Sometimes entrepreneurs ask us how to buy a business. We tell them the best way is to enlist the help of a professional service to help you with the transaction. Below are some of the checklist items we discuss with our clients.
Review their financial documents. Determine how much cash flow you can expect in the near term after giving yourself a modest salary. Divide the cash flow by your cash investment to get your return on investment. Is the ROI acceptable for your perceived risk? If it is, make an offer. Rely on the process work and you’ll find the business that’s right for you.
Get expert advice – It’s always a good idea to speak to an accountant and a lawyer, before you buy a business. For instance, you may want to make sure the seller cannot open another similar business just around the corner. Don’t forget, mistakes made now may come back to haunt you in the future. Get advice about issues such as:
• The expected return on invested capital.
• Valuation of stock and work in progress.
• Inspection of the seller’s accounts, tax returns, wages books, and any statements that must be given under the law, etc.
• Find out why is the business being sold – Sellers will offer any number of apparently legitimate reasons to explain the sale of their business. But it is worth asking anyway, and attempting to judge how comfortable the seller is in releasing information. Sometimes the seller wants to sell the business for a reason that should discourage you from buying (eg it’s not making money!). Make sure an accountant looks at the business’ accounts.
• Determine what is a fair price – Usually a business that is a going concern is sold with a certain payment for “goodwill”. This is the price the buyer pays for the business’s “good name” that has been earned over the period of operation. An accountant can help you establish an appropriate figure for goodwill by examining the business’s financial accounts.
What are the sales prospects? Among other things, you should know:
• The sales figures for each month of the year.
• The profiles of buyers (eg their age, spending patterns).
• Who the suppliers are and what their relationship with the business is.
• What the stock figures are, including average costs and turnover.
• If the stock is realistically valued.
• Profits and expenses
Make sure the profit figures offered by the seller are analyzed by your accountant. For instance, it is important to know whether the business will generate enough profits to cover your financial needs and support your lifestyle. Make sure the seller’s figures presented as expenses are realistic and are also looked at by an accountant. For instance:
• Are the expenses listed in full?
• Are there hidden costs?
• What are the depreciation costs?
• Are there any cost increases likely in the future?
• What are the terms of the lease of premises?
• What is the cost of borrowings for the business?
• What is the business’s credit rating?
• What are the total costs of employees?
• What are the liabilities that will carry over with the sale?
• Are there likely to be any rental or leasing increases?
• Are there any outstanding maintenance costs that must be met?
• The assets – Make sure you understand what assets are included in the sale price. For instance:
• Are they priced at a fair value?
• What are the depreciation costs?
• What are the leasing costs?
• What is the cash flow?
Legal help – A lawyer can help with the following issues:
• Whether the business structure is suitable for your needs.
• Agreements with the seller to ensure they don’t compete in the same geographical area or the same market.
• The terms of the purchase agreement.
• Whether the purchase agreement should be subject to finance.
• Whether there should be a trial period built into the purchase agreement.
• Looking at existing leasing agreements.
• Whether the purchase agreement says what you think it does.
• Searching the council and other agency records to ensure there are no plans or council orders that could disrupt the business or lead to a drop in sales.
• Checking the zoning regulations.
• Drafting any restraint of trade requirements of the seller, including dealing with prior customers and conducting a similar business.
• Transfer of business names, trademarks, etc.
• Information to be supplied by the seller (eg a list of current customers and suppliers).
• Any agreement for the seller to work in the business for any length of time.
• Any specific requirements of legislation
Let an Exodus Business Solutions professional help you find the most appropriate business opportunity. Click here to learn more.