Another way of starting up a business is to buy one. The advantage here is that you do not have to do all the groundwork in getting the business up and running, it has already been done for you, ready-made clientele, business plans have already been drawn up, it may be easier to get finance as the business is already established. The disadvantage here is that you will have to come up with a lot of cash upfront (not forgetting to budget for professional fees), you will also need to look at why the owner is selling up, is there a negative impact because of this?
Buying a business is a bit like buying a house. When negotiating a price, you will be doing so based on the evaluation of major assets owned by the seller. You and the seller will have to agree on the allocation prices of each asset. This means that you will need to have a professional appraisal done, before going into negotiations as this will help give you a fair idea of what a ‘fair market’ value of the business is and what you should offer for it. (A good accountant and business agent can help you with this).
These same prices are what will also aid you in calculating depreciation and taxable gains or losses if and when you decide to sell or dispose of the asset in question. It is also good to know that sellers would expect you to negotiate on the asking price; however, be reasonable on the price you offer. Even though a seller would expect a price significantly lower than the asking price, he/she would not appreciate a time waster offering half the asking price. (see business tips on how to value a company).
The final price will depend hugely on how desperate you both are to carry out the transaction. As in the property market, the more desperate a seller is, the more he/she will be willing to negotiate on a lower asking price; similarly if you as the buyer is desperate to buy immediately, then you must put your mind to the possibility of having to pay a higher than expected price.
After agreeing on the price, you will need to do due diligence (verify that information given about the business is correct) to look for dramas such as overstated earnings, undisclosed debts, poor employee relations, pending lawsuits, overvalued inventory to name a few. I strongly recommend professional advice when starting out here as it could save you a lot of money and headache later on. (see professional and legal issues section for how to choose your professional). Due diligence really should give you a fair idea of how the business is performing now, and how it is likely to perform in the future. For a down payment, the seller can agree to take the business of the market to allow time for due diligence. In general, this process can take up to three to four weeks for small businesses.
You should expect to receive from due diligence:
- The list of customers
- Financial statements
- Employment terms and conditions
- Key orders and contracts
- IT systems and other technology
- Minutes and consents of the board of directors and any shareholders
- Staff records and files
- Confidentiality agreements with staff
- Licenses and permits
- Patents, trademarks, copyrights and other intellectually related property.
You do not necessarily need an agent in this process, but they do have their advantages. If you know the owner of the business you want to buy and have a fair idea of the type of business you won’t get into, then an agent may not be of much use. However, if you are new to the whole process, then an agent is your new best friend. He/she will be able to guide you in making an informed decision on the type of business you want, how much money you should pay for it and most importantly, which specific business is right for you. He/she will also make sure that working with your solicitor, all transactions go smoothly from appraisal to negotiations up to the final deal.