Buying a Small Business

One of the ways to start your own business is by buying a small business that is already up and running.

When buying a small business you are walking into a going concern, with much of the heartache of starting and nurturing a new business already over and done with.

There will be existing clientèle and established supplier relationships, and the bank might be a bit less reluctant to talk to you than if you were starting from scratch.

However, starting from scratch may well be the cheaper option.

There is also a danger of you paying more for the business than it is really worth. The inventory or goodwill may be overstated. If the previous owner had really bad relationships with his or her customers and suppliers, you could inherit existing problems. Even if he or she had very good relationships with the customers and suppliers it could be a problem. Those customers and suppliers may leave the business at the same time that the previous owner does!

Do the disadvantages outweigh the advantages? Not necessarily, but due diligence is imperative. If you find a business that you are interested in, do the research and don't take anything at face value.

Finding an Existing Business for Sale

When you are looking into buying a small business, you can look for existing businesses that are for sale by checking out your local real estate agents office, reading local or national newspapers, searching the Internet, or talking to a business broker.

Industry magazines often have classified advertisements that list businesses for sale. The grapevine is also another method; tell people that you are looking into buying a small business and let them point out any that they know of.

If you know of a business that interests you, talk to the owner. They may not want to sell, but then again they just might and it could be a case of asking at the right time. If they say no, leave them a card with your contact details in case they change their minds.

Is it the Right Business for You?

Having found an existing business that you are interested in, you have to determine whether or not you, as the potential owner/manager, have what it takes to be successful. It might seem to be a silly thing to bring up at this point, but do you have the skills and or qualifications to run this particular type of business?

Many businesses require the owner to have permits or licenses to operate legally. If this is the case for the business you have found, do you meet the requirements (industry experience, qualifications, etc.) to be issued with the relevant paperwork?

Even if you do not need experience to gain any necessary permits, from a purely business perspective, do you have any experience in the industry? Do you know what is involved in running this type of business? If not, you may need to look at your choice again. Being in business for your-self is hard enough, without making it harder than it needs to be!

What is a Terms Sheet?

A terms sheet summaries the intentions of both parties and describes the terms and conditions of the proposed transaction. Terms sheets are generally not binding, but for your own protection if you do decide to sign one, make it conditional on the satisfactory completion of due diligence, and raising finance.

If you are serious about moving forward a terms sheet can demonstrate you commitment to the transaction and buy you time to complete your analysis without the owner selling the business out from under you.

The terms sheet should address:

• The purchase price and how it should be calculated,
• Whether the sale is for cash or shares,
• Exactly what assets and liabilities are to be transferred to the new owner?

You need to be careful with Terms Sheets. Although they are generally non-binding, it is possible to make them binding without realizing it. If in any doubt at all, get legal advice.

What is Due Diligence?

Under common law, the doctrine of 'Buyer Beware' means that it is the buyer?s responsibility to satisfy them-selves as to what it is they are buying. To avoid being sued, a seller must tell the truth if asked a question about the business, but are well within their rights to follow a 'don't ask - don't tell' policy during negotiations. If you don't ask a question, the seller cannot be held accountable for not disclosing the information.

If you are buying a corner store, you cannot cry foul that the owner didn't mention the supermarket planned for two doors down, if you don't ask about planned developments in the area!

If the major supplier for the business is going to shut up shop, the owner doesn't have to tell you about it, unless you ask. So ask! When you are buying a small business, you need to ask the new owner about everything and anything! Do some research on the market, the location, the competition, past business performance, and ask the owner questions about it.

One of the key questions to ask is why the owners are selling. You need to get the real reason. Are they really selling because they want to retire, or are they trying to get out before the business goes bust? Ask, and keep asking until you are satisfied with the answer.

Check out the financial statements for the last three years, and get your accountant to have a look as well. Compare the results of this business against industry standards. Talk to other people operating similar businesses to work out whether the business results are reasonable.

Meet the employees and get copies of their employee records.

Find out what the business owes employees for employee entitlements like overtime, long service leave, annual leave and sick leave. Check out whether the business has a history of industrial disputes, and look into their occupational health and safety record.

Getting a Valuation

When buying a small business, it is important that you do not take the owners word as gospel when it comes to what the business or its assets are worth. I am not suggesting that the owner will deliberately mislead you, just that they have invested a lot of time and effort into the business and may not have an objective (or realistic) idea of its true worth!

Bring in an independent valuer.

The valuer will provide a written report on all the assets you are purchasing, which will include things like:

• Plant and equipment,
• Fixtures and fittings,
• Inventory,
• Work-in-progress,
• Accounts receivable,
• Intellectual property,
• Liabilities,
• Employee entitlements, and
• Goodwill.

Signing the Contract

Get a lawyer before you do this.

Buying a small business is usually a significant investment and often fraught with unseen dangers. Find a lawyer who has experience dealing with the type of business you want to buy, and let them guide you through the process.

If you are serious about buying a small business - do not do anything before you talk to your lawyer!

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