consider when buying a business, some of which include (but are not limited to):

  • Why is the owner selling
  • Is the owner trustworthy
  • Is the asking price realistic
  • If there are major clients ,will they all remain after settlement occurs
  • Will all key staff remain after settlement
  • How easy is it to replace key staff
  • Is the market about to change with a new competitor entering
  • Is the product or service near the end of its life cycle
  • Do any fixed assets need replacing
  • Are there any new threats expected from existing competitors
  • Are there any expected changes in consumer trends/the economy/government regulations etc

The Sale Process

Stage One

After locating a suitable business, reviewing the information memorandum on the business, meeting with the owner to get a preliminary understanding about a business, the Purchaser & Vendor will have to agree on a fair purchase price for the assets being purchased.

In 99.99% of SME (small to medium size enterprise) business sales, buyers acquire only the stock, fixed assets and goodwill. It is possible that the debtors and creditors (i.e. the working capital) might be acquired but this is a very rare occurrence.

The main reason why only these assets are acquired is that if the shares in a company (which owned the business assets) were acquired, the buyer would be liable for many contingent liabilities such as any outstanding taxes, or sometimes contamination issues relating to the premises. Whilst warranties could be obtained from vendors to mitigate these contingent liabilities, it is much better not to have to enforce these in court which is expensive and the vendor might not have the funds should they be subsequently called upon to honour a warranty.

Reaching agreement on the price and all of the terms and conditions of sale requires skilful negotiation and it is important for the buyer to “keep onside” with the vendor as a buyer needs the vendor to be supportive in the hand over period!

Experienced Business Brokers can create a written sale and purchase agreement which a buyer may use as a template to take to their own lawyer to amend where necessary to ensure that the Buyers interests are protected.

Stage Two

Once the sale and purchase agreement has been signed and a deposit paid to the stakeholder, buyers commence their due diligence review of the business.

Stage Three

Once a buyer has successfully completed its due diligence review, land lords & all other consents have been obtained, all other conditions of sale have been met & staff offered employment agreements with the new buyer, a sale may be declared unconditional.
All that then remains is for the buyer to pay the Vendor on the agreed settlement date and takeover their new business!

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