| Preparing your business for sale Consider how to structure the sale as early as possible, and take advice from your legal and tax advisers. If your business is run through a limited company, you will need to decide whether to sell the shares of the company or just the assets. A share sale tends to be more complicated since you are selling not only the assets, but the liabilities of the company too. The buyer will, therefore, need to carry out a detailed investigation or 'due diligence' and will usually require extensive warranties and indemnities from the shareholders. An asset sale is usually simpler, but the structure of the sale will often be dictated by tax considerations. Contemplate hiving down the assets into a new, clean company in order to avoid passing on liabilities and make it more attractive to a buyer. Saving tax Ask your accountant or tax adviser to advise how to apportion the sale price between the various assets being sold. For example, if capital allowances have been claimed, there will be a balancing allowance in the year of disposal to reflect depreciation not accounted for. If the price apportioned to fixed assets exceeds their written down value in the seller's books, there may be a balancing charge on the difference, which could increase the seller's tax bill. The disposal of assets, other than trading stock, is chargeable to capital gains. Take advice, therefore, on available reliefs. These include roll-over relief in re-investment in permitted qualifying assets; business asset taper relief and indexation allowance for disposals after 5 April 1998. A seller will usually wish to keep stock values low since the sale price of the stock will be taxed as income. The buyer, on the other hand, will want higher acquisition costs attributed to the stock so he can claim stock relief. It is therefore better to make it clear early on in the negotiation, how you would like the price to be apportioned. If the business is owned by a limited company, a share sale may be the best way of saving tax. Business asset relief for individual shareholders selling shares in a private trading company is very attractive and avoids the tax 'double whammy' – corporation tax on chargeable gains on a disposal plus income tax on distribution of the net proceeds as dividends. VATUsually, it is possible to avoid having to charge VAT on the sale price. If the sale can be treated as the transfer of a going concern (TOGC) no VAT is payable. The seller does not account for VAT but is still not prevented from deducting input taxes on related expenses as a general business overhead. To qualify as a TOGC, the business must be transferred as a going concern, and the assets must be used by the buyer in carrying on the same kind of business as the seller. It is essential that the buyer is registered or becomes liable to be registered if the turnover exceeds the current registration limit immediately before the transfer. It is important to ensure that there is no significant break in the normal trading pattern before or immediately after the transfer. Special care must be taken if one of the assets to be sold is a property. If the seller has elected to waive the exemption to VAT but the buyer has not, the seller must charge VAT on the price. In order to avoid this, the buyer must elect to waive the exemption too and notify HM Revenue and Customs before the ‘time of supply'. This usually means notifying before exchange of contracts. EmployeesThe rights of employees of a business are protected when it is sold as a going concern. This is by virtue of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE). All employment rights of employees are automatically transferred to the buyer, so that continuity of employment is preserved. So,if an employee has a claim which could have been brought against the seller (eg sex or race discrimination, or harassment) it can be brought against the buyer. If it is not intended to retain the services of all employees, careful consideration should be given to paring down the workforce to achieve a sale. This is easier said than done since it is very difficult in practice to circumvent the effect of TUPE. Some possible ways round the problem are:
Extreme care must be taken if a claim for unfair dismissal is to be avoided. Obtaining early legal advice is recommended. |
Monday, June 11, 2007
SELLING A BUSINESS: Legal Pitfalls
Looking at Franchises
Buying a franchise can be the right initial business for people who have never run their own business before, but like all business purchases it must be approached with caution and a lot of careful thought.
This article will give you a good overview of how to approach choosing a franchise.
It is possible to buy a brand-new franchise from the franchisor, or to buy an established one from an existing franchisee who has decided to sell. This article begins by assuming you are setting up a brand-new franchise outlet, and concludes by dealing with buying an established franchise business.
Let's deal with the theory first, and then tackle how to check out an individual franchise opportunity to see how good it is in reality.
What is a franchise?
A franchise is a licence offered by an existing well-established business (the 'franchisor') to others (the 'franchisees') to operate a similar business using the franchisor's fully developed business model, often trading under its brand-name in a defined exclusive territory. In return, the franchisee agrees to operate the business
systems imposed by the franchisor and pays an initial fee. Thereafter the franchisee pays commission to the franchisor, usually calculated as a percentage of sales. Many well-known names offer franchises including McDonald's, Benetton, Prontaprint, Body Shop and others.
What are the advantages of buying a franchise?
As a franchisee you are operating under the wing of the franchisor and will usually benefit from:
- Using a fully proven business model.
- Trading as a well-known brand.
- National advertising arranged by the franchisor.
- Comprehensive training.
- Help with initial set-up.
- Ongoing help and support.
Who is suitable to be a franchisee?
Franchisors target people who have a desire to work for themselves but, possibly never having done so before, would feel more comfortable to have a guiding spirit watching over them to reduce the risks.
Although the franchisor is there to train you, provide all the systems, and give you ongoing support, it is down to you whether or not you are successful.
Like all other business ventures, success in a franchise will require a businesslike approach, hard work and commitment. If you are in doubt as to whether you have these qualities, don't go for a franchise just because you think the franchisor can solve all the problems. He can't and he won't.
The other factor to consider with a franchise is this. The success of the franchisor and all the franchisees as a group depends on everyone following the system and maintaining the standards. Therefore, if you become a franchisee you will have to accept that the way you work, what you sell and how you charge will be dictated by the franchisor, with very little discretion for you to make variations. This is totally understandable. Every franchisee would lose out if each McDonald's or Body Shop you went into was different. Indeed, the most successful franchises are
the ones where the franchisor maintains the closest control. After all, their success depends on the customers always knowing exactly what to expect, whichever outlet they happen to visit. However, for the very entrepreneurial franchisee it can become very frustrating not to be able to make changes or diversify without permission, and to be bombarded with directives from head office, so you must be sure that you can work under these conditions before you buy.
Presentation and Marketing of the Business
Any new business will take a year to reach its full potential from a running start, and an established business needs a lot of TLC to effect a smooth changeover. So, before you take the reins, make sure you have budgeted adequately for marketing and promotion as a very real expense in the first twelve months. How you elect to market your business depends very much on what you are selling a commodity or a service. But the basics are still the same: to put your business in the face of all your potential customers and make it stand out from the rest. Ask the vendor You can't ask too many questions before embarking in business. If you're buying an existing business, ask the vendor how he does-his marketing and what return he gets from, say, advertising in the local papers. Ask to see invoices for expenditure on advertising. If it's a shop, then wander round surrounding shops and chat to other shopkeepers and their customers. Get the feel for how they perceive your prospective business - do they even know it's there?! It's amazing how you can walk past a shop, let's say a locksmith, and never notice it because you don't need a new lock. But when suddenly your key breaks in the front door and you need one immediately, do you know where to find one? The local locksmith who has done the presentation of his business the best is likely to be the one you will think of first. Retail businesses If your business is a shop or post office, you are probably going to be in a high street or precinct and depend very much on passing trade and regular customers. So you have to tempt in customers with attractive window dressing, special offers and sell yourself as a friendly, helpful trader whom people trust and enjoy visiting. It is very difficult to make the general public see anything new. You will be amazed how many people will ask where the toys are, despite your having put up a large sign! Or if it's a new line they will say, as they suddenly see the toys on the way to something else in the shop, 'I didn't know you sold toys -1 went all the way to the next town yesterday to buy some.' That was despite a sign outside for the past two months advertising that you now sell them. You will have to be very creative to ensure that people notice what you are doing. At the same time these days, people are used to shopping in nice environments and will quickly be put off from coming in if the shop is looking old-fashioned or tired and in need of a refurbishment. It is very important to keep the shop looking as smart as possible, especially if food is involved. Do spend at least a little money on a coat of paint if it needs it. If the shop has been green for the past 60 years, why not paint it bright blue? It would be a very good way to get it noticed and create interest in the fact that it has new owners. Service businesses If your business does not rely on footfall past your door, you must still make people very aware of your existence. Therefore marketing is an essential tool of absolutely every such business at some level. The vendor of the business will know what has worked well in the past and, just as importantly, what didn't. If there were a magic formula for marketing it would have been patented years ago, but the truth is there isn't one. It is very difficult to know in advance what will work and what will simply fail to produce results. Trial and error is often the only way, so be reluctant to change what the vendor has been successfully doing up to now. We will explore a few ideas you can apply to get your new venture or diversification off to a flying start. Identify your potential customers Who are they? It is absolutely essential to identify the people or other businesses that are going to need your services. For example, if your new business is a contract cleaning business you know your customers are going to be other commercial businesses and they are not passing trade. You have to find them at a time when they need a new cleaning contract. If you elect to run a dating agency you have to find ways of tempting single people to trust you to find them their perfect partner - an altogether more delicate and personal approach is required. The approaches in these two examples clearly need to be quite different. The cleaning company needs to target marketing in a way that emphasises what makes a cleaning company attractive to potential clients. It will need to consider what are the most frequent complaints that clients have about their cleaners, and concentrate the marketing towards convincing prospects that they will not have these problems in the future if they change over. The dating agency, on the other hand, will need to think about all the natural fears that people will have in using such a service, and allay them. Even if you are taking over a successful business where the marketing seems to have been good, consider the special issues that apply to your new business and chink about whether the marketing could be beneficially tweaked in some ways. Advertising Many entrepreneurs begin by placing advertisements in their local or national papers and wonder why it doesn't work very well. They may get the odd call or customer, but may have spent hundreds of pounds for a return of very little. When you look through your newspaper, what catches your eye in an advert? Is it size, colour, content or the fact that it has Special Offer plastered all over it? Or if you are honest, do you barely glance at the display adverts and go on to read the news items? Advertising is an essential income for any newspaper and they will try to sell you space, promising the earth as soon as they spot you are new in the neighbourhood. Representatives come and visit offering special rates if you buy so many column centimetres a week for several weeks and you can be tempted into spending your entire budget. If you want to try a few adverts, take the initiative. Call the paper and ask for late space - that is anything they have left shortly before their deadline. They will usually offer you a 50 per cent discount straightaway. Don't take it! Offer them a really low amount and often a compromise can be reached at perhaps 30 per cent of the original cost. Always try to get your advert on a right-hand page. If you imagine reading a paper on your lap, it is always easier to read the right-hand page and the nearer the front of the paper the better. You can waste a lot of money on advertising. Advertising in most minor publications will not work. Opportunities like advertising on the surrounds of local maps, or business cards in dispensers in DIY chains, simply do not work. It is very easy for the salesman to quote how many thousands of people visit the DIY store or use the maps, but the fact is that nobody will notice your advertisement or business card. At the same time, bear in mind that advertising tends to work better the more it is repeated. People will often not react until they have seen your advertisement two or three times. Therefore, if you do decide to try an advertisement in the local paper do not expect miracles in the first week, and give it at least a three- or four-week trial before you decide if it is worthwhile. You may find you can get a better deal from the publication by booking a run. Sell the benefits, not the features There is little point in putting any advertisement anywhere unless it contains a useful message. This applies to posters, handbills and fliers, as well as advertisements in publications. You must sell the BENEFITS of your product not the features. Look at any professional advert and you will see it promotes what the product can do for you. The fact that it is bright green, smells nice or attracts mice is irrelevant. The important points would be that it made acne vanish, took six inches off your hips instantly or provided a life-saving service. Use the words 'you' and 'your1 frequently in the advert thus: Your local computer shop, here when you need us. Put yourself in our hands - then relax. Perhaps the most famous by-line was coined by L'Oreal which they use for all their products and it says so much: Internet These days it is not expensive to have a simple website designed and hosted, and it is almost a marketing 'must*. By referring to a website in your advertisements you can direct people to the site where you can provide far more information than you ever could in an advertisement. Increasingly people are communicating by e-mail because it is so quick and flexible. If your business is called 'Rent-a-villa' it looks so much more professional if your e-mail address is sdes@rent-a-villa.com rather than smith2348@yahoo.com. You can register your own domain to enable you to do this, as well as have www.rent-a-villa.co.uk as your website for less than £100 per year. This would be money very well spent for most service businesses. Networking Particularly if your new business is a business-to-business service you will find it very worthwhile joining the local business clubs such as The Chamber of Commerce and the Business Breakfast Club. Word of mouth is by far the best, and cheapest, form of marketing. |
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VAT - an Overview
Value Added Tax is a very wide subject which, in its detailed implementation, affects different businesses in different ways. It is not, therefore, possible to present a complete guide here and you should take expert advice, 
Once you have sorted out how it applies to your business, and you have organised a system of record keeping to deal with it, VAT should not be a problem to administer. All the leading accounting software handles VAT accounting records automatically, and there are many helpful sources of advice to make sure you do it correctly right from the start.
What goods and services are subject to VAT?
All goods and services are potentially subject to VAT, but for VAT calculation purposes there are four categories:
• Standard rated.
• Reduced rate.
• Zero rated.
• Exempt.
Accounting for VAT. The extra record keeping
Once you are registered you will need to keep VAT records. But this is not normally a big task once you have a system set up and, as already stated, computer accounts programs do the maths for you.
Even if the accounting for VAT frightens you, calculate the savings to be made on expenses, and consider whether it may be beneficial to employ a bookkeeper for a few hours a week.
Taking over from die previous owner
If the existing owner is already VAT registered, you can: either apply to take over his registration or you can apply for a new registration in your name. It is always advisable to start a new registration in case there is any 'baggage' with the old one.
If the business is registered voluntarily, and you have concluded that you prefer not to register, there is no need to do so. The only difference is that as you are not registered the vendor will have to charge you VAT for any goods he sells to you that are subject to VAT. This would include VAT on any stock and assets you are taking over, as well as the price for the goodwill, and which could add substantially to the amount you will need to pay over at completion. It might pay to register for VAT for at least a while to be able to avoid such VAT being added to the business purchase costs, but you should take your accountant's advice on this.
Paying for Stock and Debtors
Paying for stock
Stock is changing on a day-by-day basis, so it is normally paid for separately on the day of takeover when it is normal to bring in an independent firm of stocktakers to do a full stock take and calculate value.
Stocktakers
Stocktakers have their special systems for doing this job very fast, so unless it is the type of business that does not carry much in the way of stock don't try to do it yourself.
Sometimes the vendor and purchaser each appoint his own firm, and the two firms get together to agree a figure between them. However, in many cases this is an unnecessary duplication of expense and it is often easiest to use the firm that the vendor has used in the past to act for both sides. You can then split the cost.
Provided they are a reputable firm, and most are, this is not as risky as it sounds. Firstly, having undertaken stock checks in the past at this particular business they are very familiar with it, and can reach an accurate figure much quicker than a new firm would probably do. Secondly, they are at least as keen to impress you, the buyer, as they are to please the seller, because he is leaving and they will be hoping to retain the business after you take over. In any event, as a reputable firm, they would not certify a stock figure they were not happy with in any circumstances.
What to exclude
You need to agree with the vendor what stock you are prepared to take over and pay for. Just because it's on the shelf doesn't mean you have to pay for it.
If in discussions with the vendor it has become clear that certain lines or products have not been a success, tell him you don't intend to pay for that stock, or at least negotiate a reduced price so that you can afford to put it on sale at an irresistible sale price.
With most retail businesses you should put a limit on the age of stock that you will buy. In the case of food, it obviously has to be fresh. In the case of toys, maybe 90 days is reasonable. In the case of greetings cards, you would not want to pay for the leftovers of last year's Christmas, Mother's Day or other seasons. You will need to consider what is reasonable for the particular type of business you are buying.
Invoices
If the stock consists of items that could be faulty and need to be returned, make sure that you have details of suppliers, and preferably copies of the previous owner's account numbers and invoices.
Settling up
The completion of the purchase of the business is settled between the solicitors.
However, because of the last-minute nature, stock is usually paid for by way of cheque handed over directly to the vendor on the day.
Paying for debtors
The simple rule here is don't. What if you pay the vendor and then the debtor defaults?
The vendor should give you a list of outstanding debtors as at completion and should write to the debtors to notify them that all debts up to the completion date are payable to him, and any subsequent invoices to you. Obviously you can send on any cheques you receive for him.
If the vendor has factored the debtors, then the issue will not arise in quite this way, as the debtors will pay the amounts to the factoring company who will then account to the vendor.
If you decide to use factoring as a part of your finance you may find it advantageous to use the current factoring house, since they will already have set up limits for the existing clients of the business. It is highly likely that the vendor will put this to you, possibly being helpful, but possibly also thinking that if you take over the factoring agreements he will collect his money and be off the hook as far as any possible comeback is concerned.
However, the factoring house will consider any deal with you as a brand-new arrangement, so if you agree that you will take over the factoring from the vendor they will make a new advance to you, and you will pay him. There seems no point in doing that. What do you gain? If a debtor defaults, you will suffer whatever clawback may be claimed by the factoring house, whilst the vendor, who has made the profit on the original sale, gets off free and clear. It is much better to agree that the vendor gets the money when, and only when, the debtor pays. As the new owner you have no possible advantage in it being any other way.
In any event, before continuing the arrangement with the present factoring house, you will need to look at alternatives to ensure that the vendor had a good deal. The fact that the factoring house had limits already set up is not a very persuasive argument because a new factoring house, given the client list, could organise limits very quickly.
Arranging Business Contracts
Unless the transaction is very small you will need to appoint a solicitor to act for you, in very much the same way as for buying a house.
Very small transactions
With very small transactions a solicitor's fees could add a disproportional amount to the cost of acquiring the business. Very occasionally, in these circumstances, the business transfer agent will agree to act as an independent facilitator for the parties. The sale price would need to be small, up to an absolute maximum of $10,000, and the transaction very simple - possibly something like a low-key cleaning service or mail order business operated from home. There would need to be no property purchase or lease involved, or indeed any major assets at all, and the terms between buyer and seller would have to be very straightforward.
If you think your transaction falls into this category, and you do not feel able to do it all yourself, it may be worth asking the business transfer agent if he is willing to undertake this for you before approaching a solicitor.
Appointing a solicitor
Solicitors are like many other professionals - there are horses for courses. A firm that is excellent for divorces or wills may have no experience with business transactions, and it is therefore important to ensure that the firm you appoint has the necessary expertise.
Although ultimately you are always protected by the Law Society against losses suffered due to the negligence or dishonesty of a solicitor, buying a business can be legally quite complex, so you need more than just that comfort. A good solicitor will ask all the right questions of the other side, will give you the best protection in the contract with the vendor (which will often be more complex than the standard one for buying a house) and will be able to give you good advice throughout the progress of the transaction. If he is commercially aware, he will be able to advise you on any detailed negotiation points with the vendor that arise during this stage - for example, what is included in the contract with respect to acquisition of stock. Therefore you need to ensure that you appoint a solicitor who has the right experience. If you do not know such a firm yourself, ask friends or relatives who own businesses, or ask the business transfer agent for a recommendation.
Make sure that the solicitor is aware of any valuation report or survey that you or your lender have had commissioned, and that he gets copies so that he can ensure that any recommendations for further reports or enquiries are carried out.
Contractual terms
You will need to discuss with the solicitor the conditions that you have agreed with the vendor so that he can include them in the legal contract.
Raising debt finance
There are many ways of arranging business finance apart from going along to your local high street bank. For anybody who is not particularly financially aware, some good advice is going to be needed. However, bear these two very important overriding considerations in mind from the start:
• Financial institutions lend money because they are confident in the ability of the people running the business.
• Financial institutions these days are fiercely competitive for good business.
Notice the emphasis on good. The important point to make is this. Banks and other financiers are very keen to attract good business, and will be very competitive in their efforts to do so. But, if the business is less than top-rate, they will either turn it down or charge much higher rates. You have to bear in mind that one bad loan wipes out the profit from ten good ones. So what does this mean to you?
It means that you need to convince the financiers you approach that, whilst you may be new to running a business, you are clearly someone who has thought it all through very carefully. You are someone who knows what he is doing, understands the fundamentals of the business being acquired, and is, therefore, probably going to be a success in the longer term.
This cannot be done by handing over the whole thing to an advisor to arrange. Yes he has good contacts, yes using them is a good idea, but you are not going to get the best deal unless you involve yourself in the presentation of the case. You need to check all the information that he is presenting, and be available to answer any questions that may be raised by potential lenders.
Using advisors
For the purpose of this subject we will look at two groups of advisor: brokers and financial/business advisors.
Brokers
Brokers make their living by maintaining good contacts with the hundreds of institutions that provide all the different types of business finance.
They keep registers of the types of finance and the standard terms that the different institutions are prepared to offer, such as:
• Which types of finance they provide.
• Minimum and maximum amounts they offer.
• Which types of businesses they lend to.
• Their lending criteria such as maximum debt to equity ratio, minimum security requirements, valuation requirements; etc.
• Interest rates and length of loan term.
There is no doubt that being able to tap into this data can save you a lot of legwork - indeed you couldn't really do it thoroughly yourself. However, brokers generally do have their limitations:
• Many charge substantial non-refundable up-front fees. Although some institutions pay an introduction fee to brokers, a large number do not. In any event, since so many deals fail to go through, the brokers need to get paid for their time whether they are successful or not.
• Many of them have good contacts but little presentation skills. You generally cannot depend on a broker to prepare a professional presentation for you. They often need the proposition to be prepared for them so they can identify the institutions that are most likely to help and submit it to them. They are rarely able to prepare cash flows and business plans for you.
• Some institutions do not like dealing with brokers. Most notable in this respect are the high streets banks. Although they acknowledge that brokers are a good source of new business, the banks purely regard them as introducers, and do not pay commissions. Whilst they will deal in general terms with the broker at the very beginning, they do so only to establish that, on first look, it appears to be a case worthy of consideration. Once they have established their interest, they will want to see you at an early stage. They know that the brokers do not vet you in any way and they will want your answers to their questions, not the brokers.
If you can get a recommendation, from a friend or from your accountant, then so much the better. If you are buying the business through a business transfer agent, his agency will probably have a finance department or, if not, will have a working relationship with an independent broker.
Unless brokers have been recommended to you, checking them out is not so easy. The first key question, of course, is what they are going to charge you. For the reasons already stated, you will find that most will want to charge an initial fee, whatever the outcome, and probably then a pro-rata fee based on the amount successfully raised once an offer of financing is received. But how do you decide if and when to punt an up-front fee? Mainly you will have to go on instinct as to who seems the most professional, but why not ask them to provide the names of a couple of recent clients that you can speak with?
Financial/Business advisors
Under this heading I include independent advisors who are able to offer business advice, such as developing a business plan, advising on the best way to finance the business, and assisting you to prepare the presentation for the lenders.
Often these advisors are part of a firm of accountants, or they may be individuals such as former bankers who have the necessary experience. If you need an introduction, you could do no better than to speak to your local Business Link.
If, when you have read through the following sections on financing a couple of times, you find it a bit mind-boggling, you should definitely seek the assistance of an advisor before approaching any institutions, because first impressions are all important.
Business transfer agents
All of the leading business transfer agents offer a financing service and will have a department familiar with leading lenders in the same way as the brokers referred to above. If you are buying your business through a business transfer agent, this is probably the best place to start. The institutions tend to have more respect for such departments because obviously they are specialists and, through the parent organisation, have a good knowledge of the business being purchased.
Going direct
If you have the confidence, and there is every reason you should have if you follow the steps in this article, approach the local banks directly, and any other institutions for that matter.
However, before doing so, prepare yourself by going through the different types of financing available. Ask for a preliminary meeting with the business banker. At that meeting tell him that you are proposing to make an application for finance, and ask him for all the necessary forms to be completed. He will no doubt, ask some general questions and give you some good pointers as to what information he will be expecting to receive, as well as an indication in general terms of what he is likely to be able to offer you if your proposal is favourable.
However, make it obvious that you regard this as a preliminary meeting and that you will be asking for a further meeting after you have prepared a full presentation.
Preparing the presentation
Even if you are using a business advisor, work on the presentation with him by feeding him with as much of the information described below as you can.
These are the general headings that your presentation should cover. The level of emphasis on each will vary in individual cases:
• Details of the new owners.
• Description of the business.
• The management and staffing.
• The financing plan.
• Cash flow projections.
• Historical accounts.
Details of the new owners
This should include a brief history of your career to date and details of your financial circumstances.
Do not worry if you have never run a business before. The lenders accept that we all have to start somewhere, and are mostly looking at how professionally you are approaching this venture.
Do not exaggerate. If your house may just fetch $175,000 on a lucky day, but is more realistically worth$160,000, put it in at $160,000. If it's important, the manager will check it, and there is nothing that looks worse to a banker than finding statements in a presentation that mislead. It will make him sceptical about the accuracy of the other information you have included.
Description of the business
A general overview of the key elements of the business including,
as applicable:
• General description of the location.
• Type of clientele/customers.
• Turnover and profits to date.
• Price paid.
• The competition, if any.
• Future plans.
• Why you consider this to be a particularly good purchase.
The management and staffing
• General information on staff being taken over, such as experience, length of service, etc.
• Who will manage the business day-to-day?
• What will the owner's involvement be?
• What controls are in place over cash and stock?
The financing plan
• Total investment required.
• The amount of equity being invested.
• Debt finance sought - what types and how much of each.
Cash flow forecast
If you are buying a business with a cash trade evenly spread over the year, the cash flow forecast is less important and relatively easy to prepare. Indeed, provided you have ample finance to make the initial purchase of the business and stock, you will probably never need more finance unless you propose to diversify at some stage, or some totally unforeseeable circumstance arises. In such cases a cash flow forecast at this stage has little value and may not be requested.
However, in other cases, cash flow can vary considerably on a week-to-week or month-to-month basis, and it is important to identify the maximum likely funding requirement to ensure that it is covered. This is the purpose of the cash flow forecast. Undoubtedly it is the hardest bit of the presentation to prepare, particularly if you are acquiring a business that is seasonal. If you have no accounting experience, you will probably need professional help with this. If you have a little accounting knowledge, the leading banks do have free computer programs to take you through it step by step.
The cash flow forecast is essentially a chronological table of cash movements in and out of the business on a weekly or monthly basis. It is not the same as sales and purchases in the same period. If you purchase stock on the first of January and sell it on the second, your cash position will depend on the terms. If you pay cash for the stock, and sell it for cash you are out of pocket for one day. If you buy the stock on thirty days credit and sell it for cash the next day, you will be cash neutral for a day and then in pocket for twenty-nine days until you pay the supplier. That will give you the money to fund other transactions. If you buy the stock on thirty days' credit, and sell it on sixty days' credit you will be cash neutral for thirty days, no cash having changed hands, and then out of pocket for the next thirty days, after you pay the supplier, until the customer pays you. In each case you should eventually finish up cash positive by the profit margin, but, as you can see, in the meantime the amount of cash you need to have available varies. When you prepare the cash flow forecast, the appropriate payment terms are included, as are different sales and purchase volumes at different times of the year, and thus it will take all the variations into account.
The cash flow projection should also include the cost of buying the business at the outset and the cost of any additional capital items that will need to be purchased during the year. It should also include anticipated general expenses such as rent and utilities as and when they fall due. As a result, it shows a prediction of how much maximum overall funding is likely to be needed at any given time over the period it covers.
The presentation should not only contain the cash flow figures themselves, but also the assumptions you have used in preparing them, such as rate of sales growth, price increases in sales and expenses, suppliers' payment terms, payment terms offered to customers, etc.
Whilst all the leading banks have forms for manually preparing cash flow forecasts, the forecast is best prepared on a computer spreadsheet program such as Microsoft Excel, Microsoft Works or Lotus 123, and this is how all professional advisors would do it. Once set up, these programs automatically do all the mathematical calculations for you, making it easy to change assumptions and see what the effects are. For example, you could increase sales prices by 10 per cent and, without having to redo all the calculations manually, see the knock-on effects on profitability and cash flow and hence financing requirements. You can give a copy on disk to the bank and they can do their own 'what if experiments like this.
Historical accounts
You will need to attach the historical accounting information received from the vendors. You should include the accounts for the last three years, along with the management figures covering the period since the date of the latest annual accounts.
The lender will look at these figures in detail to assess the ability of the business to cover the cost of the finance being sought. It is a good idea to write a summary of your findings and adjustments when you reviewed the accounts for the purpose of your valuation (as per the sections on reviewing the accounts in.
Verifying the Information You Have Been Given
Although you will have been supplied with copies of accounts, it is vital to check that the trading information you have been given is fully truthful.
At the early stages of your discussions with the vendor you clearly have to take the figures at face value, but before you are committed you must check them out as best you can. The professionals call this process 'due diligence'.
You cannot simply rely on the accountants who produced the accounts. Firstly, you do not know what level of verification they carried out in producing them. A full audit is rarely required these days, unless it is a limited company with a high turnover. The accountants will always include a certificate in the accounts which will state the level of checking they have done. Often the certificate states that 'in producing the accounts we have relied on information supplied by the proprietors', and goes on to state that no independent verification has been carried out. In other words, rely on these accounts at your own risk. Most accountants do check things somewhat, but unless there is a full audit certificate you could never successfully sue them if you relied on accounts that you subsequently discovered were untrue.
In any event, the latest annual accounts will cover a period that ended a long time ago, so you will need to verify the management trading figures you have been given for the period since the last annual accounts - these are the latest and definitely most important since they cover current trading.
So, what should you do? Obviously you cannot check every bookkeeping entry, but there is much you can do to satisfy yourself.
You can ask your accountants to do this for you and, if the sums involved are substantial relative to your financial situation, then having them involved would be a wise precaution that is highly recommended. However, it is also highly recommended that you maintain an involvement in the process yourself, especially if your accountants are not experienced in running businesses themselves. Many accountants, whilst excellent technically in accountancy, are not sufficiently streetwise not to be taken in by a dishonest businessperson setting out to pull the wool over their eyes. Therefore, get involved yourself, and ensure that at least the steps outlined in this chapter are taken to verify the trading figures.
Ask to speak with the existing accountants to the business
If the vendor has nothing to hide he should have no problem with this. If you are doing the verification without your accountants, the current accountants are probably hoping that they will continue to be doing your accounts when you take over, so they are likely to be helpful. Engage them in chat as much as possible to see what general comments transpire.
They will probably know quite a bit about the business, and you will gain an overall impression about their professionalism. Ask them what they do to produce the accounts. They might tell you that they effectively write up the accounts from scratch, in which case if you trust them as people you probably trust the accounts. On the other hand, they may say that they get books written up by the owner which they convert into final accounts for the taxman, but they do little more. If it is the latter, ask them how good the accounting systems are at the business. If they say, 'You don't have to worry about John, he accounts for everything down to the last penny,' then fine, but if they are cagey you have been warned!
Depending on how much the accountants do, it will be appropriate to undertake all or some of the following tasks with the accountants or with the owner:
Check the bank accounts
Ask to see the original bank account statements for at least the last two years. You can check a lot of things looking at these:
Turnover - add up the credits going through the account. Do they roughly amount to the sales figures you have been given?
• Expenses - look at the direct debits/standing orders. Rent, electricity/gas bills, telephone bills, business rates, etc., will be paid through the account. Do they look similar to the amounts shown in the accounts?
• Bounced cheques! Does the account look healthy? If the owner is selling because he can't make ends meet, it will show. It doesn't mean that you don't want to buy the business, but you need to know why he is under pressure. It may be entirely personal financial pressures, in which case you may have a really good opportunity here.
Check the VAT returns
The owner should have kept copies, which will show turnover declared and expenses claimed for VAT. You will need to review the returns for all the periods covered by the accounts (at least two years if it is an established business). The total sales declared on the returns should be consistent with the accounts you have been given.
The returns will show the net amount paid in VAT to the Government, or refunds received. Double check that the returns are genuine by checking that there are paid cheques, or credit entries, in the bank statements for each of those amounts.
Check purchase invoices.
Check that volumes are as expected, and that prices are as well. If the vendor has told you that toys make a 33 per cent mark-up for example look at some invoices and check the unit prices against sale prices on the shelves.
If you have been told that the business receives credit from its suppliers, check whether the invoices indicate the credit terms you have been told the business gets. Most companies show the due date, as well as the invoice date, on their invoices. You can do a quick calculation to check the overall average credit received from suppliers, the formula being:
average days' credit received = total creditors x 365 annual purchases
So if annual purchases are $250,000 and total creditors outstanding stand at $65,000:
65,000 * 365 = 95 days 250,000
Obviously this is only a rough guide as there could be variatic according to the time in the month the calculation is done, ant is no substitution for a detailed physical check of the original invoices. However, it will certainly show up any significant variation from what you have been told.
Spend some time at the business
The vendor may be worried about staff finding out that he is selling, and may not be keen for you to spend time there for the reason. However, if you can, be around and watch what is going on. Keep a mental note of what is going through the till, for example. If it's a pub or cafe, it should be easy to sit in a corner and just watch and listen - are the staff good, the customers happy, is the till ringing up as much as you would expect?
For businesses with trade customers
You need to know how dependent the business is on selling to a few large customers. This is a much more common problem than dependency on suppliers.
Ask the vendor who the biggest customers are and what percentage of total sales they represent. Ask to see the records to verify the answers.
Obviously, a business that has a high proportion of its trade with a few large customers is much more risky than one with a wide spread of small customers. If one or two customers account for 25 per cent or more of sales, was this what you were expecting? Are those customers loyal to the vendor personally and likely to go elsewhere when he leaves?
If the business sells on credit, you need to know whether the term of credit given is what you have been told. It is easy for the vendor to say that his terms are thirty days but, if most of the customers are taking sixty days to pay, he is in reality giving sixty days. A quick check on the overall situation can be easily calculated. The formula for working out the average number of days' credit given is:
average days' credit received = total debtors x 365 annual sales
If the total outstanding debtors are $50,000 and the annual turnover is $450,000 the calculation is:
50,000 x 365 = 40 days 450,000
Obviously forty days is an average. If particular customers are being very slow to pay, perhaps you should look into whether they are worth having. If they amount to a significant proportion of turnover, you may wish to recalculate what you think the business is worth.
You should be able to verify whether the business has many customers who are very slow payers. The vendor should be able to supply you with a report of outstanding invoices showing how they are. If their invoices are factored, and the credit com function is handled by the factoring company, there should reports produced by the factoring company to look at.
Remember, if you have done your cash flow calculations based on the business giving thirty days' credit, and in reality they giving an average of forty-five days, you are going to need en workingHow to Find and Assess the Business
Finding the right business will probably take a good deal of time and research.
Newspapers and magazines
You will need to start with national or local newspapers, or trade magazines and papers.
Use the Internet
Even if you do not have a computer yourself, find out how to use the Internet search engines and how to access the sites of the major publications, and go to a friend's or a library or an Internet cafe. It is not difficult and it will save you hours and hours.
By way of example, the leading search engine is Google. Try going to www.google.com and in the search box type "US businesses for sale". Within 30 seconds or so you will get pages of links to sites that sell businesses. When you see a reference that looks interesting, by clicking on the link on the screen you will be automatically transferred to the relevant web page. If you have an Internet connection at home you will find that the home page of your service provider will have a search facility. Many service providers use the leading search engines like Google to furnish their search facility anyway, so the result will be just as good as going direct to Google, Yahoo or whoever.
In the case of business transfer agents, you will be able to register your details on their sites, giving a breakdown of your requirements, such as business type, maximum price, location, and so on, and you will be automatically notified when a suitable business becomes available.
Business transfer agents
Don't just rely on websites and publications. You should call the business transfer agents and discuss your ideas and aspirations with them. In many cases they have been selling businesses for many years and have a wealth of knowledge to offer.
How to Find and Assess the Business
Naturally there are good ones and bad ones and you will soon get to know which are which. Although they are acting for the seller, not you the buyer, they will be keen to advise you and help you find the right business if they think you are genuine. They know that trying to sell a business to someone totally unsuitable rarely works because there is almost always something that prevents the sale from going through - the buyer may realise it's not right, he asks his accountant who puts him off, or perhaps the bank won't put up the money. A lot of time can be wasted this way, so good agents will always try to put the right buyer with the right business if they can.
It is also in the best interests of the client. As a seller of a business you would want to feel that your business is being offered to the right people, and you would probably know from experience that the agents that are most successful in selling businesses are those that take the trouble to get to know about the potential buyers on their books. Therefore, the more the agent knows about you, the more helpful he can be.
Here is the best advice when dealing with business transfer agents:
Tell the truth
Experienced agents can tell someone who is exaggerating a mile off, and if they suspect that is what you ate doing they will not be very helpful. They get many calls from timewasters and dreamers, and know that they cannot afford to spend time on. either. Be prepared to offer detailed and truthful information about yourself and your circumstances openly and frankly. They will then not only trust you, but will also be in the best possible position to help you find the ideal opportunity.
Give the agent your wish list
At the outset the agent will ask you for a run down on what you are looking for. Remember, you will need to be flexible to some extent - the exact fit is unlikely. However, as you specify what you are looking for, he will be able to offer you a considerable amount of general advice, and may help you fine-tune your thoughts.
At this point you will gain some indication as to how good this agent is. Try to find out, if you can, whether he charges the sellers an up-front fee, or whether he only charges when the business is sold. Unlike estate agents, it is not uncommon for a business transfer agent to charge a fee to put the business on the books. Some agents always charge an up-front fee, others only if they think the business will be difficult to sell. Some never charge an up-front fee. The latter only offer businesses that they feel a great deal of confidence about, and ideally these are the agents for you to deal with. Naturally, there will be some good businesses on the books of agents charging the up-front fee, and I am not suggesting ignoring them altogether, but obviously be a little more circumspect about believing everything they tell you.
If he's good, visit him
Most business transfer agents find themselves almost exclusively dealing with potential buyers over the telephone. If you want to stand out, make an appointment to see him. The personal contact always helps and, remember, when a little gem comes on the market you want to be the client who is first to see the details.
Now that you are on the agent's books (probably several agents), he will send you details of businesses he considers you might be interested to see.
Visiting potential businesses
Having now been given particulars of potential businesses, it is time to pay them a visit. You can, of course, ask for an appointment to see the owner. However, if it is the sort of business with public access, it is generally a good idea to have a quick look around first, before making yourself known. Agents will normally disclose exact locations as long as you are clearly a genuine prospective purchaser.
If it's a pub, spend a while there as a customer and get the feel of the place. Is it busy? Are the loos clean and modern? Does the place need a lot of money to be spent on improvements? Do they obviously have a lot of happy regulars? Are they patronised by football hooligans or other undesirables? Do you like the bar staff?
If it's a convenience store, walk in as a customer and look round. Is it clean? Is it busy? Are there stale loaves arid cheeses on the shelves?
What do you think of the general location?
You will be able to save yourself a lot of time if you can do this first. Save meetings for businesses that pass the test on this first look. However, in case this is a business you will wish to visit again, be careful not to be conspicuous to the staff. Under no circumstances ask to see the owner - any meeting must be arranged through the agent first.
Preparing to meet the owner
By this stage you have hopefully had a chance to have a quick look around, and no doubt a number of questions will already be in your mind. Make a list.
The agent will have sent you particulars. Having read these, no doubt you will have some general questions. Add them to your list.
The particulars also normally give some very brief information about the trade - turnover, gross profit and net profit. There should be figures for at least two, and preferably three, years, unless it's a newer business. At your first meeting you will not want to go into great analytical depth about the trading figures, but you will want to have a general chat about them. At the first meeting you only need a superficial knowledge for general questions, which that section will give you.
Has the business been offered at a reasonable price?
At this preliminary stage, however, you cannot go into that much detail, but you can sometimes work out a ballpark figure for a leasehold business by multiplying the weekly sales by a given number of weeks. It must be emphasised that the value this produces is very rough and ready, and assumes that profitability is at normal average levels for a business of that type. It can be used for picking out businesses that seem to be worth looking at more closely, and for preliminary discussions with the agent and vendor. However, you will need to do the proper valuation exercise covered in the next chapter before agreeing a price with the vendor. There could be many special reasons why any particular business is offered at a price widely different from this ballpark figure, but knowing the ballpark figure at least enables you to open a general discussion on how the vendor assessed the price he is asking for the business.
If it is a freehold business, then there is also the question of the property value to be considered and added to the ballpark figure.
Although you are not going to undertake a detailed examination of the trading records at this stage, the only way that you are going to be able subsequently to verify the accuracy of the trading information you are being given is by looking through the annual accounts and daily books kept by the business. The first key question, therefore, concerns the quality of the detailed accounting information you are going to receive in due course, and it is strongly recommended that you ascertain this before going much further. However attractive a business may seem at this stage, you are not going to buy it if you have no confidence in the truthfulness of the accounts.
All businesses have to submit annual accounts to the taxman, and this is normally done for the owner by an accountant or professional bookkeeper. Like all professionals, accountants and bookkeepers vary widely in competence and integrity. They have to include in the accounts a certificate of what they have carried out in preparing the accounts. If they have not been given all the reliable information that they would have liked, they should normally say so in the certificate. If the business is run through a limited company, the rules are laid down in the various Companies Acts and for larger companies a full audit is required. A good accountant will not put his name to accounts that he is not satisfied are genuinely accurate.
The annual accounts will have been prepared from the bank statements and bookkeeping records maintained by the business throughout the year. Obviously the annual accounts are more likely to be completely accurate if the daily records are well maintained than if paperwork is just tossed into a shoe box for the accountant to sort out later. It is also important to you that the bookkeeping records are good because annual accounts are likely to be at least ten months out of date, and possibly much more, and you will have to rely on the bookkeeping records to verify how trade has continued since the date of the last accounts. Before you commit to buying the business, it is going to be essential to satisfy yourself that the trading information on which you are basing your decision to buy the business is accurate. You don't want to waste lots of time looking at potential businesses only to discover that the trading records are poor, so before going any further I suggest you ask the agent:
• How recent are the available annual accounts?
• Who prepared them?
• How good are the bookkeeping records?
Having decided to proceed to the next stage, prepare for the meeting with the owner.
A few key figures will have been included in the agent's particulars. Are sales going up year on year? If they have gone down, ask why? Have a look at the gross profit. This should be shown as a percentage of sales. Is it normal for that type of business? If not, ask why not. This question should be raised even if the gross profit is better than the norm, because you need to be certain that the unusually high sales prices can be maintained in the future.
Make a list of these general sorts of questions to ask the owner. It may sound pedantic to say 'make a list", but this is important for two reasons. Obviously you're bound to forget something if you don't but, equally, it is much harder for the seller to drive the conversation towards areas he wants to talk about, and away from those he wants to avoid, if you have a list you keep coming back to.
The other important issue you will need to discuss with the owner is the risks the business faces, and how well he has placed it, in so far as he can, to face those risks.
Is the business well placed to handle the risks it may face?
Some of the risks arise from external factors outside your direct control, and others from internal factors, which you may or may not be able to control. Prior to meeting with the owner, consider what risks could be involved, and add appropriate questions to your list. To assist you, listed below are some of the most common risks that could be relevant.
Location
In any type of business where the general public comes to you, the location is critical, but not always from the same point of view. Consider the location issues that apply in your case. Here are some examples to start you thinking.
1. Is visibility important? People will not come to your shop if they do not know it's there, or they just don't notice it. If you are a general retailer of some kind (flower shop, card shop, convenience store) you have to be very visible. When you have worked in retail, you quickly realise just how difficult it can be to get the public to see things. Often being just round the corner from the main road is enough to get overlooked. Check the footfall (footfall in this context being the term used by retailers to mean the volume of pedestrians walking past the front door).
2. Parking is likely to be important. People will not walk far these days, especially with bags to carry. If you are a post office it will be sufficient that you are very close to parking. If you are a television repair shop it will be important that people can stop right in front of or behind the shop.
3. Are there likely to be changes in planning that could adversely affect the business? It's important to consider this. Measures such as pedestrianisation, one-way systems, ring-roads, traffic-calming, etc., can devastate individual businesses. You will be able to judge from the general nature of the area whether such measures could be possible. If so, ask the owner, but also ask around in the neighbouring shops and bars (obviously be discreet about why you are asking), and approach the local planning department. A very successful privately-owned convenience store not far from New York was sold a few years ago to one of the smaller chains. Two months after they had taken over they were banned from allowing cars to cross the pavement to park in front of the shop. This was because it was close to, a pedestrian crossing and it had become very dangerous. The trade dropped to a trickle, because the nearest car park was two hundred yards away across a busy road. Whereas being able to park outside had previously made it a very convenient shop, it was now considerably less convenient than other shops in the town. Needless to say, the previous owner had known this was coming, but obviously the chain did not carry out the right checks and suffered as a result.
Technology
This heading will not apply to the vast majority of businesses, but if your potential business relies heavily for its survival on technology in some way, there are a number of angles that could be relevant to consider.
Obsolescence
Is the technology used in your potential business likely to be phased out in favour of newer technology, or even completely replaced? If so, can the business adapt? For example, a television repair shop once dealt in valves, but without adapting to electronics skills, could not have survived to the present day. In the future, many technologies will be completely replaced at an ever-increasing pace.
Machinery
If your business depends on costly machinery, is it up-to-date? Small garages are a good example. These days more and more cars on the road rely on electronic diagnostics and tuning, and the small independent garage cannot undertake much of the repair work on these cars that it once was able to do.
Printing machinery, or machinery in small engineering works, can easily be out of date, possibly meaning that it is difficult, if not impossible, to produce work to a high enough specification for the modern client, or at a competitive price. If you are looking at this type of business you need specialist knowledge.
Competition
You will need to know what competition the business is facing now, and what you could face in the future, Consider competition in terms of:
• Existing local competitors.
• Potential for new competitors to come into the area.
• New alternative products.
Trends
Is the business a passing fad? Basically it is the entertainment type of businesses that are vulnerable here. Have karaoke machine sales peaked? How long will karaoke bars be popular? Be very wary of coming in at the end of a fad. Bars and pubs become the place in town to be seen, only to be overtaken by the new one that opens.
Internal risks
Internal risks are much more under your control, but you will want to discuss them with the current owner in order to assess the degree of risk, and how the risks are controlled by him.
Control of cash and stock
Obviously this is vital in all cash businesses with employees. Bars and cafes are particularly vulnerable, and breweries have gone to great expense to have sophisticated stock control systems to enable checks to be maintained.
Stock
Apart from the risk of theft already touched upon, there are a number of other stock risks that your business could face.
Buying the right stock
To what extent is it necessary to understand what your customers will buy? Is this the type of business where you could finish up with thousands of dollars of unsaleable stock because you bought the wrong items? A small newsagent's and tobacconist's shop may not be particularly problematic from this point of view, but greetings cards or gifts, and worse still, toys, could be a different matter. How does the current owner face this?
Sourcing stock well
Can the current owner introduce you to a range of suppliers who offer good products and good prices? When we cover the detailed verification process, because it is most important to satisfy yourself before proceeding whether the current owners have excellent supplier relationships. As a new owner of a business, in the early days you will rely on being introduced to good suppliers to get you going.
Stock price risk
Is your business one where the value of stock can drop? A small computer shop, for example, would be very wary of carrying more stock than necessary, because today's highly desirable state-of-the-art processor chip will be overtaken (and therefore devalued) within weeks.
Perishables
If your business stocks perishable items, how much is thrown away, and are the best measures taken to minimise loss? For example, a flower shop with a cold room will throw away fewer blooms than one without.
Reliance on larger customers/suppliers
Obviously a business that gets a high proportion of its business from a few large customers is inherently more risky than one with a broad spread of clientele.
The same can be said about suppliers. However, it is usually less of a worry to find alternative suppliers than it is to replace large customers who are lost.
Debtors
This risk has been left until last because it is not normally relevant to the vast majority of retail or catering types of businesses - usually it applies only to business-to-business type trades. If the business sells on credit then you will have debtors. However, debtors could be a critical aspect of the business's viability. In order to assess whether it is worth taking matters to the next stage, at this first meeting you will want to ask a few questions about how debtors affect the business and are controlled:
How many customers does the business have, and what proportion of trade do the largest represent?
In this type of business you are interested to know how well the business is spread across its customers. At this stage you should ask for a general indication of how many customers there are, and how much of the trade comes from the largest few. Clearly, a business with 100 roughly equal customers is less at risk than one where three customers provide 75 per cent of the business. In the latter case, what happens if one of the major customers goes elsewhere or goes bust?
How do they decide how much credit to give to individual customers?
Would your bank lend you $1 million unsecured without making checks? There should at least be a system for taking references, and possibly credit insurance.
What length of credit do they offer?
Thirty or sixty days, and occasionally ninety, is normal.
What length of credit do they take?
How good are the customers at paying on time, and what procedures are in place to chase-up late payers?
Meeting the owner
Remember, most owners will not have told their staff that they are selling, and are paranoid lest they find out. This confidentiality must be respected, so don't rush up to the counter and, clutching the agent's particulars in your hand, ask to see the owner, making it obvious why you are there. Be tactful!
The owner may be reluctant to talk when staff or customers may overhear. He may suggest that you pretend to be from the insurance company or something similar, but such covers usually will not work well, and anyway limit your ability to ask searching questions. Therefore it is best to resist this suggestion. If there is nowhere private on the premises, it is better to offer to visit after hours, or to go to a nearby cafe for a coffee or lunch. That way you will be able to have a much more relaxed and informative conversation.
Make it clear that you would like a general chat, but that you have a list of questions that you will wish to cover. Most business owners are keen to talk about their business, and why they think it's an exceptional opportunity that has probably been undervalued by the agent. You should be able to slip most of your questions into the general chat.
Look for any inconsistencies in what the owner says. Make a note for later of any points that strike you as important or in need of further investigation.
Why is he selling? Normally owners will say that it's due to ill health, or retirement, or to spend more time on the rest of their business empire. It's a question that people always feel they should ask. Intrinsically, it doesn't matter to you, as long as it's a good business opportunity at the right price. That is not to say you shouldn't ask, but sellers are not likely to tell you it's a decaying business that can't survive when Macy's is open down the road! You may get a feeling that the truth isn't being told but, quite honestly, assess the opportunity on its own merits, based on detailed and careful research, and largely ignore the answer you are given.
More relevant questions are:
• How long has the business been on the market?
• Is anyone else interested?
Be very wary about businesses that have been on the market for a long time, or where there are no other interested parties. It may be that the business is a dud, or it could be that the owner is simply asking too much for it.
In the latter case you may wish to take the conversations further of course. However, be patient about it, because it rarely pays to get into a price discussion at this early stage. All business transfer agents will tell you that business owners frequently convince themselves that their business is worth far more than it really is, and certainly far more than they would be willing to pay for it themselves if they had come along to buy it.
The problem is that vendors are usually very difficult to shake from this view, and they are certainly not going to change their mind in a first discussion.
If in all other respects the business looks appealing to you, raise the price issue with the agent when you go back to discuss your concerns with him. He will know the likelihood of the seller being willing to compromise. Obviously, you will not be able to take a final view on the value of the business until you have gone back for another meeting to go through the valuation and verification process described in the next chapter, How to Assess What a Business is Worth. However, if it is clear from these preliminary discussions that the price is far too high, there is no point in going through a more detailed and time-consuming exercise, or spending money on a professional valuer, if the agent indicates there is unlikely to be any substantive movement from the seller. In this case, move on. Do not be tempted to overpay.
After the first meeting
Having carefully prepared yourself beforehand, you will have probably managed to glean most of the information you need to judge whether or not it is worth taking further. However, when you sit down to think about it there are almost bound to be further questions that spring to mind, and possibly concerns that you would like to discuss in more detail. Speak to the agent - he will probably call you for your reactions anyway. A general chat with him will probably answer many of your concerns, and he can ask the seller for any additional information that you require that he does not have to hand.
Let's assume that at this point you have decided you like the business and, provided it checks out and the price is reasonable, you would like to proceed.
Before going further, you will need to have a feel for what a reasonable price for this business would be. At this stage you will need to call for the detailed accounts to enable you to undertake this exercise.
Obviously, once you have put a value on the business you will be in a position to make a verbal offer, subject to contract, and the negotiations can begin.
How Much Should You Spend on a Business?
The aim of this article is to give you some basic thoughts to enable you to decide how much you should be prepared to invest in a business.
There are two aspects that need to be covered:
• Deciding how much it is right in your circumstances to consider investing.
• Assessing how much of your own money will be needed to ensure your business venture is well funded.
In order to give yourself the best chance of success, it is clearly vital to ensure that you are on a sound financial footing from day one.
There is nothing difficult about working out a sound structure for your finances - it is all down to common sense and, as long as you give this subject the time and thought it deserves, you should have no difficulty in avoiding arguably one of the biggest causes of business troubles: inadequate or inappropriate finance.
In business, as at home, there is nothing worse than forever struggling to make ends meet. You do not want to find yourself held back at critical times by lack of adequate funds. By ensuring that you are well funded, you can avoid the sort of situation where, for example, you know that more business is there for the taking, but you can't afford the extra stock; or where stock has to be run down because the rent is due.
It is important to be certain that not only is your business well funded, but also that your domestic financial resources are adequate at the same time. So often a good business, possibly soundly funded at the outset, runs into difficulty later because the owners have had to draw out too much money from the business to enable them to meet domestic commitments.
Assessing your own circumstances
Everybody's circumstances are different, so there is no magic formula. Nevertheless, the key issue is this. However carefully you may have investigated the business you eventually buy, you might find that there is not initially as much available cash to bring home as you had thought there would be.
There could be any number of reasons for this, not all bad ones. Maybe due to special circumstances there is a surge in trade and additional investment in stock is needed. Good news, but it might leave you short of cash for a while. On the other hand, you may take over at a bad time or at first you may not do as well as you could have done due to inexperience.
As already stated, it is vital to ensure that you are on a sound footing from day one. If you are short of financial resources right at the beginning things can only go from bad to worse, because somehow you will never recover, at least not for a long time. It is, therefore, essential to ensure that you have reserves in your domestic finances to enable you to survive in case of need without drawing on the business for a while.
How much do you need in reserve?
Again, there is no hard and fast rule, but enough to enable at least three months' domestic spending to be covered without drawing on the business at all is probably a sensible amount. Obviously you hope not to need to draw on it, but it will give you great peace of mind to know that this cash reserve is there. If your spouse/partner is working, that income (if secure) may reduce the reserve you consider to be necessary.
Assessing the needs of the business
As you will be aware, some of the funding for the business can be arranged via debt, but some of your own resources will be required.
How to arrange finance in detail is covered in a later chapter, but at this stage you have to consider how much of your own money is likely to be needed.
When you come to look at a specific business you must consider the financial needs in great detail, especially if it is a seasonal business where the needs are likely to vary greatly throughout the year. In such cases a detailed cash flow projection will be required and, if you are not experienced in accounting matters, professional assistance will be necessary. However, at this stage just work out a rule of thumb to enable you to know the price of business you are able to consider. The detailed workings can be done later when you have a particular business in mind.
As a rule of thumb, assume that, if it is a leasehold business, you will need to find a third of the total costs of buying the business and the stock from your own resources. If it is a freehold business assume twenty per cent, because you can normally use the freehold as security for borrowing, thus enabling you to obtain a higher percentage by way of loan.
Analyzing And Assessing The Business
One of the most important steps you will take towards buying a business will be to make a sound judgement on the viability and true worth of what you are buying. In a sense, you must play the part of a good detective and uncover the truth about the business you are buying. The first assessment you must make in evaluating a business for sale is to review its history and the way
it operates. It is important to learn how the business was started, how its mission may have changed since its inception and what past events have occurred to shape its current form.
You should also understand the business's methods of acquiring and serving its customers and how the functions of sales, marketing, finance and operations interrelate.The business's financial statements, operating documents, and practices should be also be reviewed thoroughly.
EVALUATION
The following are the main sources you should use to evaluate a business for sale:
BALANCE SHEETAsk to take a look at the balance sheet of the business. This should give you records for accounts receivable, inventory, marketable securities, real estate, machinery and equipment, accounts payable, accrued liabilities, notes payable and mortgages payable.
INCOME STATEMENTCheck the income statement. The potential earning power of the business should be analysed by reviewing profit and loss statements for the past three to five years. The business's earning power is a function of more than bottom-line profits or losses. The owner's salary and fringe benefits, non-cash expenses, and non-recurring expenses should also be calculated.
FINANCIAL RATIOSCheck the financial ratios. While analysing the balance sheet and the income statement, sales and operating ratios should be calculated in order to point out areas requiring further study. Key ratios are the current ratio, quick ratio, accounts receivable turnover, inventory turnover and sales/accounts receivable. Look for trends in the ratios over the past three to five years.
ODDS AND ENDSFind out the situation with the business's leases, personnel, marketing, patents, taxes, legal issues and competitors.
OUTSIDE HELPThese factors for evaluating a business have to be carefully scrutinised and weighed. Seek out professional assistance if needed to interpret the significance of the information. In most instances, all of the business records should be made available to you. In some cases, however, certain information may be withheld until a bona fide offer, contingent upon obtaining that information, has been made.
Everything About Buying A Website
If you have been looking online to buy a website, and haven't found one that is worth considering, then you need a better way to go about this process! First, you need to adjust your thinking. Keep in mind that a website for sale listing will only give you a snapshot of the business. These listings cannot outline everything about the website.
First step. Looking through the business listings.
If you spend your time searching endlessly for a website you'll probably give up with no results. This is a common reason why 90% of the people who begin the search to buy a website never complete a transaction. If you want to participate in the tremendous wealth being generated by the internet, then you need to make the transition from "looker" to "buyer".
Communicating with the seller is critical to the business buying process. It is the best way to gain focus and clarity on the right business for you. Starting today, when you look at a listing, I want you to do the following:
From these exchanges of information you will be able to either eliminate or pursue each business. As you communicate with more sellers, you will become clearer about what you want and don't want in a website. With this clarity, when that right website presents itself you'll be able to pounce right on it and get a deal in place.
What are the key motivators for people to buy a website?Before making a decision to purchase a website, a buyer should understand his or her objectives to make sure those objectives can be met by purchasing a particular website. Surveys of people purchasing websites reveal similar responses. Surprisingly, making money is not at the top of the list. Here is a list of the typical answers, in their order of importance:
An existing website has a historical track record (good or bad) which can be used to evaluate the website. An existing website has usually shown there is demand for its products or services, and it should have, among other things, detailed financial records. Sometimes, a seller of a website will agree to help to train a new owner. These are important factors because many websites tend to fail during the early stage of their development. On the other hand, there can also be disadvantages to buying an existing website. A buyer will be assuming an established website culture and infrastructure which may make implementing changes more difficult. Also buyers will generally have to pay a premium for an existing website.
What should I be looking for in a website?A buyer should only consider a website he or she will feel comfortable owning and operating. The time and effort which will be required is an important consideration as is how much the buyer can afford to pay for the website. The amount of cash the buyer needs to regularly take out of the website is very important, especially if the website is to be the buyer's only source of income. Because many experts believe you should not purchase a website unless you can make it better, it is helpful if a buyer has some definite ideas on how to improve the purchased website.
Can I obtain financing to help me buy a website?The availability of outside financing will depend upon the asset base of the website, its operating history, collateral availability and projected cash flow - the same issues considered in all business lending.
How is the asking price of the website determined?Sometimes the seller will simply make up an inflated asking price to determine if there is any interest in his website at the inflated price. Other times, the seller will obtain a professional valuation of the website.
Should I hire an attorney?The answer to this question depends a great deal upon your appetite for risk. If the purchase price represents a significant amount of money to you, then it is a good idea to retain an attorney to review the necessary legal documents. It is important that the attorney you hire be familiar with business acquisitions to be as effective as possible during the process.
Why is confidentiality so important to the website seller?
Typically, confidentiality is very important to a seller. It can be damaging to a website if it is known that it is for sale. Customers may not be interested in buying from a website that is up for sale and competitors could use the information to their advantage.
What is due diligence?
Due diligence is a systematic process for acquiring and analyzing information to help a buyer or seller to determine whether or not to proceed with a proposed business transaction. The information obtained relates to all aspects of the website to be purchased. Due diligence should include both quantitative information, such as sales and other financial data, and qualitative information, such as an assessment of the existing website, security systems, existing relationships with suppliers and customers and other matters. Sometimes the information to be reviewed can be quite technical or industry specific. It is important that the person doing due diligence have a complete understanding of the information being reviewed.
During the due diligence process, there are some significant warning signals. Be wary of the following: