Much the same principles apply to buying a business as apply to setting up a new business, however there are some additional matters to consider.
HOWEVER CONSIDER AT LEAST THE FOLLOWING:
1.What is the reason(s) for the sale of the business? Is the owner under some sort of pressure to sell?
2.Are you purchasing only the business or the company/entity that operates the business and owns the assets/liabilities?
3.What industry does the business operate in? Who are the main competitors and how do they compare to this business?What is the reputation of this business in the industry/market?
4.What have industry conditions been in recent times?
5.Is there any further growth potential within the industry or has it almost reached its maximum potential
6.What is the earnings history of the business? Has it been increasing year on year?
7.What are the profit margins of the business? Does this include abnormally high or low remuneration to the existing owner?
8.Does the business have an annuity based income that is, or can be secured for a longer term basis?
9.Has the business prepared sales and profit forecasts for the upcoming years? Are these realistic?
10.Who are the customers of the business? Are there repeat customers or only one off?
11.What are the costs of operating the business? Which costs are fixed and which are variable?
12.Will all of the staff be coming across with the business?
13.Are there some members of staff who are key to the operations? Is the business reliant on its owner and can it operate without him/her?
14.What assets will come across as part of the business? Are intangible assets, such as trademarks or business names registered and can be easily transferred?
15.Does the business have adequate stock on hand to cover sales forecasts and order lead time?
16.Is there items of plant & equipment that are key to the operation of the business? What is the quality of this equipment, will it need replacing soon and what is the cost of this?
17.What liabilities will come across as part of the business? If there are leases in place can they be assigned to the new owner?
18.Are existing supplier agreements able to be kept in place or will they have to be renegotiated?
19.Can we continue to trade out of the same premises if we purchase the business?
NEGOTIATING WITH THE SELLER
Keep in mind that the seller has made a decision to sell; it may be that he is committed to the sale for one reason or another. The buyer must first understand why the business is being offered for sale.
The buyer should, on the other hand, not form any final decision until after a full investigation and evaluation has been made. The psychology of buying and selling has a very definite influence on the outcome of negotiations. An overly eager buyer is more likely to be influenced by irrelevant considerations.
The owner may:
Wish to retire
•Have chosen to be involved in some other business
•Be unable to finance the ongoing operations of the business
•Perceive that the business is declining
•Know that business may be in financial trouble
It can be seen that the reason for the sale may well affect the urgency with which the vendor must sell, which in turn has the potential to influence the price which will be accepted.
The buyer must;
- Thoroughly investigate the business and
- Have a qualified accountant obtain and analyse its financial reports over the past few years.
- Whilst these reports will only give an historical picture they may reveal a great deal more, e.g.
- Whether the business is growing or shrinking
- Whether the business is affected by seasonal or other factors.
- Whether business has been well run
All aspects of the business, its performance and its position in the market place should be investigated before the negotiation begins.
Careful notes should be taken during the negotiations as it may later be important if you have placed reliance on any representations made by the seller. You should confirm in correspondence matters said and promises or representations made by the vendor. This will discourage the seller from colouring the sale.
No commitment should be made before you see your solicitor. It is possible to make an agreement orally and, if you make commitments, you may find yourself bound by such an oral agreement. It is wise to write to the vendor at a very early stage and state “that we are embarking upon discussions with a view to the possible purchase of your business; however I am not intending to be bound by any agreement unless it is fully in writing and approved by my solicitor”.
- Acquire the telephone number of the vendor as this is a valuable component of the goodwill.
- If the business operates from leased premises and it is intended to take over the lease, have your solicitor inspect the lease before making any commitment.
- The purchase price will normally be divided into, goodwill plant and equipment and fixtures. A vendor may, rather than apply a meaningful allocation to these divisions, put figures on each arbitrarily. You should endeavour to find a balance, particularly between the amount which the vendor wants to attribute to plant and equipment and goodwill. The vendor may have claimed depreciation on various items of plant and equipment for tax purposes. It will follow that a vendor will want the written down value to be the price of the plant and equipment as tax would be payable on any amount received over and above that amount. As the price will remain the same the vendor will want the goodwill figure increased. The disadvantage to the purchaser will be that there will be correspondingly a lesser amount on which to claim depreciation. The amount which should be used is the actual value of the plant and equipment.
- Be satisfied and have written into the sale agreement that the vendor must not be involved in any competing business after the sale for an agreed time and within an agreed area.