Simple Steps to Buying a Business
Buying a Business Steps
Buying an established business can be a big commitment of time, money and energy. You need to consider all options before making your decision.
The following steps will guide you through the common aspects that need to be considered before buying a business.
Step 1: Should I buy a business?
There are many advantages and disadvantages to buying an existing business and these must be considered before the final decision is made.
Some of the advantages of buying a business are:
- Initial setup & groundwork has been done for you
- Established client base
- Already existing market for the products & services
- Accessing finance can be easier due to a proven financial record
But some of the disadvantages with purchasing a business are:
- Honouring outstanding contracts
- Existing staff can become uncooperative
- Additional finance may be required to make the business successful
Step 2: Finding the right business to buy
There are many avenues you can explore to find the right business to buy. Once you’ve found a business you also need to consider how it will fit with your lifestyle and family.
Some of the main things to consider when deciding on a business are:
- Are you physically able to perform a majority of the business tasks?
- Is your financial situation agreeable to the equity and cashflow requirements?
- Is the business and market security appropriate to the level of stress you're willing to incur?
- Do you have the necessary skills, experience, connections, networking and time to make the business a success?
Listen to this excellent video by the Australian Taxation Office that elaborates on the topic a little further.
Step 3: Analysing the business
Now that you’ve found a business to buy you need to conduct due diligence to confirm that the business meets all claims made by the seller. This is where Umbrella Accountants can provide much-needed independent advice so that you make a sound business investment.
Some common aspects of the business that need analysis are:
Financial Viability - You'll need to understand what the fixed and variable costs are, so you can calculate the Break Even Points for various products and services, not all products or service may be viable. You may also need to understand what the industry Key Performance Indicators (KPI's) are to measure to gauge the financial health of the business by monitoring changes in certain activities called KPI's.
Commercial Leases - If the business is in a commercial building the terms and conditions of the lease are of vital importance.
Stock - Are you sure that the rate of stock turnover is in line with industry practice?
Assets - Do you know exactly what you are buying and not buying? Are there lists of assets and have you checked them?
Equipment - Is the equipment in good repair? Is it efficient? Is it in danger of becoming obsolete or difficult to service? Are parts available? Could it be sold easily?
Existing Employees - What are the contracted agreements with existing staff?
Taxation Requirements - Is the business structured correctly to prevent additional tax costs?
Step 4: Making an offer
Fair Market Value?
What is the Fair Market Value of the Business, are their industry rules of thumb used - (ie) 3 times net profit with add backs for owner expenses such as interest, depreciation, usual high owner wages, travel expenses, etc.
Business Plan & Cashflow Projections for the Bank
A business plan provides direction, keeps you on track and is usually a requirement when you seek finance. Depending on your business type, your plan could include the following sections:
- Business Summary: A one-page overview written after your business plan is finalised.
- About your business: This is typically called the management plan or operations plan. It covers details about your business including structure, registrations, location and premises, staff, and products/services.
- About your market: This is the marketing plan. It should outline your marketing analysis of the industry you are entering, your customers and your competitors. This section should also cover your key marketing targets and your strategies for delivering on these targets.
- About your future: This section covers your plans for the future and can include a vision statement, business goals and key business milestones.
- About your finances: The financial plan includes how you'll finance your business, costing and financial projections.
When you decide to purchase the business you need to present an offer to purchase to the seller which they may choose to accept or reject. If your offer is accepted you need to have the business transferred into your name.
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TIPS TO AVOID THE 4 MAIN ISSUES THAT CAN DERAIL A BUSINESS SALE
Once you have made the decision to sell your business and found a buyer willing to pay the asking price it can be a huge relief. But there is a long road to travel between receiving the offer to purchase (which is usually made by way of a non-binding expression of interest through your broker), to the actual settlement of the business sale.
A business sale agreement still needs to be negotiated, agreed and signed by the parties to make the offer binding and then all the conditions in the contract need to be satisfied (or waived).
One of the main conditions will be the buyer obtaining suitable finance. This is outside the control of the seller and rests entirely on the buyer’s ability to finance the business purchase. There are however other conditions and issues that could arise within a business sale transaction which could lead to the buyer pulling out of the purchase either by not signing the binding business sale agreement or by rescinding or terminating the agreement.
A prudent seller should consider these issues, seek advice and take steps to avoid these issues derailing their business sale before going to market. Here are some top tips on what to watch out for and how to avoid these being an issue for your business sale:
ISSUE #1: BUYER GETS COLD FEET
People don’t like surprises, especially if you have a nervous buyer who does not understand all the nuances of buying (or running) a business.
There are obvious things that could lead a buyer to think that there is something wrong with your business, for example:
- Finances not being readily available (‘What are they trying to hide?’). Make sure you have your last 3 years’ accounts, BAS statements and POS records ready to provide to a buyer who has signed a confidentiality agreement
- The business name not being registered to the seller – if they are paying an amount for goodwill the seller will expect the Intellectual Property in the business to be robust.
- Long lists of charges registered against the business on the Personal Properties Securities Register (PPSR) – this may indicate to a buyer that the business runs on credit or was struggling. (‘Who else do they owe money to?’).
TIPS TO AVOID THE ISSUE: SORT OUT ANY POTENTIAL ISSUES.
We regularly come across issues in a business sale that should have been addressed by the seller before the business went on the market (more commonly when the business is being sold privately without a broker). If you sell your business through a broker they will analyse the business beforehand and identify any matters that are likely to negatively impact upon the sale price or cause problems down the line. Engaging a commercial lawyer to conduct a Seller’s Due Diligence early on in the piece can also be useful in flushing out and addressing these issues, they can help you to:
- Ensure that the business name is registered to the seller (for example where an old business partner has it in their personal name or it is simply not registered). The same goes for a trademark.
- Discharge any old PPSR charges (for example from previous supply arrangements) so you don’t need to provide the buyer with covenants or delay settlement.
- Ensure that all key contracts are documented – handshake arrangements have no value to a buyer so it is important to get all key customer and supply agreements in writing.
- Ensure that you have everything you need to complete the business sale agreement, for example all schedules, as it is preferable to send across a complete first draft contract to the buyer.
- Address any issues with your lease.
ISSUE #2: LANDLORD WON’T ACCEPT THE NEW TENANT
If you lease your business premises, the business sale agreement will need to be conditional upon the assignment of lease to the buyer. But what if the landlord won’t accept the new tenant? In that case, the conditions regarding landlord’s consent to assign the lease will not be satisfied and the contract will fall over.
TIPS TO AVOID THE ISSUE: UNDERSTAND THE LEASE AND COMMUNICATE WITH YOUR LANDLORD
- Speak to your landlord – If the sale is not highly confidential, have conversations with the landlord early on in the piece so that you are both on the same page.
- Vet your buyer – Determine what the landlord’s priorities are and make sure that the buyer ticks their boxes (the higher offer might not be the better offer if the landlord won’t accept the buyer).
- Review the lease: – Make sure that you are aware of all the assignment conditions in the lease and that these are notified to the buyer. For example, that they need to provide personal guarantees, a bond or a bank guarantee and how much that will be for (they will need to factor this into their financial analysis when determining whether they can buy your business or not).
ISSUE #3: THE LEASE IS TOO ONEROUS
The buyer may decide after reviewing the lease that it is not ‘satisfactory’ and not to go ahead with the assignment.
This is likely to occur where the lease is onerous or if the lease term is too short and the landlord is unwilling to amend it to provide for further options to renew or grant the buyer a new lease for a longer term. This is likely to occur where:
- The landlord does not want the buyer to become its tenant; or
- Where the landlord has plans to redevelop the premises and there is no redevelopment clause in the lease.
TIPS TO AVOID THE ISSUE: MAKE SURE YOU UNDERSTAND YOUR LEASE
- Review your lease before listing your business for sale – conduct a seller’s due diligence and make a plan to address any issues.
- Where you have a lease with only a short term left to run and no further options it is worth addressing this before you go to market.
- Consider negotiating further option terms which are likely to be more attractive to a buyer and their financiers. (Don’t extend the initial term of the lease though because, if the sale does not go through you will end up being liable to pay rent for a longer term).
- This may also be a good time to renegotiate other onerous terms in the lease. So, send to a commercial lawyer to report on what needs changing to make the lease more ‘commercial’ in the current climate.
ISSUE #4: BUYER WANTS TO RENEGOTIATE PRICE
We have all come across buyers who have little regard even for a signed contract and use any opportunity to renegotiate the purchase price just before settlement.
The sad thing is that this often occurs where the buyer has or perceives that they have the bargaining power, for example where the sale has to go ahead quickly and they know that the seller will not:
- be able to afford to fight them in court; or
- want to waste any more time putting the business back on the market and trying to find a new buyer.
TIPS TO AVOID THE ISSUE: MAKE SURE THAT THE CONTRACT STACKS UP:
- Take a large enough deposit from the buyer to discourage a breach of contract.
- Make sure that all conditions are drafted tightly enough to ensure that the buyer has little ‘wriggle room’ for example, if there is a due diligence clause make sure that it is tight enough to point to exactly want constitutes unsatisfactory due diligence. Do not leave it to the buyer to say that they are simply ‘not satisfied’.
- When you need to rely on a clause in the contract you want to be sure that there is no ambiguity and that the interpretation finds in favour of the seller. The standard REIQ contract is not adequate to protect a seller, it needs well drafted ‘buyer’s’ special conditions.
- Even before the contract is signed, having all the terms documented in a well drafted set of heads of agreement or terms sheet will help avoid this. Both parties will be on the same page and understand what the process of the business sale will be.
It is important to work with experienced business sale professionals when you sell your business to maximise the chances of success. We regularly assist with business sales and would be happy to assist you through the process.
If you require any assistance with your business sale or business purchase or need help with other commercial legal issues, please contact our commercial legal team:
| Helen Kay|
PartnerPh: +61 7 3009 6555