Buying a Business

There are a whole variety of reasons businesses don't work, and if you are thinking of buying a business there are a number of issues you should be considering. Before you make any decisions you should be asking yourself the following questions:

	Will I be happy doing this particular type of work
	Will I like the area the business is located at
	Do I have the support of my partner
	Will I mind working without a set weekly income
	Do I possess the necessary management skills
	Am I prepared to work extended hours on some occasions
	Can the margin support the borrowing costs comfortably
	Is my health good enough for this
	Am I buying this for all of the right reasons
	Does this business get me closer to my ultimate goal

If you can't answer YES to all of those questions then you should not be in business. Your investment could turn out to be a nightmare.

On the other hand, if you have answered YES to all of the above, you are well on your way to financial independence.

Buying a business can be fun and exciting, but at the same time can be stressful and frustrating, not only for you but also for the broker, vendor, solicitor and bank manager. If it is stressful and frustrating it's usually because either the vendor has gone to market unprepared, or you are not asking the right questions at the right time. Each professional involved has guidelines, company policy and legislation among other issues that have to be addressed correctly, and if not, you are the one at risk. Risk of failure, or risk of receiving incorrect or invalidated information. Risk of paying money you never expected to pay. If you are at risk, then so is the Bank, your suppliers, and many others, even your family. To buy a business with the minimum of risk you must listen to your professional advice, then respond accordingly.

There are a number of HIDDEN COSTS. Costs that should be taken into consideration before you start, because the last thing you want is somebody knocking on your door in your first week looking for money. Let's assume you are looking at a leasehold business. Below are costs you will need to have in reserve, depending on the cash flow of the business and the level of credit you will provide to your customers in the first month. Let's take a look:

Stamp Duty on the purchase

Solicitors fees [conveyancing and verification] + disbursements

Insurance

Accounting fees [cash flow forecast]

The first months rent in advance [or more]

The Power Bond

Salary & Wages for the first month [or longer]

Stock purchases for the first and second months trading

Working capitol bank & loan fees

Perhaps take over vehicle or equipment leases

Up-coming plant & equipment service contracts

Franchise takeover & training fees [maybe]

Employee long service contribution [negotiable]

Total personal living expenses

Awful isn't it? You see being aware of these costs negates any financial problems that may occur had you not been expecting them. You shouldn't be deterred by any of this. Being aware and prepared makes your investment a more secure proposition than average. Remember, its more than likely you are looking at spending your life savings, which means you should be asking about everything. Remember the vendor will be expecting you to, so don't be embarrassed about asking how well the plant and equipment has been serviced, or if the roof leaks, or how old the copier is. You're the buyer; it's your money, or your debt.

If a business is as good as it seems on the surface, then it will be good enough for you to expect to be given a full "business report". A business report should identify everything about the business and I'll give you some pointers:

Building lease details or

Rates notice for freehold

Equipment leases with current payout amounts

Schedule "A" (detailed list of unencumbered plant & equipment)

Contractual service agreements (eg photocopiers ~ fire safety equipment)

Employee details

Vehicle finance agreements and registration details

Current vehicle roadworthy certificates and warrants of fitness

Supply Contracts if any

Licences ~ Permits & Fees

Trading Hours

Training procedures after handover

If there is no business report available then you need to know why. Why, because they take a little time to prepare. If there is no business report, then the agent either can't be bothered, or doesn't understand what is required; either that or the vendor is in a hurry to sell, perhaps in that much of a hurry there has been no time to prepare one.

If advertising has already started then there is no intention of providing detailed information in the hope an inexperienced buyer may not ask the difficult questions. If the explanation is that it is being prepared and will be ready soon, then why the urgency to go to market, when going to market unprepared by choice will invariably cost the vendor so much in asking price, or settlement value.

I'm afraid I have seen far too many buyers destroy their credibility and families when they have come in to re-sell the business they thought they bought, when in fact we find they are no where near the value to what they paid only a few months earlier.

There are a number of tasks you have to complete for your purchase to be a happy one with the
minimum of stress:

To be fair to both parties your purchase contract should have three separate dates and I'll explain why. The first date is the contract date. That's the date the last set of signatures go on the contract. The next date is often referred to as the finance date, but it really is the conditions date. When you reach agreement with the vendor, there will more than likely be certain conditions that both parties have to meet. These could be roadworthy certificates on vehicles, or finance approval. Importantly, its a date where you the buyer should have arranged a line of credit with the businesses current suppliers; whereby avoiding hiccups after you take possession. Phone and power accounts, insurance and due diligence all should be satisfied by the condition date. It's that period where you meet with the Lessor of the building. You may have said to the vendor that you would like a pile of rubbish removed before you take over, well the condition date will generate urgency on both sides to get the jobs done on time.

It would be most unfair to the vendor if your finance application went to the final day before settlement and you found out that your application had been declined. You can't say to a vendor on the last day that you won't be proceeding. That's only one reason a business contract should have a condition date. It is 2 weeks after the initial signing of the contract and 2 weeks before your settlement date, and that's the three dates.

If you or the vendor haven't got your contractual tasks completed by the condition date, it's usually a simple phone call between solicitors to advise that you are running behind schedule. But if there is no condition date then you can bet that settlement date will be extended, and that impacts on insurance, finance and stocktake. The other matter is when you and the vendor have both completed your tasks on or by the condition date, the business contract becomes unconditional. That's when you have officially taken the business off the market, but until then it's only sold with conditions.

It's all very well to talk about buying a business but you have to have the financial capacity.
When you finish with this page click the finance link to see what's required.

Some businesses advertise high sales. HIGH SALES DON'T REALLY MEAN A LOT but Gross Profit means everything and Net Profit is the result of past managements' business decisions. If a business demonstrates good consistent gross profit, it's sometimes beneficial to approach the bank that has known the business for some years. Always talk to the vendor before applying for a loan. The existing banker may not want to lose a good account and it's well worth it .

To assist with approval of your application, any additional documents required by the lender should be tendered on request, without delay. All of this information is to assess your level of security, percentage risk factor, and the ability of the business to service the loan. You will demonstrate efficiency by knowing exactly how much you need to borrow, and don't be concerned about a contract without finance approval. Just make sure you have the condition or finance date on the contract, in which case if your finance is not approved your deposit will be fully refunded. If you think you know it all as a buyer there's one more directive. Never, ever go ahead without advice and assistance from a good commercial solicitor.

Solicitors A solicitor that specialises in Commercial Law is your best investment for legal advice and protection. But remember, your solicitor only deals in FACTS, and not many possess "operational management policy and marketing skills". Their comments should be limited to the legal implications of your purchase and not management strategies.

Try to steer towards the corporate specialist. Importantly remember this. If you think their fees are excessive then you are wrong. Your solicitor will give you one of the most important elements in business today and that's Peace of Mind. Your solicitor will clearly identify the vendor's responsibilities, as well as your compliance requirements. After you have paid for and taken over you will go home each night with a sense of security and happiness. Believe me, they're worth every taxable cent you pay them.

Accountants & Business Valuations
One of the most common misconceptions of today is the belief that your accountant can value a business by just looking at a copy of the financial choreography the business has supplied to the inland revenue or taxation department from behind their desk.

Balance Sheets are the financial results from the decisions of past management. They may or may not identify good or poor management techniques. Trading figures of the past cannot possibly accurately demonstrate the financial activity level of the business in the future, although they may set a benchmark from which to plan for the future. There's nothing wrong with poor or low profits if you have the resources to inject what will be required to turn the figures around. The future of the business will be determined by the following:

Management skills and business acumen

Marketing strategies and competitiveness

Liquidity, stock control, purchasing and credit policy

Location and presentation

Terms and conditions of lease agreements

Serviceability of plant & equipment, and maintenance programs.

Effectively managing the CODB. [Cost Of Doing Business]

Front line, first impression attitude towards customers

Enthusiasm

Your accountant may be a contributor for the development of a cash flow forecast or the accounting section of a business plan, but be mindful there are a variety of contributors with specialized knowledge that group effectively to develop your valuation and plan for the future.

It would be unfair for you to expect your accountant to perform a business valuation without considerable expense. A verbal opinion is an unqualified guess without appropriate research. A worthy valuation requires investigation of industrial relations and awards, visits to the business, vehicular and foot traffic volume assessments, average unit sale per period and units per given period, comparative businesses recently sold, the lease, plant & equipment and future expansion potential. Research and analysis is required for many elements relating to businesses.

Your accountant would more than likely be hesitant, knowing that litigation could and should follow if the valuation was unqualified and resulted in diminishing financial impact with related parties. An accountant that displays the title "Member of the Australian Institute" or "Registered Valuer", is an accountant that will legally stand by their official valuation. Don't listen to opinions and verbal appraisals, they are only hot air and are worth nothing.

It's your money going out, don't increase the risk of losing it and impacting your family and lenders by listening to uninformed guesswork. If you require a valuation, or written appraisal, be sure to employ the "correct people".

Never visit a business un-announced.	Employees at the business may not be aware the business is for sale. They may feel their jobs could become insecure, and the proprietor may be very busy at the time you arrive. Details of the business are confidential and should never be discussed in the presence of employees.
Never observe the business at a distance.	You will only create suspicion, and above all, you will never get answers to your questions by sitting outside or pretending your just another customer.
Use the Broker, or original contact handling the sale.	If it is a Broker advertising the business, you can be assured the broker has plenty of experience handling the sequence of events, and business sale requirements set down by legislation legal and finance protocol. That's a broker, not a residential real estate salesperson only dabbling in businesses, there's a huge difference.
Don't expect to be given full trading figures on your first call.	Trading figures are considered sensitive and confidential. Trading figures are usually presented for your perusal at your pre-arranged inspection of the business. What's the point in having trading figures if you don't like what you see. Like the business first, and if it is making money then advance further. You will always get limited detailed trading information from your broker prior to any inspection. Up to making an offer you are under no obligation to anyone.
Always look for well serviced plant & equipment.	If it has not been well maintained you may be up for replacement, next week, or expensive repairs soon after you buy the business.
Look after your Broker:	Remember, almost every broker or agent works on commission, usually paid by the vendor. Your broker may spend a substantial amount of time and money with you, tending to your requirements. If you don't like the business presented to you, tell him straight away. He may have something else for you to look at. If you find another business from a window display, or advertisement with a different broker or agent, get your original broker to contact the other broker on your behalf. If you purchase the other business, your original broker will at least get a conjunction fee for referring you. Remember, he knows most other brokers in the region. You will always be better off being recommended, rather than just cold calling, and you're doing the right thing morally.
Disregard comments like "There's plenty of Cash in this business"	All that means is that the vendor has broken the law. A business is always only worth what's been put in front of you, and if the profit and turnover is down because the vendor has taken the money without recording it, then it's worth a little less. If the cash can be verified, then the asking price will be higher.

Looking at a Franchise?
If you are looking at purchasing a business that is part of a franchise in Australia it is essential that you understand your rights and responsibilities set by legislation. This does not mean that you disregard any of the issues above. What it means is that there are a separate set of rules that determine the way you do business in the future. The franchising code of conduct has been developed to provide a framework on which disputes may be resolved. It has been put into place to protect you and all other parties involved in franchising. These documents are available from most state development centres and if you do not download them from here, you should ask your solicitor for the franchisor's disclosure documents. If you have access to a printer you can click then print your own hard copies of the code so that you will know what's required of them before you sign any contracts. If you do, or have prematurely signed a purchase contract, the important issue is that in the special conditions, there should be a clause that reads: This contract is subject to and conditional upon the purchaser's acceptance of the terms and conditions set out in the franchisor's disclosure and agreement terms & conditions. This allows you to vacate the contract and entitle you to a full refund of your deposit. This refund should be upon cancellation, not one or two months later like I have seen on many occasions.
Agreement Checklist	Disclosure Checklist	Compliance Checklist	Disputes Checklist	Compliance Manual	Annexure 1 Long Form	Annexure 2 Short Form
Pdf 98 Kb	Pdf 134 Kb	Pdf 112 Kb	Pdf 130 Kb	Pdf 1.32 Mb	Pdf 201 Kb	Pdf 162 Kb
Statement: We have reproduced the entire booklet including the annexe with permission from Director Publishing Australian Competition and Consumer Commission GPO Box 3131. We have not created any of its content. The source of the material is The Commonwealth and the ACCC. Neither the ACCC, Bundaberg Business Brokers & Development Consultants, The Laboratory of Effective Neuro-Marketing, or garrydonnell.com have any sponsorship arrangement. This content is purely for readers convenience. Each document was electronically released in April 08. Our links page contains hyperlinks to all business departments in Australia and New Zealand. July 30th 08. Garry Donnell

In Summary: Marketing people are marketing because that's what we're good at. It's our job to clearly identify elements of a product that ignite your attention. Everybody on this planet has a desire to be independent and in control. Owning your own business; in principle, offers those two very sub-liminal elements. At this time of buying, it's easy to let your primitive underlying emotions blur your ability to think analytically towards your future, and the future of your partner and children if.

Buying a business is very different to buying a house; which if you don't like can be put back on the market soon after buying it. But a business can not be resold for the same money easily. There are just too many risk factors; and why are they so important? Because your new business has to pay all of your living expenses. What you have spent in the past week by week, month by month will have to come from your business in the future. On top of that, your new business has to fully fund itself, + interest. What you have to do is consider all of the alternatives if it doesn't.

From experience I can tell you that business is great. It offers everything you have ever wanted and I have loved every day of it. Being in business tests you. It tests you every day, day after day and as each day passes you become better with your decision making. Winston Churchill once said, "The managers of tomorrow, are the managers that can adapt to change today." Take up the challenge, but be smart, ask the right questions.

Click on the Finance page.