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Facts, facts and more facts - due diligence.
So it's good enough to continue with? You may be required to sign a confidentiality agreement to proceed with your due
diligence. Now is the time for the in-depth financial analysis. Do your
projections; check the going rates, the market conditions, and the strengths
and weaknesses of the business? Consult your solicitor and/or accountant to
draw up an offer (there are a number of ways to value a business, your
accountant will assist with this). Remember you are buying a business, not a
job! - Usually your offer will be conditional upon certain aspects being
satisfied. On conditional acceptance be thorough, check everything; call in an
advisor, an industry specialist, and your accountant and lawyer. This will cost
(be specific, ask for quotes), it will be cheaper than getting it wrong.
Now the facts! Every business will differ in what is required,
but you will need to cover :
The financials - Inspect the business's books covering the
past 3-5 years to judge its health and financial trends - the accounts may need
to be normalised (adjusted to exclude interest payments, owner drawings etc),
do they make sense? Is there a profit after owner's wages? How is the business
trading? If the owner owns the building, are they paying market rental? What
you are looking for here is if the business is making any money, and whether it
is in a sound financial condition to provide the return you want? Work with
your accountant or business advisor to check irregular figures and establish
industry operating ratios - how do they check out against others?
What exactly is for sale - There is likely to be plant and
stock of some description, how have these been valued? Plant will be generally
be valued as; Either a Going Concern ie. The assets are valued as a working
part of the business. Or at Salvage Value (the lesser) where assets are only
worth what they would fetch individually if dismantled and sold. The final
value will depend on whether or not the company is trading well. Are there
patents, are they registered - where do they apply and till when, is there any
intellectual property and is it transferable? What about licensing and lease
agreements - the business may be worthless if either of these run out and
cannot be renewed? There may be stock - how old is this, should some be
discarded, has it been priced appropriately - ensure you know what does and
doesn't belong. On inspection your Solicitor will be looking for evidence of
ownership of equipment etc. What's being sold - the business, its assets or
it's shares? Check out the risks.
Verify market demand - By now you should have an understanding
of the market, what the going rates are, where this business is positioned, its
market share, and what the market conditions are like. You would also have
looked at the businesses competitive advantages and its strengths, weaknesses,
opportunities and threats. What skills will you bring to this business? How
healthy is this industry? Are there barriers to others entering the market? Is
there an adequate margin, or are people price-cutting just to get the business.
Has the owner been doing this to attract custom? It may help speaking to an
industry specialist.
Do your projections - Use all the above, particularly the
financials to project out 2 - 3 years what your profits will be. Do your most
realistic scenario, then look at your best and worst cases. Great! So it's
looking good - what about cash flow? Is it there - the bank will be most
interested in this as every month they will want their money. Get your
Accountant or Business Advisor to help or check you figures.
What's the business worth - You like
what you see and want to make an offer, but what about the price? This section
looks at how businesses are valued and has been treated as a subject in its own
right.
Making an Offer - Usually your offer will be conditional upon
certain aspects being satisfied. It is generally best if an offer is in
writing, this can help prevent any confusion or misunderstandings. There are
three options; 1) Get your Solicitor to do this. 2) Use a standard business
sale and purchase agreement; you can generally obtain these through your
solicitor or your business broker. 3) Do it yourself. Discuss this with your
solicitor, he may suggest some appropriate clauses, or wish to view it if he
thinks it is necessary.
There are a number of things you will want to cover; the names of the buyers
and sellers, what is being sold, the price it's being sold for, terms of
payment, warranties by the seller, and any special conditions (these provide
some safety if things aren't as you have been lead to believe). Some common
"Special Conditions" the agreement could be subject to are; the buyer obtaining
suitable finance, the buyers solicitor approving the agreement and the lease,
the buyers accountant approving the business's viability, any restraints of
trade, having a period to conduct due diligence to approve the business's
financial records, equipment, licences etc. Also if the seller is to terminate
any existing employee contracts, and is to payout all wages, salaries and
benefits owed. It is critical you seek professional advice on this.
At this stage, the deal is still contingent on your offer's conditions checking
out okay. If they don't - then no deal, either walk or renegotiate.
Generally business due diligence only needs to be done once you have a signed
agreement. In practice however much of this work is often done in
finding out about the business and in determining what to offer. Next you need
to decide.
These points are intended to act as prompts - they provide an overview only.
When purchasing a business always seek professional advice.
Richard O'Brien is the Managing Director of nzbizbuysell - an online
advertising site dedicated to the buying and selling of New Zealand businesses.
To search more opportunities click: nzbizbuysell Businesses for Sale listings
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