Buying a Business Tutorial
Although buying a business will always be a risk we believe that a successful new entrepreneur should be in a position to buy a business based on his/her own business knowledge and expertise. With limited involvement, advice and costs you can insure that a profitable deal be negotiated by yourself with exciting results of your own.
Aspects to consider when buying a business
Why buy a business
Acquiring personnel with industry experience
The business will have qualified and experienced personnel members to do all the routine work, enabling you to focus on running the business. However the option does exist to reappoint all staff members on a probationary period with final decision to reappoint them on a permanent basis within 3 months. Link regarding labour affairs to follow.
Be in control of your and your families destiny
With the current high rate of unemployment in South Africa buying a business to fit your personal needs to accommodate your family is the face of the future. Statistics show that Family businesses success rate is much higher.
Better chance of successful financing
Applying for financing for an established business with a proven track record and financials increases your successes rate of financing. www.standardbank.co.za
Career change
It’s a proven fact that change is as good as a holiday and develops a healthy mindset which is of the utmost importance in assuring positive growth.
Eliminating competition
Buying an existing business reduces the risk and avoids unnecessary flooding of the market.
Ensure fast growth in the business
As a result of the foundation being laid by the founder or second owner of the business, new energy, capital and ideas will ensure fast growth.
Established relationships with clients and suppliers
Established terms and conditions with clients and suppliers are already in place, which will have a positive effect on cash flow.
Higher return on investment
With interest rates being at an all time low you can expect a higher ROI when buying a business suppose to investing your money in a bank.
Historical data and proven track record
The importance of realistic business plans forecasts and budgets can not be under estimated which underlines the importance of historical data and a proven track record
Improve your cash flow
Existing clients, fixed contracts, the elimination of unknown and unnecessary expenses and income from day 1 will improve the cash flow situation.
Minimizing your risk
The current owner has already paid “school fees” with regards to suppliers, customers, employees etc.
Calculated Risk
The risk of failure of a new business (current failure rate of 75 %) is reduced dramatically as the risk becomes a calculated one with information available.
Surpass the critical start-up process
Once again the critical start-up process of 1000 days are reduced or removed by the existence period of the business.
Systems already in place
No business can be operated successfully without a proven written system in place.
Trade secrets and training from current owner
Tricks of the trade will be made available and must be supplied by the current owner. A training period of a minimum of one month free of charge by the current owner is standard and must form part of any agreement.
Personal situation
Your personal situation should be evaluated carefully with emphasis on the following:
Financing required and maximum amount to be invested in a business.
Buying a non-franchise business the banks require a minimum of 30% own cash contribution and the balance of 70% will be financed subject to 100% security in form of a property or pension fund. As a result of the complexity of the financing process every application is handled with its unique circumstances. Purchase price is normally based on the Latest Net Income. Aspects such as asset value and goodwill are also taken in consideration.
Most franchises require between 50% and 60% cash contribution with the balance being financed with full security. Security could be in form of a property or pension fund.
Key factor of cash flow must be kept in mind
Don’t use all your cash when buying the business allow for an initial cash flow. Remember that initial running costs of at least 2 months, rent deposit’s, joining fees for franchises, electrical deposits in some cases etc. have to be provided for.
Benefits of a Management run business versus an owner run business should be carefully considered.
It is a known factor that the closer you are with your business the bigger the chance of being successful. Supervision, control systems, training and trustworthy personnel is of the utmost importance if you decide to acquire a management run business.
Monthly salary required.
A fixed monthly salary is normally provided for although certain expenses are allowable and should be added to the owners total package.
Preferred location, location, location!!!!
The ideal position of your business must never be overshadowed by traffic and travelling cost although both remains an issue and should be carefully considered.
Support system consisting of your partner, spouse or even children may make a valuable contribution to your success. We all need a break at times however your business may be broken if you take an unplanned break.
A business related background, knowledge and expertise will also be important in the final analysis. Experience and knowledge of the type of business will reduce the risk and will be an added benefit and injection to your new venture.
Identified your favourite businesses? Request the following information:
Documentation required (Management accounts for the past 12 months, turnover figures for the past 24 months, licences, tax clearance if applicable
Reason for selling
Expansion possibilities
History of the business
Personnel compliment with Job descriptions, employment contracts etc.
List of assets complete with values.
Careful consideration should be given to Legal entities such as, Private Companies, Close corporations and Individuals .Link to acts to follow.
Making your final decision
Avoid the possibility of paying an excessive Purchase Price by calculating the return on investment (ROI) Payback Period and Goodwill.
Due Diligence investigation
Do an extensive investigation covering all aspects of the business as specified in the Agreement of sale within a specific time frame.
Current lease agreement
No business should be sold without a written current lease agreement complete with periods, escalation, monthly payments etc, in place.
Negotiating .Link with the art of negotiating
Please refer to Industry Information & Documents on the Home page.
Why buy a business
Avoid the possibility of a wonderful proven idea with well qualified and experienced employees dying a slow death as a result of the lack of hard work and minimum capital required. Make a small contribution to the founder of the business by acquiring his ideas and efforts in the global network of businesses.
Why sell a business
You have taken up the challenge some years ago to built your business at a frantic pace facing many challenges, having fun and be stimulated by success and now it is time to slow down a little bit.
Buy the shares of a business or buy the business
The legal dentity of a company remains with the seller when buying the shares of a company whereas a new legal dentity must be formed when the business is bought out of a company;
A number of clauses should form part of the agreement of sale with warranties or indemnities undertaken by the seller the most important.
Notice in terms of section 34 of the Insolvency Act must be published in local newspapers which give the creditors the opportunity to object to the sale.
Where to find a business
Local Business Brokers are a good source however the most effective way of finding a business is electronically via the internet on www.bforsalewc.co.za.
How to fund a business
Personal cash funding remains the most popular method with an edge in the negotiating process.
Funding via Banks and other financial institutions are also available and every application is normally different and handled on merit and circumstances.
Buying versus starting a business
Statistics shows that the risk is reduced considerable as a result of the following when one buys a business oppose to starting it from scratch:
- School fees have been paid
- Proven track record available
- Historical data available
- Qualified and experienced staff available
- Loyal clients and suppliers on file
- Trade secrets and training available as part of the purchase price.
Do one need advisors during and after selling process
Although advisors like Business Brokers, Accountants, Attorneys, Labour experts, consultants who specialize in Business plans and application for financing may be useful in their related fields a lot of frustration and money may be saved if the buyer take that little more effort in familiarizing himself with the buying process and obtain valuable information prior to the seeking of advice.
During these investigations valuable knowledge of the business including products, personnel, system, customers, use of machinery etc are obtained.
Owner versus management run business
It is a proven fact that owner run businesses have a far better chance of succeeding as a result of personal attention and looking after your own interests although it forces one to spend more valuable time at your business.
Excellent management skills from owner and manager is obviously necessary in a management run with supervision and control systems of the utmost importance.
Why do businesses fail?
The following are only a few reasons for failure:
- Bad and ineffective management
- Lack of control systems on staff and stock.
- Insufficient time and effort spend at business to ensure proper service and high quality products.
- Under estimated the importance of ongoing training of personnel
- Lack of capital
- Reluctance to learn more about the business world
- Not attending courses on negotiating skills
- Paying too much for a business
- Lack of self discipline and handling of cash especially in peak periods.
- Location not suited for business
- The importance of a proper Business plan complete with forecasts overlooked.
- Planning with no implementation
- Not conducting continuously marketing in ALL aspects of business.
Is a due diligence necessary?
Do your homework to ensure that everything is checked that includes Fianancial Results and items not on the Balance Sheet which includes:
Legal contracts pending, personnel health, competitors, relationship with suppliers, contracts outstanding etc.
WATCH OUT FOR SKELETONS IN THE CLOSIT.
- Is it advisable to negotiate on your own and negotiating tactics.
- All ways have a witness present
- Have a timeframe
- Stick to your Agenda
- Show humour
- Do not close the door for further discussions
- Be well prepared
Must one have business knowledge to buy a business?
Yes although literature, seminars and advisors are all of the utmost importance to guide you through the buying process.
Why is confidentiality important
Confidentiality will ensure that key staff members, suppliers and clients do not jump to negative conclusions as a result of uninformed facts and roomers spreading.
What is the recipe for success when buying a business?
Be open minded
Focus on your strengths and be aware of weaknesses
Do your homework and plan intensively
Appoint informed consultants
Which documents are required in the buying/selling process?
Memorandum of information
Memorandum of Agreement of Sale
Agreement of Lease
List of Fixed Assets complete with values
Financial Statements on which decision were made
Personnel contracts and details
Licences required
Outstanding Contracts
Statutory Documents / Certificates /Share Certificates/CK Documents/
Who buys businesses?
Anybody looking for a challenge
People who wants fair compensation for their efforts
ROI
Buying Tutorials
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