A Basic Guide to Buying a Business
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Obviously all transactions will differ to some degree but a common factor in a successful purchase is good preparation: This guide aims to outline the four main stages involved in buying a business. This document indicates that the sale of the business is a serious proposition. It should confirm the main terms of the sale; set out the timetable and obligations of both parties; and may include some binding clauses such as non-solicitation and confidentiality provisions.
Once you have broadly agreed terms, the next step is to investigate the company you want to buy.
Buying a Business – An Overview
This will include details of its financial and legal position, what assets including property it owns or leases, the number of employees, the material contracts etc. Your research should give you a clear understanding of what you are planning to buy and help to resolve any outstanding issues arising from your initial negotiation; indeed you may wish renegotiate preliminary terms before proceeding further. This is the stage where many of the points covered in the Heads of Terms are documented to provide guarantees, indemnities and warranties to cover any issues that have arisen from the due diligence exercise and the general state of the business.
These documents cover the scope of the transaction and provide the basis for the sale agreement as well as a means of resolving any issues that arise post-sale. In a straightforward sale, this stage may simply involve signing the completion documents and transferring the monies. No transaction is the same but the stages outlined above are the most fundamental and apply in the majority of cases. Depending on the size and type of business you want to buy, you will probably need to invest in professional advice at the due diligence stage to ensure that no stones are left unturned in the quest for information.
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Formally register your interest in buying the business. The owner will usually have instructed a business adviser, such as a business broker, lawyer or accountant, to sell the business. Approach the advisers, rather than the owner, to register your interest. Your integrity and your future plans for the business are usually extremely important to the seller. If you can uncover the seller's motivations, you'll gain an advantage in the negotiation process.
If the owner has to sell within a certain time period then you may be able to negotiate a lower price. Before you make any offer, complete a preliminary due diligence to ensure the business has no major problems. Always ask yourself this question — "If the business is as wonderful as they make out, why they are selling?
Sellers often gloss over the weak areas of the business or create short-term gains to give a favourable impression of the business. For example, lowering stock levels to artificially inflate profit before stock needs to be re-ordered can make a business seem more profitable. Ensure you investigate thoroughly before you show your interest in buying the business. Tap into the knowledge of those in the know to assess the future business viability of your acquisition:.
If the business is not making a profit, try to uncover why. Once you've indicated that you're interested in buying the business, you can usually get access to more detailed information. You'll likely need to sign a Heads of Agreement or confidentiality statement. Does the business have an efficient accounting system in place and does the owner monitor key performance indicators regularly?
Check the major balance sheet items:. Working out how to value a business is key before you make an initial offer. Always get professional advice, especially if there are any tax implications. Make your own sales and profit projections rather than relying on supplied figures. If you have ideas on how to increase profits, this is your good fortune. Don't inflate your offer price because of opportunities you've identified.
If you can't identify where savings can be made and where there is scope to increase profits, then you shouldn't be buying the business. Though it sounds obvious, making a lower offer and increasing it if required is always a better strategy than going in high at the start. Ultimately, the business is only worth what someone will pay for it. The seller might have to lower their expectations. Goodwill is an amount the seller might expect from you for the value of the business's intangible assets such as an established brand, loyal customers, high profit, quality staff, good location, long lease or supportive suppliers.
Emotional Fit. Even if you know what you are doing, running a business is not easy. It's essential that you pick a business you care about — one that engenders . A Basic Guide for Buying and Selling a Company [Wilbur M. Yegge] on Amazon. com. Expert advice for a successful transaction Today, businesses are being.
Get advice from your accountant on the most favourable way to deal with goodwill. Try to negotiate it down if you can. For example, it may be more favourable to pay more for assets than to pay goodwill because assets can be depreciated over time. Sellers usually prefer a lump sum for the business, and if that's the case you may need to look into securing business loans and finance. However, often the seller often has to leave some money in the business to help finance the deal.
Try asking the seller if you can pay off the business over a period of time rather than in a lump sum. This allows you to pay using cash generated from the business itself. It also hints that the seller is confident the business will be able to fund repayments from cash flow.
Leave a Reply Cancel reply Your email address will not be published. Not everyone appoints a broker, but there are, despite the costs involved, persuasive reasons for doing so. Sometimes a single note or message can last weeks in full view every minute of every day. Employees are typically not aware of the sale until after the sale has closed and the Seller introduces the Buyer as the new owner of the business. Making the first offer.
The information contained in this article is correct as of July and is intended to be of a general nature only. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article. Whether your business is getting started or growing, choosing the right transaction account is important.
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Our range of business loans, overdrafts, equipment and trade finance options can help you achieve your goals. We have a range of calculators and tools, along with a national network of business bankers, to assist you. Skip to Login Skip to main content. Latest offers Personal Business. Your essential guide to buying a small business Purchasing an established business can be complex. It is subsidized by the premium prices that Maddy can charge for her beautiful cakes designs.
Your essential guide to buying a small business
By contrast, the wedding cake business requires very little in the way of advertising spend; most new customers are referred by friends and family who hired CakeBake for their wedding cake. Recently, Maddy has mentioned to you that she is planning to step back from the business. Although she feels an obligation to all her employees, she approached you as the only person she would trust to carry on the business she built.
If you are not interested in taking over the company, she will probably just close up shop. That make this the perfect time to either transfer ownership or just close up shop. You are in touch with the current landlord. Maddy has agreed to be available as an advisor for the first 12 months. When you confess to the banker that you are feeling overwhelmed, he suggests a lawyer might be able to talk you through the basics of a business acquisition like this.
This fact pattern should help illustrate some of the common issues that people considering buying an operating business encounter. In many cases, the smaller value of the company—and thus the smaller purchase price—makes hiring a lawyer seem cost-prohibitive. Experienced legal counsel can help you avoid costly but totally preventable missteps during the purchase.
The outgoing owner has a level of sophistication not only in this business, but also in business in general. So even if you have a good working relationship, do your homework by reading this list to make sure that you are speaking the same language. People write entire books on each of these topics. This list is designed to give you a basic working knowledge of some major areas that you should be discussing as part of the purchase.
There are basically two ways to accomplish this goal. First, you could give money to the owner in exchange for her ownership interests in the company. This is the instinct of most folks, probably based on a familiarity with how stocks are traded in the market. However, this leaves the possibility of unknown and unanticipated liabilities popping up post-sale. In our example, this could look like a dissatisfied former customer from the recent wedding season returning with a claim for reimbursement of some of their money.
Seems unfair to you, who had no ability to control the situation in the first place, no?