Buying a business can be a confusing and complicated process and for most people a once in a lifetime experience. Spending 15 minuets of your time reading through this section of the site will give you excellent information on how to prepare and what to expect.
Prior to investing your time and money into investigating the business-buying process the following preparation needs to be undertaken:
Make a decision on the type and specific characteristics of the business you would like to purchase. Following are some questions you need to answer:
What industry are you looking to enter into?
What kind of the business are you looking for?
What level of owner’s involvement would you be happy with?
What position in the business are you going to fulfil?
What is maximum price you can pay for the business?
What level of working and reserve capital you have?
Where is the preferred location of the business you would like to buy?
When are you able to enter and start operating a new business?
What are the minimum profits of the business you would except in order to purchase the business?
In addition to this talk to your solicitor and accountant/business adviser and notify them about your intentions too. Have an initial consultation with them, get informed of level of their involvement, costs and help and assistance they will provide for you. Ask them what kinds of information and documents are necessary to be provided to them once you have found a business you are interested in purchasing.
To avoid any nasty surprises it is very important to also get a good understanding of additional costs involved when you buying the business such as legal cost, taxes and duties, bonds necessary etc. (See cost involved when buying the business). This will help you determine the maximum price you can afford to purchase the business.
Make sure you have or can get access to any necessary finance. Don’t leave it partially done. If you are financing the business purchase get pre-approval from the bank or financial organisation, if you are selling another asset to finance the deal do it prior to any serious searching for a business to buy. It is common to see people investing several months and thousands of dollars and not buying a business because they could not raise the finance at the end or while they are organising last minute finance somebody else snatches the perfect business right from in front of their nose.
When the above mentioned preparations are completed, you are ready to start searching for a business.
If you are searching for a business in the Sydney market, the following are some of the ways you can get in touch with businesses for sale: Saturday edition of the Sydney Morning Herald, weekly edition of The Financial Review, Industry related magazines, Business Brokers and Business Agents.
Using these sources and the criteria developed in the preparation stage, make a list of businesses you would like to investigate further.
Information you receive from the advertisment for the business for sale probably will not give you answers to all the questions you need in order to see if you want to investigate the business further. You will need to make first contact with the seller to request further information to see if business advertised matches your pre determined criteria for further investigation.
In some instances you can obtain this with one phone call by talking to seller and in some cases you will be asked to sign a confidentiality agreement, this agreement is a legally binding document and by signing it you are agreeing not to disclose to any other parties or to use to your advantage any information given to you by the seller.
Breach of this agreement could make you legally liable for any financial losses incurred by the parties you have entered into the agreement with.
In any case it is fair and wise to respect the sellers confidentiality and to keep and treat all information you receive private and confidential.
Once you make a short list of businesses that fit your essential criteria, it is time to investigate these businesses further.
You will need to meet with the owner and or owner’s representative and inspect the business premises and get familiar with the businesses operations. This could take place over several meetings and visits to the business.
Through talking to the owners and investigating the nature of the business operation and a preliminary look at the documents, you need to gain an understanding of the following elements of the business:
Owners could be reluctant to provide some of the information at this stage fearing damage to the business or loss of revenue or employees. You will probably have to wait for this information until the due diligence stage or even until you purchase a business.
This could be information like actual names and contact details of the customers and suppliers and some business secrets.
In general owners will leave informing their employees about the sale of the business until the very last moment or after the settlement, which makes employee interviews at this stage impossible. However a good investigation of the business and a good look at employment history and staff turnover can give you an idea of employees’ attitudes and business employment culture.
Your investigation needs to give you the answers to the following questions
Is this the business you are looking for?
Can you run it and sustain its current performance?
Is the business value for money, based on the past performance and current situation and profits?
If the answer on all three questions is yes, you are ready to submit your offer.
The offer is most effective if put in writing in a form of a letter of intent and it should include the following:
Name of the buyer and the date
Purchase price
Time frame for the settlement
Required owners assistance during the changeover, time and nature of their involvement
Competing trading restrictions for the owners
Exclusion from purchase, if any
Conditions your offer is subject to
Some examples of offer conditions:
Putting the offer in doesn’t mean you will buy the business.
Offers serve two purposes. First is to communicate to the vendor your serious intent to purchase the business and the conditions under which you are prepared to do so.
Second is to minimise loss of time and accruing of expenses associated with due diligence and further investigation of the business if the owners are unable to accept the conditions under which you are prepared to purchase the business.
The offer submitted by you will not only depend on the business you are buying but also on your current circumstances as well. Certain businesses could have a greater value to one buyer then to somebody else, or due to buyers different positions they may want to structure the deal differently or faster or over a longer period of time.
Sometimes vendor’s and buyer’s circumstances require different structures to the deal. This may put vendors in the situation that they are unable to accept the offer proposed. In situations like this it is necessary to enter into negotiation.
Fortunately for all involved in buying and selling a business, businesses by nature are very complex and flexible which creates room for negotiation.
The best way to do this is to not to manipulate other parties or use tricks and techniques but to enter into a communicative and creative process. Get to understand the sellers situation, present clearly your situation to the seller and the reasons why you have submitted the offer that you did. Then work hard and attempt to create the deal and agreement which can satisfy both parties needs and circumstances.
After your offer is accepted by the seller you should engage your accountant, solicitor and business adviser to help you complete your business investigation and verify the books and records of the business. At this stage of the investigation you need to inspect closely all applicable, but not limited to, following records:
If close inspection of the books and records by you and your advisers is completed satisfactorily it is time to move to the next step, exchange.
The Contract for the sale of the business with conditions agreed by you and the vendor is signed by you and usually a 10% deposit has already being paid by you into the trust account of the business agent or solicitor. This deposit is usually fully refundable until the contract of sale is entered into.
At this point you have entered into a contract for sale of the business which means that the buyer is committed to purchasing the business and the seller is committed to selling it. No parties past this point can change their minds regarding any component of the transaction, except with agreement of the other party.
Standard time between exchange and settlement is 4 to 6 weeks however it can be agreed to be longer or shorter (sometimes even on the same day)
Payment is made on this date to the vendor for the agreed amount less the deposit already paid. The deposit is also released from the trust account and paid to the vendors account less any agent’s commission or otherwise.
On settlement the ownership of the business and all of its assets are transferred to you and from this date all the profits or losses of the business belong to you.
All employee entitlements (Holiday leave, long service leave etc.) to this date will be the responsibility of the previous owner of the business and your business will re-employ all the staff.
Lease of the premises that the business is occupying will be reassigning to you or your company as well as all rental agreements and all leasing arrangements. This will also happen to all licences, business name, phone numbers and intellectual property that is part of business sale.
Congratulations from this date you own the business.
After the settlement, if so agreed, the previous business owner will remain with the business for an agreed period of time without pay in order to assist you with training, operations, introduction to customers and suppliers.
In some cases the owner will stay past this time in a specific role or stay engaged in the business in a consultancy role or similar for a period of time in the business for a determined payment. All of these options are negotiable and are normally addressed in the offer and negotiation stage of the buying of the business.