July 26, 2016

The Baker’s Dozen of Buying a Business

You’re in the market for a business. You’ve decided that being your own boss is for you or a new business is just a part of your life plan.

When you spend your money buying that business you want to make sure that you get the best bang for your buck. Money is too hard to get and sometimes even harder to hold onto.

We’ve set out some key indicators you might like to consider when you embark on your search, and once you’ve found that perfect business.

Be thoughtful, be deliberate, but above all be alert to the certainty that you must buy the right business fit for yourself.

1 Find a Business that suits your style and temperament

So you’re in the market to buy a business. Before you embark on your journey take some time out to think about your skills and talents and how to marry those skills and talents with a particular business.

If you are a people person then buy a business that suits your talents. If you are not a people person then fess up to that right away and buy a business that has less customers you have to deal with.

Get the business type wrong at your own peril.

2 Avoid the blue sky issues – be hardnosed

Forget the blue sky issues like, ‘this business has great potential’. Well if it has why hasn’t the current owner realised this potential because he appears to be asking me to pay for something that is not potential and I can’t see that line on the balance sheet.

Be hardnosed – if you pay too much for the business then you might just not ever get that money back.

3 So what are you really buying – ID what you want to buy as opposed to what you might be buying

Determine what you are buying.  Sit down and calmly work out what it is you expect to have once a contract has been completed – what items of machinery, plant and other equipment – is that item of machinery really included in the sale, is there really goodwill at all – go through each constituent part of the business.

Today in a business you will need to make sure that you get email addresses, web pages, domain names and so on because we live in the digital age and that means getting all those bits and pieces that make up the business which you are looking at.

4 Legal input

Your lawyer can work with your accountant on the buying entity and how to limit exposure for the buyer/s. Your lawyer can also advise on the terms of the contract and its formulation. Checking the fine print is always important.

5 The Buyer and the value of a good accountant

Who is going to buy the business – will it be a sole-trader, partnership, company or trust? Your accountant can give you advice on this matter along with your lawyer. Get it right the first time.

Accountants have a variety of ways of determining the value of a business. Ask your accountant what he would pay for the business if it was ‘his money’.

6 Don’t offend the seller – make a sensible offer

The first and most important rule – when making an offer don’t offend the seller. Treating the seller with respect and courtesy will always pay dividends in terms of help and assistance which will most likely be needed in coming to grips with the business if you buy it.

Avoid making silly offers.

7 How you make the offer

If you have an agent – then your agent can make the offer. If you don’t then your accountant or lawyer can.

8 Your financier

Make sure that your financier has all the financial details of the business.

Treat your banker as a guardian of your money. If the bank won’t lend you the money for the business then there probably is a good reason.

Don’t be hasty.

9 Due Diligence

Due diligence enquiries give you the opportunity to thoroughly check out the business, the financial data of the business, the lease and so on.

Always ask for a due diligence condition in the contract. Who knows what tricky little details are in the lease of the business premises.

10 Employees

If the business comes with employees, check out their skills and credentials. Are they really going to add to your business? If not, then have the seller terminate their employment. Key personnel might be critical to the operation of the business but always check out who is key and who is not.

11 Plant and equipment

Always check the equipment. It has to be in good working order and condition at the settlement date. Above all, always make sure that the equipment is identified in the contract. Take photos, check details because if things go wrong then plant and equipment can be costly.

12 Stock

Stock which you buy has to be ‘good and saleable’. If you pay for stock and you can’t sell it then it has no value for you. If the stock has no value or does not fit in with your future plans then let the seller take it – you don’t want it.

13 A happy ending

When the sale is complete don’t be tempted to throw the baby out with the bathwater. Make changes in good time – don’t rush in. It is a common mistake because you want to put your stamp on the business. Remember, you bought the business because you saw its value – the seller must have been doing something right.

An ebook which will deal with the topic in a more comprehensive way is currently being prepared. If you have an interest in this topic – stay tuned.