Buying a business. Will it turn out to be a dream or a nightmare?
We have been helping clients buy and sell businesses for many, many years. Sometimes, the buyer has their rose-tinted glasses on and they are not prepared to see risks and pitfalls that might be pointed out to them. I can usually identify these people by their response to advice pinpointing some negative aspect “…Yes, but…”.
There are good businesses bought and sold and lots of happy business owners. However, there are risks and as part of the acquisition process, there should be a number of due diligence enquiries or examinations carried out. Roughly speaking, these are financial, management and legal.
Initial Due Diligence
- Identify the business that you would like to buy and the reasons why you would like to become involved in that particular type of business.
- Carry out a detailed analysis of the business and identify the component parts of the business required to make that business successful.
- Identify what talent, experience, attitude and or resources you have and how this could contribute to the running of the business and what deficiencies you have and how you can compensate this by engaging the staff.
- Find out why the business owner is wishing to sell. Is it to retire, to move on to something else or is there some other reason such as a competitor planning to open nearby? When you have established whether the business is worthwhile purchasing you then have to carry out your financial due diligence.
Financial Due Diligence
- Ask to see all the business records and make it plain that you will require the Vendor to warrant that all of the financial information has been made available to you and that it accurately reflects the financial aspects of the business.
- Once you have satisfied yourself about the business, you can start the negotiating process to endeavour to arrive at the basis of an agreement. After this, you should probably sign a Heads of Agreement or a Confidentiality Statement and thereafter, ask to speak to suppliers and customers and the like. Enlist somebody to assist you, perhaps your accountant, to look at sales growth, profit margins, overheads and working capital, including debtors, creditors, stock and work in progress. Ascertain if there is scope for improvement and what specific value you can add to the business based on your skills and experience. Take care to look for changes or inconsistencies in the conduct of the business such as a changing accounting policy to show better profits, comparing the businesses financial projections with other evidence to determine whether the business performance is in line with projections and whether those projections are in line with the economic circumstances of the community and the industry. In particular, other financial checks can be:-
- When was the last full audit?
- What are the stock levels? Rising stock levels may be a dangerous sign of falling sales. On the other hand, low stock levels may indicate that the vendor of the business is not purchasing stock in order to reduce expenditure and improve the bottom line.
- If there are employees you should consider conducting a review in order to:
- ascertain the general skill levels, employee customer relation skills and general expertise;
- identify key employees and ascertain whether they would be prepared to sign fixed term contracts so that you can ensure that they remain with the business until such time as you can learn their skills or build up the skills of other employees;
- discuss the change of ownership with the employees and try to find out if they will be prepared to stay;
- try to ascertain whether some employees should go and some should be retained.
Legal Due Diligence
After you have completed your due diligence in relation to the business and the financial aspects, it is time to enter into a contract. That is where we come in. If the business is conducted in a premises, we look at the lease and whether it is reasonable or oppressive. We look at the term of the lease and whether there are any options to renew. We review the development consents relating to the operation of the business in that particular premises and ascertain whether or not any works approved have been carried out in accordance with that approval, and we enquire as to whether any special skills or licences are required and ensure that they are all in place, if required.
There are many other issues that we investigate during the course of acting on the purchase of a business.
The purchase of any business generally involves the payment of a significant amount of money which should provide you with a vehicle to carry on a successful business. It is not something to be done lightly. You should always rely on the very best of financial and legal advice.
Paul Pritchard has extensive experience in regard to the buying and selling of businesses, franchising and commercial leasing. Call us on 9543 1444.