The Cycle Of Buying A Business
Your 12-Step Roadmap to Making a Successful Purchase.
Acquiring a good business is a serious commitment for all involved.
You must have the mental and financial commitment to offer price and terms consistent with the marketplace. Performance Business Sales can help you find the right business and structure a contract (Agreement to Purchase) if you’re committed to follow through.
So, take a long, honest look at yourself. When you meet with your Performance Business Sales broker, he will want to know about your background, work experience, level of family commitment and financial situation in order to help gauge the right kind of business for you.
As previously mentioned, it is a good idea to first complete the Business Search Form on our web site.
Here is an example of the questions we are likely to ask you.
- Why do you want to buy a business?
- What kind of business do you think you want to buy?
- What business categories are of most interest to you – wholesale, manufacturing, retail, hospitality, service etc.?
- Are there any business types you definitely wouldn’t purchase?
- Would you like the business to be in a specific suburb, town, city, region etc.?
- How far are you willing to travel to and from work each day?
- Do you intend to operate the business yourself, or put a manager in place?
- What are your special skills and educational background?
- What is your work and/or business ownership experience?
- What is the minimum income you would need to make from a business in order to meet your current living expenses?
- What are your hobbies and areas of special interests?
- What personal funds and real estate equity are you willing to invest to finance the business?
- If you have an equity partner/investor, how much do you expect them to invest of their personal funds?
This self-assessment process is considered vital if we are going to find you and your family – the perfect business.
Appoint an accountant to advise you on your legal structure, funding, taxation, keeping accurate records and the process of due diligence. But more of that later.
Once you have decided that you want to buy a business, contact a recognised business broker such as Performance Business Sales. When assessing a reputable business broker, there are a few simple things to look out for.
- Ask to see how they present their businesses for sale. You will easily recognise a good broker from the effort and pride they take in presenting the information.
Remember the more information you are given upfront, the less your accountants’ fees will be. Also, your financier will have all the information needed to make a quick decision at the best interest rate. If the business is not fully explained, your accountant will charge you for researching and analysing the target business. - Are they full-time business brokers, rather than a firm that handles real estate sales, leasing, rentals etc.?
Dealing with a full-time broker that specialises in your required business sectors is of the utmost importance in finding the right business in the shortest time frame. - Ask for references and testimonials from former clients, or obtain a recommendation from other professionals.
Performance Business Sales will help you find the right business and will assist you in developing an acquisition strategy that fits your price and background. As part of our service we will perform industry and market searches to find the business that accurately meets your needs. If you don’t know what type of business will suit you, we will show you key performance indicators from successful businesses we have sold. For example, we can aim your personalised search criteria at businesses that show higher-than-average gross profit margins, low advertising expenditure, low staff requirements, quick selling time, essential products etc.
Being provided with this inside knowledge up front, will help you narrow your search criteria to include high-quality businesses that offer a low risk and high future capital growth. When we find the business of your dreams, we then complete market evaluations and industry comparisons to help price the business fairly.
Confidentiality is vital to the buyer but critical to the seller. You will have to sign an agreement and promise to keep the seller’s information confidential for each business we show you. PBS does its utmost to ensure that you and the seller’s confidentiality is maintained.
Depending on the seller’s instructions, you will receive either an interim 1st stage report or an extensive 40 plus page hard copy report on the business. You should look carefully at the information provided in consultation with your PBS business broker and your accountant before making any decision to continue. You will find PBS does what very few, if any, business brokers do. We put together a comprehensive and factual business report that evaluates the business’ staff, products, markets, facilities, sales potential and competition. This can often run over 40 pages, analysing everything you need to know to make a quick but informed decision while saving time, money, frustration and risk.
More importantly, the report is designed to provide a framework for communications between yourself, your accountant and financial adviser about your business purchase. As a result of our innovative and highly-professional approach, guess-work and hit-and-miss negotiations are replaced with a systematic approach that ensures a rewarding deal for both the buyer and seller.
Following informal discussions with your business broker, you will be in a position to visit the business and meet the owners. This will give you the opportunity to verify what you have read in the highly detailed report. Your Performance Business Sales broker will accompany you on these visits and facilitate any negotiations that may eventuate. You will usually be able to tour the premises and ask questions regarding the operations of the business.
However, for confidentiality reasons, you may not meet the staff or even see the business in full operation until a later stage. It is common for those who are thinking of selling their businesses to hold all meetings with prospective buyers during non-operating hours in order to avoid employees, clients and customers from finding out about the prospective sale.
One important point to bear in mind is not to discuss the price or the terms of the sale with the business owner. Leave all such matters to your Performance Business Sales business broker. You should also be aware that any proprietary information you obtain about the business must be kept strictly confidential. With the exception of your accountant, financier and legal advisor, the fewer people you discuss the business with, the better. If information should fall into the wrong hands or be released too early, the acquisition of your dream business could be placed in jeopardy
The business owner will not want to go through a detailed due diligence process unless he or she is sure you are serious and are willing to sign a realistic financial offer to purchase the business.
The basic steps to drawing up an agreement to purchase are :
- The business broker will help you draw up an agreement and, in conjunction with your accountant, discuss a fair price you wish to offer the vendor.
- Any legal details which require the attention of a solicitor will also be discussed at this time.
The agreement determines the terms and conditions under which you are willing to buy the business, and under which the seller is willing to sell. Some of the more important conditions are outlined below :
- Your legal identity.
- The price offered.
- The settlement date.
- Finance/Lender
If finance is required, your Performance Business Sales business broker will discuss various lending sources, depending on the type of finance required. - Deposit down payment
The amount of the deposit will depend largely on the price paid for the business. The amount needs to be sufficient to show your serious intent to buy the business and to encourage the seller to provide you with highly-confidential data and take the business off the market while you complete your due diligence. For most small to medium size businesses, a deposit of 5% to 10% is typical. - Restraint on vendor competing.
- Vendors training period after settlement date.
- The business premises
Will it be a new lease or an assignment? - Vendor updating and signing the business report as an accurate and true statement of the business’ current trading position.
- Due diligence
Having lodged your deposit of good intent, you will usually have 7 to 14 days during which to complete your review of the business including financial documents, operating agreements, property leases and any other aspects of the business. During the due diligence period, the business broker will coordinate all your requests for documents and assist in arranging meetings with the relevant individuals. - Check equipment for mechanical defects.
- No unsaleable stock to be included in the stocktake.
- Continuation of key employees
This usually involves meeting all key employees and you being satisfied they will all want to continue to be employed in the business after settlement date. This condition is normally completed within 5 days prior to settlement date. - Continuation of client trading
Introduction to key customers within 5 days from settlement date. You must be satisfied, through direct introduction by the vendor, that all clients and suppliers will be retained after settlement date. This condition is normally completed within 5 days prior to settlement date. - All required trading licenses to be assigned prior to settlement date.
Your PBS broker will then present your offer, along with your background, experience, and favorable points.
The seller will either accept or decline your offer or may make a counter offer. PBS will help negotiate the terms of the offer and find solutions that satisfy both parties whenever possible. Once the seller accepts an offer, the business comes off the market. The offer to purchase becomes an “Agreement To Purchase A Business”, with contingency conditions.
Now begins the in-depth inspection of the seller’s records and accounts. As previously mentioned, this step does not occur before the offer is made because experience shows that in-depth due diligence is often wasted if the price and terms have not been negotiated first.
The due diligence primarily involves checking the financial and legal status of the business prior to making your final decision. Once you have cleared all special conditions, the purchase and sale agreement becomes unconditional.
When you have completed the due diligence process and are satisfied with all aspects of the business, your nominated settlement agent will conduct the necessary searches and prepayments required on settlement date. Your settlement agent will also coordinate with all parties and their advisors to ensure that all the necessary paperwork is completed on time.
In the vast majority of cases, the vendor of a business will agree to a ‘hand-over period’ during which he or she will make themselves available to answer any questions the new business owner might have, and to effect initial training without remuneration.
Then it’s just a matter of moving in and becoming your own boss!