1. Should you buy a business or start one from scratch?
Buying an existing business can certainly have its advantages.
In an ideal world you will take over a loyal customer base, reliable suppliers, experienced staff, sound processes and procedures and instant positive cash-flow. Your due diligence will evaluate each of these areas to determine if the target business is as good as it appears.
The downside of course is that you will have to pay for all of this. What capital do you have? You will need to come up with the purchase price, acquisition costs and initial working capital. If you need finance, talk a finance broker or your bank early on, to understand what finance you can obtain.
2. Start the search – does your ideal business exist?
What are the personal objectives underlying this decision to buy a business? If you want to spend more time with your family than your previous job allowed, will this business deliver that for you?
Start with the end in mind. If you want to improve the business and sell it in five years, will there be willing purchasers lining up?
Look at what is on offer in newspapers and industry publications. Talk to people in businesses in your target location area and/or industry.
Consider your own skills and experiences and the businesses that will best match them. Some of our most successful clients set themselves up by working in their chosen industry, learning the ropes and identifying where improvements can be made. They then went out on their own, either starting up from scratch or buying out their boss. It would be hard to do a more thorough due diligence than working in your target business for ten years!
Particularly if you are short on time and feel that you need some experience, you should consider using a business broker. They can help you to identify your interests, pre-screen available businesses and provide guidance on regulatory issues. Even with a cost of 5-10% of the purchase price, a good broker can truly pay for themselves in these areas and at the negotiating table.
3. Analyse the business
The due diligence process will often require assistance from your accountant / tax adviser and lawyer.
On the financial side you will need to evaluate the historic financial performance and the return on investment (ROI) so that you can determine the value of the business.
Put the financials into context:
- How do the historical results support your future projections?
- What trends can you identify from the financials?
- Beware of recent changes in accounting policies which result in a higher profit.
- Beware of heavy reliance on key staff or on one or two major customers or suppliers.
- What stage of its commercial life is the business at?
- What are the seller’s motivations to sell? Do they believe the business has peaked and will decline?
The risk of investing in a small business is higher than say in a portfolio of blue chip shares. The ROI should reflect that higher risk, sitting somewhere between 15% and 40%. You also need to consider the opportunity cost of the investment – what else could you be doing with your capital?
From a legal and tax perspective you need to understand what you are buying and the implications thereof:
- Are the shares in a company for sale or the business assets?
- Are there any restrictions or charges on those assets?
- What are the tax implications of the proposed business structure on acquisition, while operating the business and on exit?
- What licences and permits will you need to continue trading?
- If you wish to take over the existing contracts with customers, suppliers, employees, the lease on the premises and the business name, will it be easy to obtain the necessary approvals for these transfers?
4. Negotiating and making the offer
Having the business sale agreement drafted by a neutral lawyer can often speed up negotiations, as the starting point will be fairer to both sides, rather than having your own lawyer or that for the buyer draft it. As time is money, this can significantly reduce legal costs.
For added security, you might negotiate the inclusion in the contract of:
- A performance clause, stipulating minimum revenue or profits for a period of time, whereby part of the purchase price is held in escrow until this requirement is met,
- Warranties for any representations made by the seller as to the underlying business performance drivers,
- Restraint of trade provisions, and
- Warranties for the transfer of all licences, permits, registrations and certificates.
You might consider a trial period for you to work in the business before signing a binding contract, so that you can verify seller’s claims.
You will need to fund working capital and acquisition costs, so ensure that you do not commit all the cash you have to the purchase price. If you are financing part of the purchase, ensure the repayment terms are manageable. Getting the business going will entail enough headaches without the added stress of meeting challenging loan repayments.
5. Put your own stamp on the business
Once the deal is done you will be itching to implement all those potential improvements you identified throughout your due diligence.
- Slow down and choose wisely.
- Do the small inexpensive things first.
- Get a better feel for the business before committing further significant capital.
- Invest time in a good business and marketing plan, set objectives and hold yourself to account with regular reviews
- Above all – work hard and work smart.