TIPS FOR BUYING A BUSINESS
THE INTERESTING STUFF
- DO SOMETHING THAT YOU LIKE
Acquiring a business (or starting from scratch) is your opportunity to create a 'new start' for yourself. It's an opportunity to start over again in many ways. So don't get into a business that you won't like. This is your chance to do something that you'll like to do – something that defines you.
- DON'T LET THE KNOCKERS AND DOUBTERS CONTROL YOU
Many well-meaning people will try and talk you out of chasing your dreams. Listen to all the advice that you receive, but in the end, it's your life, and you need to make bold decisions if you want to succeed, – and if you want to accomplish your goals and targets. Business owners must be bold and a little selfish if they are to succeed. Look at successful people like Mark Bouris, Richard Branson, Steve Jobs, Elon Musk, they all followed their own vision, and didn't allow people to talk them out of doing what they knew was the right thing for themselves.
- KNOW YOURSELF
You must know your own strengths – and weaknesses. Be honest with yourself. Don't "overstep" your ability. If you have weaknesses, get help in those areas. Don't try to do everything yourself.
- HAVE FUN
Life is short. Have fun. Sometimes having fun is more important than making loads of money.
- ALWAYS BE LEARNING
Those people who think that they know everything and cannot learn any more are headed for failure. Don't be too proud to admit that you don't understand something. Be humble. Keep learning. Life is a journey of constant learning, and learning is fun.
- BE THE PERSON THAT YOU WANT TO BE
Many business owners unintentionally become someone that they don't want to be. Angry, stressed, serious, boring, complainers……. Don't let that happen to you.
- CHOOSE OPTIMISM
Nearly all successful business people are positive and optimistic by nature. It is rare to find a successful self-made business person who isn't positive and happy. This is not an accident. Their attitude is often the reason why they have been successful. A positive attitude and a great outlook will help you to have a successful and positive business. THE BORING STUFF When considering whether to buy or start a business , it is important to make an informed decision. Consideration of alternative choices, and application of informed decision making, plus an overall understanding of opportunity cost, will allow you to avoid the potential pitfalls on the path to success. Issues Prospective Purchasers Should Consider Before you set your sights on a specific target business to acquire, undertake a comprehensive analysis of the target's business and industry – and your relative position with respect to such factors. A strategic objective should be sought as a potential outcome of the proposed transaction. This objective may be as simple as "owning and operating a coffee shop business because I can make it a success and the business provides me with a sense of personal satisfaction", or "I want to buy company X and merge it with company Y in order to achieve a 52 % market share in widgets". As part of your initial planning, you must develop and implement an acquisition strategy that addresses:
- Why you want to purchase a specific business or enter a specific industry;
- Your plan to achieve the overall acquisition strategy (i.e., should I buy the target's shares or only its assets?); and
- What are your plans for the business once it is acquired (i.e., I will merge the operations with my other hardware store, or, I will sell the tools that my tool production company makes in the hardware store).
The acquisition strategy must be part of your overall vision. It is advisable to identify a variety of suitable targets and initiate contact with the targets on a confidential basis to assess the possibility of a transaction – usually through a business intermediary (or business broker). After you make your initial assessment, you can start implementing your strategy (with the use of professional advice from your business lawyers and accountants) and then begin to lay the groundwork for the transaction. Basic Questions a Purchaser of a Small Business Should Consider Asking
- Why do I want to buy this particular business? What is the value of this business to me?
- What are the advantages and disadvantages of purchasing this business? Have I compared the cost of buying the existing business with the cost of starting a new business within the same industry?
- Can my resources (time, money, capital etc.) be utilized in a more productive alternative investment which better suits my goals, requirements, skills and vision?
- Have I obtained enough information, conducted enough research and properly evaluated all the data to satisfy my informational requirements regarding this particular business, the general industry and the overall economic value of the business?
- What skills and resources can I bring to this business to make it more profitable, efficient and productive?
- Do I have the time and access to the knowledge, skills and resources required to enhance the value of the business? How easily accessible are the required knowledge, skills and resources?
- What is my previous exposure to this industry? What lessons have I learned from my past dealings within this industry and, if applicable, with this particular business?
- Do I have the network to provide the base of contacts required for this business venture or will I have to develop a new set of contacts?
- What am I willing to give up in terms of price, assets and financial capital in order to acquire this business? What do I expect in return? Are my expectations reasonable?
- What financing arrangements should I make? Have I raised enough capital to sustain the business in the early stages? It is important not to be undercapitalized and in search of financing when you should be spending time managing the business, especially in the early stages.
What is the Best Way to Acquire the Business?
- What is the most effective way to acquire the business that you are buying? Is this going to be a purchase of the business by way of assets, or shares? Do you understand the difference and corresponding benefits and risks between an asset or share transaction?
- How will the purchase price of the business be determined and allocated (i.e., will it be based on multiple of earnings, revenues, goodwill, book value etc.)? How has the transaction been structured, is it for cash, shares, property or some other form of consideration or a combination thereof? Have you considered all potential closing costs and expenses when calculating the purchase price and required capital? What is the adjusted cost base of the shares (if it is a share transaction)?
- To obtain a comprehensive understanding of the business, use a number of sources including the vendor and if possible, the vendor's customers, competitors, present or former employees or business partners. This research should be done in addition to the market, industry and other research required.
- What liabilities will you be assuming if you acquire the shares in the company?
- What legal obligations will you inherit by buying this business? What licenses and permits do you require (i.e., liquor license if a bar) and what environmental and other standards have to be met in order to operate the business? Do you require any governmental approvals or consents in order to purchase or operate the business?
- What tax issues should be considered with respect to this business?
- Who is the vendor, and why is he/she selling the business? For example, does he/she feel that the industry has matured and there is no further potential for growth? Does he/she have alternative business opportunities that they wish to pursue? Does the target or its principal(s) have a good reputation in the industry, and is the target having trouble generating business (and if so, will you inherit that bad reputation)? If you can understand the vendor's motivation for selling then you can design and implement appropriate strategies to counter any setbacks or capture any opportunities when you buy the business.
- What critical information can you extract from the vendor regarding the business? How can you extract such information if the vendor is not motivated to provide it?
- What strategy are you going to pursue for this business post settlement? It is vital to have a clear, concise and coherent strategy before you purchase the business. The proposed strategy should be proactive and further your vision and goals for the business and the relevant industry. Essentially this is your Business Plan.
- Have you and the vendor agreed upon the general terms of the transaction? If so, what are the terms? How have you papered the transaction thus far (i.e., letter of intent, oral agreement, correspondence)?
- Have you obtained the advice of professionals such as business lawyers, business consultants, accountants, and others with specialized knowledge? If so, who are the advisors and what is their experience, knowledge base and track record? Do they have experience within the specific industry in question?
- What legal structure should you use to complete the transaction (i.e., sole proprietor, partnership or a new/existing corporation)?
Other Issues to Consider
- Is the property leased? If so, what is the term of the lease and the rent? What are the terms and conditions for remaining at the current location of the business? Will the landlord give consent to transfer the lease? Will you be able to execute any renewals at the expiry of the lease? How soon will the lease terminate? Can you negotiate a renewal as part of the transaction and if so, should you negotiate a renewal and at what rent?
- What proportion of the value of the business is tied to its specific physical location? If you are required to move locations does the value of the business diminish significantly or is the business flexible in its viability to move to different locations and still generate the required client base and revenues?
- Is the value of the business based on its tangible or intangible assets? Is the equipment/inventory modern and in good condition? Do you have a complete list of the assets? Which assets are not for sale and why? Have the assets/equipment in question been appraised to determine their value? Has the target protected its intellectual property by using trademarks, patents and copyrights?
- Have you talked with other business owners to determine their thoughts and input with respect to the business and the general economic viability of the area/ business/industry?
- Who are the key employees of the business? Do you require their services in the future? Who are the leaders and who are the followers among the employees? What is their relationship with the vendor? Can you successfully transfer the vendor's employees without losing value in the relationship (and the business)? If not, what can you do to minimize any negative consequences that will arise due to the transfer? How do you plan to terminate employees that do not meet your requirements? How do you maintain the balance between employees you want to retain and those you want to terminate without diminishing value from the business? Is there a union involved? Are the employees' compensation arrangements and government withholdings up-to-date and is their compensation in line with industry standards?
- Who are the critical suppliers to the business? What is required to ensure a long term supply of these goods/services? What terms exist with the business at present for supply of goods and services, and if they are favourable, will the suppliers continue providing you with such terms? Are there better alternative suppliers to consider (e.g., more cost-effective, better quality or logistics)?
- Who are the competitors of the business, and what are their strengths and weaknesses? What opportunities and what threats can you map out for the business? Can the competitors use the transfer of the business from vendor to purchaser as an opportunity to take advantage and acquire customers, goodwill and suppliers from the business How can you attract business from the competitors? Can you identify clients and customers of your competitors?
- Are the vendor's required during a transition period? Is the vendor willing to sign a Consulting Agreement to provide support and training for you for a defined period of time and on defined terms if required post-settlement?
- What is the bargaining power of the target's customers? What credit terms do customers enjoy? What is the quality of the target's receivables? Does the business suffer from bad debts? Does the business demonstrate consistent sales throughout the year or is it subject to seasonal sales?
- Are there opportunities to find growth and expansion of market share, client base, and product/service lines? How will you capitalize on such opportunities and what resources will be required? Have you prepared strategies to immediately seize upon any such opportunities?
- Can any synergies be identified and quantified which will assist you in calculating the purchase price? Can you immediately exploit such synergies post closing without added expense or resources? If not, what expense and resources are required to realize such synergies?
Financial and Fiscal Basics
- Have you been provided with financial statements (or pro-forma financial statements) for the business? Try and obtain financial statements for the past three fiscal years if available.
- What do the projected calculations and forecasts for performance indicate about the first year? Have you developed detailed and quantified projections and forecasts based on reasonable assumptions and expectations? Have you had the forecasts checked by a professional, and if so is there any bias in the reporting or is it an arm's length calculation?
- In your projections/forecasts, are there any periods when cash flow will be tight and supplementary financing may be required? Is there a margin in the financing you have available to cover fixed and other costs in case of a downturn?
- Will additional investment capital be required, and when will such investment be required? Do you have a list of specific priority based investments to apply cash and capital towards that will provide immediate dividends in terms of productivity, marketing, sales or other valuable aspects of the business?
- Do you have the finances required to maintain your lifestyle without having to divert funds away from the company?
- How sensitive is the business to certain risk factors (such as industry and/or economic downturn)? What strategies can be put in place to cushion such risk factors (i.e., can the business' assets and resources be utilized in another capacity to generate revenue if the core business is suffering from a downturn)?
Financing the Business
- Upon completion of the transaction, it is important to ensure that the business can meet its commitments. Therefore, prior to purchasing the business you should assess whether the business will be able to meet its financing obligations.
- What is the suitable level of debt to equity in the industry for this business (will your ratio be within industry standards)?
- Have you considered all transaction costs (i.e., professional fees, taxes etc.) in determining the necessary financing and overall costs of the transaction?
- Will you need Vendor Finance to complete the transaction?
- What is the "quality" of the financial statements/other information that you have been supplied with? Does the information meet your requirements ? Is the information current or out of date? Who prepared the information – was it prepared by a professional accountant, or was it prepared in-house? Does the balance sheet reflect fair values or is there a risk of an overstatement of assets and/or an understatement of liabilities?
- Remember that Due Diligence is more than numbers. Conduct legal searches and make enquiries with as many regulators and parties as possible.
- Ensure all forecasts and projections are 'normalized' and adjusted to realistic market-based standard, and that all facts, figures and numbers used are reasonable.
- Have you engaged in "feet on the ground" research . Do some legwork and try and gather a "real world" perspective on the entire operation of the business. Speak to stakeholders in the business such as customers and suppliers about all aspects of the vendor and its business.
- Who in your organization will be responsible for due diligence?
- Do you want to interview employees of the business? Will it be better if employees are kept out of the due diligence examination, and allowed to focus on their duties?
- Have all the material contracts been examined thoroughly?