The 5 easy steps to buying a business are:
Step 1. THE SEARCH
Step 2. UNDERSTANDING THE VALUE OF THE BUSINESS
Step 3. THE OFFER
Step 4. DUE DILIGENCE
Step 5. THE TAKEOVER
In many ways buying a business is like solving a jigsaw puzzle. There are many pieces of information to be gathered for a complete assessment of the business.
To ensure you fully understand what you’re purchasing, we’ll take great care to give you a complete picture of the businesses of interest to you. We have long realized it is not in anyone’s interest to offer a business that is not well disclosed with good documentation.
With an excellent reputation to protect, you will find us making a point of providing you the best possible documentation – and should any queries arise, we’ll do our utmost to provide you with complete answers. If you select a business to be of definite interest, the GMO broker will arrange for you to meet the owners and make a physical inspection of the business and its premises.
This meeting should also explore questions you might have about the business model, the business operations, the profit calculations and the strengths, weaknesses, threats and opportunities that are presented to it.
Your GMO broker will follow up with supplementary answers from the owner and the business’s accountant.
The GMO team is here to assist you in putting all the jigsaw pieces together.
STEP ONE: The Search
Your GMO broker will give you an Information profile on one or several businesses which match your criteria.
The profile has a thorough coverage of how the business operates and a financial analysis to help you and your accountant make an informed decision.
The profile includes information on:
- The overall description of the business
- The historical financial data
- Business history
- Contracts held by the business
- Government licenses held
- The premises lease
The Total Cost of a Business Acquisition
When buying a business, it is important to be accurate in estimating the total investment and your ability to meet what is required as the total investment can be more than just the purchase price!
For instance, you may need to allow for the following:
- Purchase Price
- Stamp Duty
- Stock at valuation (wholesale value) if applicable
- Fees – such as for Accountant’s Due Diligence advice, legal fees etc
- Possible assignment charges (lease application fee, assignment fee, rental bond, franchise application fee, training fee)
- Loan establishment fees
- Pre- paid advertising reimbursement to Seller
- Work in progress – adjusting payment to outgoing owner
- Working capital needed before cash flow becomes positive
If you’re seeking a loan to purchase your business, we strongly recommend using an experienced Finance Broker to assist as he/ she will know which banks and bank managers suit certain industries. The Finance Broker will assist in making your loan application look as professional as possible.
STEP TWO: Understanding the Value of the Business
There are four key aspects to a business that you pay for:
- The tangible assets such as plant & equipment. The plant includes shop fittings, office equipment, computers, machinery and sometimes includes vehicles.
- The stock or saleable inventory of the business. This stock has been paid for by the Seller and he/she is reimbursed by you (the Buyer) at settlement for that cost. You then own the stock and can upsell it to the customers for a profit margin.
- Intangible assets. This may include intellectual property such as patents, trademarks, operating systems, designs/drawings/logos, recipes and formulae.
- Goodwill. Goodwill is the expectation that the customers will continue to patronise the business, regardless of who owns it. Goodwill is a consequence of profits and the level of goodwill is determined in part by the consistency and level of those profits. The total purchase price of the business is made up of those four components. Effectively, the plant equipment, stock, intellectual property and the use of those assets by the owner of a business result in customers liking and patronising the business. This patronage results in the business being profitable.
How a Business is Valued
The profit of a business is “valued by the marketplace” on a yield on the purchase price or a multiple of profits. The most common way this is expressed is as a Return on Funds Invested. That is: the profit divided by the total price and multiplied by one hundred per cent. The formula looks like this:
The Stability of Profits
The stability of profits is an indication of the likelihood of earnings continuing after you have assumed ownership.
Essentially, a business is worth what the market will pay for it, but as basic guideline, value usually relates to expected returns as well as the level of security. The price is usually based on a multiple of earnings. For instance, a business regarded as “very safe” may fetch a high multiple of earnings while “less safe” businesses may sell for a lower multiple of earnings.
The role of our brokers is to explain this in full to you – so do feel welcome to ask questions as you must have a full understanding of what you’re paying for and a good appreciation of the business’s value. When you can see yourself in the business and have a good understanding of its value in the marketplace, you’re ready to make a conditional offer. Of course, you will not yet have every building block of information about the business yet, so we will help you prepare a Conditional Offer which is “subject to” certain pre-conditions being satisfied by thorough Due Diligence before you are totally committed to the purchase.
STEP THREE: The Offer
Before making your offer, you need to decide what type of entity best suits the operation of your business.
You may offer as an individual, a partnership, a company (corporation), or corporation or individual acting on behalf of a trust (such as a family trust).
Your accountant can advise you on which format best suits your family and tax planning situation.
Your offer will be to buy the business: For a certain price – On a certain date – Subject to:
- Finance being approved by your bank
- Due Diligence and being satisfied with the claimed profitability
- In doing Due Diligence being satisfied with terms and conditions of the premises lease (and also the franchise terms – if the business is a franchise)
- All government licenses held by the business being transferrable to you at settlement.
- Satisfaction with staffing arrangements and staff transition to your stewardship
- Written assurance from the outgoing owner regarding a competitive restraint period
- Any other pre-conditions you wish to include such as environmental issues, supplier contracts assignments, product warranties etc.
The GMO broker will present your offer to the Seller and there may be either an acceptance or a counter offer.
GMO will mediate on any issues to achieve consensus and acceptance.
Once agreement is reached between Buyer and Seller, the business is then officially “under offer”.
Your deposit is paid into the GMO Trust Account, your Due Diligence will then commence and GMO will help you tick off “all the boxes” as you progress towards settlement.
You need to be aware that though a business can be your route to securing an excellent income and future, sometimes there are trade-offs and personal challenges to your family’s lifestyle to be prepared for.
- Some businesses involve long trading hours
- Will you have the personal skills for customer relationships?
- Are you able to manage staff?
- Have you considered your personal strengths and weaknesses – for instance is your strength in administration, in sales, or in the logistical operation of the business – and how will you handle the weaknesses you might have?
If you’re not familiar with running a business, we recommend discussing your plans with an accountant or an experienced banker as they can help you to equip yourself well. Remember that whilst a business is your route to securing an excellent income and building a better future for your family, sometimes there are trade-offs to be prepared for.
STEP FOUR: Due Diligence
At the end of the Due Diligence process, you should have a clear picture of where the business is today, where you can take it in the future and why the owner is selling.
The Due Diligence process involves examining the Financial Data, Income Statements, as well as the recent years Tax Returns to determine:
- Whether the claimed Profit can be verified
- The Accounts Payments and Receivables history
- The business structure: Legal agreements such as licences, permits, insurance policies, and documents related to intellectual property, franchise agreements, contracts with suppliers and clients
- Employees: Awards, wages and salary information, superannuation payment records. Whether there are any staff issues
- Operations: Discussions with the seller on suppliers and customers are desirable
- It’s worth analysing the business’s diversification of suppliers and clients
- Consider the equipment and its capabilities of handling future growth
- Post Due Diligence confirmation of premises lease documentation and resultant meeting with the landlord and managing agent
We can recommend experienced accountants and solicitors to help you with Due Diligence, if you do not have arrangements in hand yourself.
In addition to accountants and solicitors we can help you to obtain professional advice from other professionals such as:
- Finance Brokers or Bankers
Even if you’re an experienced Business Buyer it is still a good idea to have an additional opinion to help you reach an informed, well-balanced decision and to ensure a smooth Settlement.
Through having been in the business sales industry for a long time, we have met and worked with many of Perth’s best advisors.
Let us know if you need a recommendation for professional assistance. We can make suggestions to you on the appropriate route to take.
What if due diligence fails to meet expectations?
If the Due Diligence is not to your satisfaction, or your finance is refused, then your deposit is refunded and GMO will present you with other businesses to consider.
Far more likely: Due Diligence, finance and lease issues will all be satisfied and you are now positioned to become the proud owner of the business!
STEP FIVE: The Takeover
GMO recommends the appointment of a Conveyancer/ Settlement Agent.
- organise the money movements and liaise with your Banker and Finance Broker to arrange a settlement time with the Seller’s Conveyancer.
- liaise with the Landlord/Managing Agent on your new lease documents and also handle transfer of licenses associated with the business.
- organise business names transfers and help you with housekeeping issues such as phone and electricity.
As the new owner, you will need to decide if you wish to employ all, or some of the staff and give the Seller time to advise staff members of their employment going forward and introduce you to the staff prior to Settlement Day.
On Settlement Day, you and the outgoing owner should:
- Arrange for the stock to be counted
- Check off all the plant and equipment of the business
- Transfer control of keys, alarms, domain names, websites, security codes and computer systems
- Cash floats, parking access and staff employment transition will need your attention too!
- Arrange transfer of purchase funds
- Arrange transition of Facebook and other social media
- You and the outgoing owner will also need to agree when and how the suppliers and key clients of the business are informed of the change of ownership
- Have the correct stock and cash float in place for a successful first trading day
- Be satisfied that all licence transfers have been approved
- Understand the role of the Seller in the training/assistance period following Settlement Day
Settlement funds usually transfer on a Friday and stocktake and keys handover usually occurs over a weekend.
You are now in business!