Buying Tips

Where To Start

Pick up a pen and paper now and ask yourself the following questions:

 

Why am I contemplating this?
Am I tired of working for someone else?
Do I want to be independent, control my destiny?
Will this give me more security and satisfaction?
Do I want to be wealthy?
Do I want to make better use of my abilities?

 

What type of business should I buy?
Is there a particular type of business I''ve always dreamed of owning?
Am I a retailer, manufacturer or sole trader?
What sort of business do my skills, education and business experience to date qualify me to run?
Will my family be involved?

 

Where earnings are not the prime motivator then a "lifestyle" business could be considered - one perhaps based around your favourite leisure or sporting activity.

 

How much money do I want or need to earn?
What are my current commitments?
What level is needed to service borrowings?

 

How much can I afford to invest in the business?
This will be determined by the amount of cash you have available now, and what other assets you can provide as security.

 

What level of debt am I comfortable with?
A good idea is to talk with your Bank Manager early in the process and determine the level of support you can expect. Some are far more supportive than you may think.

 

What is my exit strategy?
You should always be mindful of your exit strategy. This is made easier by buying in a popular industry sector. Don''t underestimate the importance of this, as you never know when your circumstances will change suddenly and you need to sell the business quickly.
 

What To Look For

When considering the selection of your business, the most important factors, in approximate order of importance, are:

 

1. Business Type
The choice of sector - whether retail, wholesale, import, export, manufacturing or service - and then product/market within this sector.

 

2. Future Prospects
In terms of growth, trends, demand.

 

3. Earnings
Continuity of future earnings and quality of past earnings.

 

4. Price and Terms
Ensure that the price is supportable in terms of key criteria.

 

5. People
Attitude, quality and length of service of staff and management.

 

6. Barriers to Entry
Factors that limit or prevent competitive activity.

 

7. Requirements for earnings reinvestment
Where funds are required for future investment in plant equipment or IP.

 

8. Rate of change
Need to introduce new technology to stay competitive.

 

9. Proprietary Skills and Qualifications
Where the vendor''s shoes look "too big to fill" or specialist qualifications are necessary.

 

10. Asset Backing
What is the Asset Backing for this business? Are the assets of a quality I can borrow against?
 

The Negotiation Process

Buying a business is nothing like buying a house, where price is the only significant variable. Price is only one of the significant and negotiable factors in the purchase of a business. Even the components of price are themselves negotiable, and trade-offs can be made on values for:

• Goodwill
• Plant and Equipment
• Stock
• Furniture and Fittings
• Debtors

Other negotiable terms may include:

• The lease of premises
• The percentage of equity to be purchased
• Period of vendor assistance
• Vendor finance
• Earn-outs, where the goodwill may be payable on the achievement of future profit levels

Purchasing a business is unlike the purchase of most other assets, where the price is the only factor and the objective of the negotation is to drive it down as low as you can. This may not pay off in business acquisitions.

 

Most vendors have an emotional tie to the business they have created, and a genuine desire to see it grow. This should be capitalised on by the new owner.

 

Price is only one factor in the sale, and a concession here by the buyer may be beneficial and help to secure more favourable terms on items such as:

• Vendor finance
• Period of assistance
• Outgoing management contract
• Earn-outs to support goodwill

As can be seen, there are so many factors included in valuing a business that it is never possible to say that a business is worth $X.

 

Pitfalls to Watch For 

 

Issues they are likely to consider when buying a business include:

Information Reliability
It is essential that your business consultant provides a comprehensive Information Memorandum.

Vendor Integrity
If possible, always look to provide evidence that supports statements made by you.

Genuine reasons for sale
Are the reasons you have given genuine or:

• Is there the imminent loss of a major customer?
• Is the market about to change?
• Is the product near the end of its life cycle?
• Does the equipment need replacing?

Competition
Are new competitors about to enter the market?
Are there new threats from existing competitors?

 

Calculation of the value of a business
Th is is a very complex area and most buyers will seek independent advice from professional advisors. While the principles of valuation remain unchanged over time, your business performance may vary and this will influence a purchaser’s view of the value at the time of decision.

 

Sector Popularity
Is the business vulnerable to:

• Shifts in consumer trends and tastes
• Changes in the economy
• Government regulations

 

Only Deal With A Reputable Consultant
Ask them about their track record to date. Watch out for lines like this:

 

"Don''t worry about the figures for last year, next year''s projected profit is $1 million"

 

"Sorry, the accounts are not available, but here are the owner''s forecasts"

 

"Vendor has dying mother and must return to the UK. Yours for only $500,000"

 

We at Company Sales and Acquisitions are very proud of our track record of successful business sales. Many of our clients have returned several times to purchase additional businesses from us. This should give prospective purchasers confidence that the businesses we will show them are quality listings.