Practical Tips To Ensure You Buy The Right Business At A Fair Price

 

1.               Take the time to study the businesses in your market place.  Look at the businesses that you feel will suit your experience, personality and the products or services that interest you.  You need to imagine yourself being happy in that business.

2.               Take the time to meet personally with the business broker that has the business listed.  Ask questions and request more information if required.  Meeting personally will achieve a better understanding of the business than internet or telephone contact.

3.               Look at the business “incognito”.  Remember you have signed a confidentiality agreement so do not discuss “the sale” with owners or staff.  Try to study the business as a customer if you can, or watch the premises from a distance.  Obviously there are some businesses that you cannot just “visit”, like manufacturing or service contractors.

4.               Arrange an official inspection and meeting with the owner via the business broker.  Ideally meet the owner and spouse along with your spouse.  It is important to get a good gut feeling for you and your spouse.  The genuine business Seller will treat their business as their baby, so they need to like you before they will negotiate with you on favourable terms.

5.               Never do any “face to face” price negotiating with the Seller.  Ask as many questions as you can think of about the business, request more information.

6.               Does the business provide the income and is the owner’s workload acceptable to you and your family?

7.               Your business broker should already have qualified you with regard to whether you can afford to buy, but confirm your financial position with him.  If in doubt, speak to your current bank and/or ask for a referral to an experienced business finance broker or alternative bank manager.

8.               Remember that you will have to allow for extra costs in the purchase of a business e.g. working capital, stamp duty, legal and accounting fees, bank charges, business name transfer, etc.

9.               Be prepared to negotiate on price and terms.  If you are certain of being able to pay, a “cash offer” is more attractive than “subject to finance”.  Other terms include settlement date, owners’ tuition period, Seller finance, etc.

10.           Get to know what the Seller intends to do after the sale.  An offer to the Seller as a part time consultant might be very attractive if he has a nagging wife that wants him to stay at home!

11.           If you are concerned that the future performance of the business may not live up to the Seller’s claims, think about a “performance based offer” over 6-12 months.  If it performs up to expectations a further full top up payment is made.  If it does not perform then a lower “top up” or nil “top up” is paid.  Performance contracts are often based on sales or gross profit.  A typical payment structure is 70% payment on settlement plus up to 30% based on performance.

12.           The deposit paid by the Buyer is normally 10% of the purchase price.  This can be split to a nominal payment of $5,000 - $10,000 on signing of contract with the balance payable when contract becomes unconditional and finance has been approved.

13.           Finance should be geared so that the business pays the interest and capital.  Interest is a taxable business expense.  Be aware that banks are currently being very hard on business loans at the moment.  Other finance can be sourced from friends, family and the Seller, if they have faith in you.  Get more than one quote for finance and work one against the other for the best result.

14.           A full “due diligence” on the business will take place once the contract is signed.  “Due diligence” means inspecting and being satisfied with the books and records, lease, franchise agreements, premises, plant, equipment, stock, employees, suppliers, customers, etc.  Buyers should use their professional advisors e.g. solicitor, accountant, independent industry expert during this process.  If the Buyer is not satisfied then the contract can be renegotiated or become void in which case the deposit will be returned.

15.           Once the contract becomes unconditional the Buyer will be able to commence tuition from the Seller.  This tuition period will have been discussed and will be itemised in the contract.  The Buyer needs to learn as much as possible during this time so that there are no problems in running the business from settlement day.  Bank account, Eftpos facilities, suppliers accounts, telephones, insurance, employee contracts and payroll/franchise/distribution agreements, utilities, domain names, internet addresses, business name, vehicle transfers, equipment rental agreements, debtor accounts, business cards, stationery, etc have to be organised or confirmed prior to settlement.

16.           The stock take will usually take place on the day before settlement.  Buyers should inspect the stock during due diligence, to familiarise themselves with it all, and particularly to identify any old or obsolete stock.  The Buyer can refuse to take “unsaleable” stock or can negotiate a fair price for the product.  It is best for both Buyer and Seller to have this sorted well prior to the day before settlement.

17.           Settlement day is the day that the Buyer makes the final payment (less deposit).  The stock at value amount needs to be relayed to the solicitor so that the final payment can be confirmed.  Adjustments will also be accounted for such as prepayments for Yellow Pages.  The Buyer is deemed to have taken over the business as at the commencement of the working day, even though the actual payment for the business will take place towards the end of the day.  Congratulations, you are now the proud new owner of a quality business at a fair price.