Ten things you need to know about buying a business
1. What are your objectives ?
You are going to make a large commitment of finance, energy and time. You need to have clear idea of why you are buying a business. Is it lifestyle, buying yourself a job or do you want to use your skills to create wealth for yourself and your family?
2. Do you have the necessary skills ?
You do not need to have the trade or professional skills of the staff unless you are buying a small trade-related business. But you do need to have business skills in the areas of planning, budgeting, marketing and supervision. If you have not operated a business before it might be advisable to enrol in one of the many TAFE courses applicable to business operation.
Excellent assistance is available from the WA Small Business Development Corporation.
3. Adequate funding
You need to have enough funds available to cover:
- The purchase price or deposit required to purchase the business
- The ingoing costs including stamp duty, settlement costs and lease transfer costs. Every Schultz Partners Information Memorandum has a summary of these costs.
- Working capital
4. Deal with a reliable intermediary
We are often amazed at the stories of people buying a business direct from the seller. A normally cautious person will often let his guard down when a smooth-talking seller promises huge amounts of undeclared cash or other lucrative promises relating to the business.
When dealing with Schultz Partners you can be assured we have vetted the business, put our own valuation on it and prepared a detailed Information Memorandum. (However, all of this does not constitute any form of guarantee from us. You still need to do your homework).
5. Get the full facts
You cannot make a sound decision without all the facts relating to the purchase of a business. This includes:
• A description of the business, its products, markets, competitors and potential.
• Three-years financial statements
• A list of staff with duties, pay and length of service
• A list of plant & equipment
6. Do your homework
Study the Information Memorandum, check that the figures make sense, check the method of valuation and seek advice from your accountant and/or business advisors.
After doing your investigation and seeking advice, make up your own mind. If you rely on others to make your business decisions, then maybe you should not be in business.
7. Be prepared to move when you find the right business
When you find a business that meets your objectives and is within your budget, put an offer in without delay. There are not that many good businesses out there. You still have the option of walking away during the “due diligence” period.
8. You will get a better deal with a written offer
We have often seen a vendor reject a verbal offer, only to accept the same offer when put in writing from another purchaser. A written offer on the table, together with a deposit, tells the vendor you are serious.
9. Make sure your offer has a “due diligence” clause
A due diligence clause provides for the purchaser to carry out a complete examination of the business. We have our own due diligence clause which we insert into every sale contract. This allows the purchaser and his accountant to attend the business, observe its operation, and to inspect all the books and financial statements. If at the end of the due diligence period, usually 10 to 14 days, you are not satisfied, you can walk away and get your deposit back.
10. Ensure that all the preparation work is completed on time
There are usually a number of conditional clauses in the sale contract to be fulfilled within certain time periods. Schultz Partners will, as soon as the offer is accepted, send you a list of these conditions together with the dates of fulfilment. You need to attend to these on time.
We had the case where a vendor, after accepting a good offer for his business, changed his mind about selling (it was a lucrative business that provided the vendor and his wife with a great lifestyle).
The vendor waited until one of the conditional clauses was one day overdue and served us with a notice that the purchaser was in breach of the contract and the contract was therefore terminated.
The purchaser was extremely disappointed but could not do a thing about it without resorting to protracted and expensive legal action.
You will also need to attend to a considerable number of matters prior to settlement. We will provide you with the Schultz Partners Business Purchase Checklist, a 36-point list of tasks to be completed prior to settlement.