This blog will explain some of the process and the pitfalls buyers need to know in how to buy a business.
The buying process…
So you are looking to purchase your very first business? we understand its a big decision both emotionally and financially – where do we start?, good question.
- Identify the type of business you want: once you know the industry that you would like to purchase into, then do some due diligence on the industry such as; is this industry growing or declining? Have there been any similar sales of this industry recently? Have there been any changes to legislation surrounding this industry? What do I need to know in regards to; knowledge, licenses, trading trends, cash flow, how to attract business etc…
- Find a business for sale (in that industry): once you find a business for sale online or in print media start working out your budget for affordability taking into account, the purchase price, the deposit, stock (if applicable) working capital to operate, government stamp duty (if applicable in your state) and then go and consult with your bank manager or finance broker first to gather an understanding of how much you can borrow. This knowledge will save you time and money in the long run. In many instances we see buyers chew up money in, accountants and solicitors fees whilst under contract with them only to fall over because they cannot obtain finance.
- Now you know how much you can afford: start looking for a business within your budget. Once you find that business then make an inquiry with the listing agent and complete the necessary NDA forms to allow you to obtain the business information and also book a meeting with the broker to discuss the finer points of the business prior to an inspection.
- Your feeling confident now: the business is shaping up to be what you’ve been looking for, what to do next? Present the agent/broker with a written offer to purchase with some bullet point conditions such as, subject to: due diligence, finance, lease, training etc…depending on the industry.
- The offer is accepted: the rest should fall into place under the guidance of the agent/broker your solicitor and accountant. We always recommend you engage professionals such as solicitors and accountants.
Tip – there are no short cuts in purchasing a business, it will only cost you more in the long run. Make sure your ready to purchase so as not to be disappointed and miss out on an opportunity. Being ready means, your aware of how much you can borrow, you have a solicitor and accountant that are commercial business savvy, you have your purchasing entity structure in place with ACN & ABN, and your ready to purchase now.
How to buy a business – The pitfalls…
- Financials: be wary of management accounts, such as: MYOB, Quickbooks etc as they are inherently unreliable and have not been finalised by an accountant. We suggest you or your accountant annalise the end of year financials completed by an accountant along with the corresponding BAS statements and tax returns.
- Side ways money: what does this mean? If you find a business for sale where the vendor owns multiple businesses under the own company entity then this should put up a red flag. Be careful that the business your looking to purchase is not being propped up by the other businesses owned by the vendor. If the vendor owns multiple businesses and they all operate under separate entities and bank accounts then there shouldn’t be any problems and the incoming revenue should be easily tracked and cross referenced.
- Goodwill: did you know that there are three types of goodwill? They are…commercial, industry and personal, understand the type of goodwill associated within the business your looking to purchase and what are the pitfalls.
- Documents: don’t sign anything until you understand what it is your signing (your responsible) and that you have instructions from your legal representative to sign. Not understanding what it is your signing will stitch you up quickly.
- Don’t penny pinch: meaning you may have to spend a few thousand dollars with solicitors and accountants to get to the bottom of the information with the right guidance. This small amount of outlay is tax deductible – and in the end it could save you thousands.
- Completion / Settlement: means once all conditions have been satisfied the deal is about to complete.
Tip – make sure your solicitor and the vendors solicitor are on the same page and the lines of communication are open and that both parties are fully aware of the settlement date and time. You should have clear instructions from your solicitor of your obligations and what you should do prior to the settlement date, be guided by your solicitor so as the deal is completed correctly.
REIQ – Business Broker of the Year 2016 & 2015