August 17, 2017

4 Important Tips when Buying a Business

So, you’ve made the decision to be your own boss and buy the dream business you’ve always wanted.

We know that this is an exciting time for you and your family but wait……………. let’s just consider 4 points before you sign that contract and commit to buying your dream business.

Put your business hat on and take off the emotional one that has been tugging at your heart strings.

Let’s consider the 4 points in sequence – calmly and rationally.

  • Before you sign the contract you should make sure that you get the best accounting and legal advice that you can.

Sound advice from your professional advisors is a must. If you do that, then you are ahead of most other business buyers who tend not to see anyone and rely purely on the assistance of the selling agent.

Always take the information your accountant needs, trading figures, tax returns and other financials which hopefully the selling agent has given to you.

Advice from your accountant on issues such as the entity in which to purchase the business [ie. a company, a trust or perhaps a partnership] will be vitally important. Then there are issues such as tax, GST and employee arrangements, just to name a few.

Perhaps most important question of all for your accountant is “IF YOU WERE ME, WHAT WOULD YOU PAY FOR THE BUSINESS?”. Your accountant should be able to give you guidance on an actual sale price.  Remember, if you pay too much for the business, then you are starting behind the 8 ball first off.

Your solicitor can give you advice on any existing contracts which relate to the business, a lease of any business premises, employee issues, risks associated with the business and strategies for limiting risk.

Appreciating the matters which will confront you in buying and running the business will be critical to your success.

  • Always make sure you know what you are buying.

The inventory for your business should clearly set out what is owned outright and what equipment is subject to lease or hire purchase. The inventory should be as specific as possible – equipment should be clearly identified and include brand type and serial numbers, if possible. It wouldn’t hurt to take photos of the major items of equipment just to avoid any disputes down the track.

If there are items of equipment which require a roadworthiness certificate or other certifications as to the suitability or state of safety, then you should make sure that these issues are noted in the contract.

If the business comes with contracts which underpin the viability of the business you are intending to buy, then ask questions like – what are the contracts for, what obligations will you have as the buyer of the business and particularly what is the length of those contracts, and, most importantly of all, can the benefit of the contracts be transferred to you.

Contracts like this often refer to management arrangements, contract cleaners, lawn mowing franchises and so on.

Don’t be afraid to ask questions of the selling agent or the seller of the business.  If your questions are not answered or are answered reluctantly or in an evasive manner then these should be warning signs for you.  REMEMBER – YOU ARE SPENDING YOUR HARD EARNED MONEY SO SPEND IT WISELY.

  • Don’t fall for the blue sky syndrome. This is where the selling agent tells you that the business has great potential.

Why do you need to avoid this? Well because if I was intending to buy the business, then my response would be ‘If the business has great potential then why hasn’t the current owner realised the potential?’

So when the selling agent responds by offering an explanation as to why, don’t buy the explanation. Simply respond by saying ‘Well that may be fine but I am only willing to pay for the business in its current state – if it has great potential, then I AM THE ONE who will have to realise that potential’.

  • Avoid the fresh broom approach. After almost 40 years as a solicitor, this is the most common problem I have seen with buyers of businesses.

In almost every case you will be buying a business because you see value in it, it has solid cash flow, turnover and customers which are the foundation of a good business.

Everyone has ideas on how to improve things – it would all be a pretty dull world if we didn’t, but avoid the temptation to change things immediately.  Program your changes to take place gradually. Always keep in mind that most of us are generally resistant to massive change – customers are no different and they are, after all, the life blood of the business you have just bought.

Putting your own stamp on your business is important, but it is more important that change be managed in a constructive and deliberate way.