Purchase An Existing Business
Purchasing an established business is the quickest and most direct way to enter the business environment. However, thorough investigation is required in order to avoid taking on the problems of other. The extent of the investigation will depend largely on the size and nature of the business. It is therefore crucially important to consult attorneys. The following issues should be closely investigated before any sale agreement is finalised.
REASON FOR SELLING
Establish why the present owner is selling. Very few people sell their businesses if the enterprise is doing well, although entrepreneurs enjoying success are forced into selling because of age, failing health and the like. Extra care should be taken should investigations reveal a business is being sold because of poor performance or location, a declining customer base, or similar problems.
PURCHASE PRICE
Determine exactly what you are buying. Many different assets are involved, such as equipment, machinery, stock, land, and building. There are· numerous factors to consider before assessing whether the selling price is fair. A point of departure should be to closely examine audited financial statements covering at least the past three years. You should consider requesting sight of bank statements and compare these figures against tax return reports and investigate any discrepancies. Also consider interviewing some of the Seller’s employees.
SETTING YOUR PRICE
Set the price you are prepared to pay for the business from a financial perspective. There are various formulae used to calculate the fair value of a business. Most selling prices include aspects such as goodwill, the difference between the book value of the assets and the selling price of the business. Verify with your accountant whether the goodwill is a realistic figure.
It is recommended that you consult with your accountant, business broker or financier regarding a fair selling price for the business.
OTHER THINGS TO LOOK FOR
- Thoroughly check the stock. Stock items may well be old and/or damaged.
- Investigate any lease agreements, including the expiry date and rental escalation clause.
- Thoroughly investigate the existing creditors and debtors of the business.
- Check the asset register, consider using a knowledgeable person, such as a professional business evaluator, to ensure all the assets of the business are properly accounted for.
- Check with local authorities regarding licencing requirements. permits and zoning.
- Establish whether there are any future obligations such as guarantees, warrantees, unfulfilled contracts. pending damage claims and lawsuits which would affect the business.
o Investigate any new environmental standards that will affect the future of the business.
- Check the agreements with employees and customers.