Buying a Business










BUYING A BUSINESS

Probably one of the most important career decisions made of a business by people, concerns the acquisition of a business. Having made the decision to buy an existing business the propective purchaser should examine and investigate thoroughly all the information presented before making any financial commitment. If the quality of information presented is either inconclusive to make an informed decision, it may be necassary to make further investigations or even reject the proposition totally.

It is critical for the purchaser to understand precisely every aspect of the purchase decision. The quotation "Buy in haste repent at leisure"; is never more evident than when buying a business. Professional assistance is almost mandatory, some of which may include

1)  ACCOUNTANTS

Accountants will investigate and comment on historical financial records, interpret performance, prepare future projections and assess the value of the business

2)  SOLICITORS

Solicitors/Lawyers will construct interpret and comment on all  legal documents to protect your interest

Primary documents include

(a) The agreement to purchase contract.

(b) The Lease as appropriate

(c) Caveats on title

3)  INFORMATION AND COUNSELLING SERVICE

This is run by the Department of Employment established in 1976, it now has over 70 offices thoughout the U.K. At one stage three sessins with a counsellor were free and further consultations if needed were charged reasonably.





SUGGESTED CHECKLIST FOR BUYING A BUSINESS

PRIORITY -EVALUATION

THE BUSINESS AND YOU

1.  Is this the type of business you were actually looking for ? How long has the business been owned by the current proprietor and how long has it been on the market.?

2.  Is this the type of business compatible with your interests, experience, personality and capital?

3.  Do you know the precise reason for the sale? Falling Sales? Road Closure? Loss of Agencies ? Zoning problems ? Lease Expiry? Financial problems?

4.  Will the cash flow from operations be sufficient to meet your debts and expenses ?

5.  Is the seller being co-operative in supplying you with the information and in permitting a trial period before commitment?

6.  Will the vendor train and assist you before purchase?

7.  Will the vendor agree not to set up in competition against you at an agreed distance and time after purchase?

8.  Do you require any special licences to operate the business ? If you need new licences, do you know how to obtain them?

9.   Is the plant and machinery in a good state of repair? Is it efficient?

10.  Is the plant/equipment in danger of becoming obsolete or difficult to service? Could it easily be sold?

11.  Are the assets you are buying free from debt and liens ? Have you checked this carefully?

12.  What is the book value, the market value and the replacement value of the fixed assets?

13.  Is an adequate salary allowed for work done by the owner and family in addition to an attractive profit margin?

14.  Does the proprietor receive interest on loans made to the business and is the interest charged to the profit and loss account?

15.  Are some expenses prepaid by the vendor ?  Will you have to reimburse the vendor for your shares.   e.g...Deposits on forward orders, advertising, management fees?

16.  Are profits arequate to warrant taking the risk?

17.  Is the vendors personal role critical to success?

IF YES STOP HERE

IS IT TIME FOR YOU TO RELAX FOR A FEW MOMENTS.  CLICK ON SWOOPO !
THEN CARRY ON !!!






18.  Is a particular employee critical to success ?  If so, will you be able to retain that person in your employment?

IF NO STOP HERE

If at this point there are unanswered or negative aspects evident then the business may not be for you. Proceed with cauction through the next business analysis.

19.  Is the business in a good location or is this the reason why it is for sale ?

20.  Is the product or service likely to maintain its marketability or is it in danger of becoming oversold, out of date, or obsolete ?

21.  Have all the sales been reliably recorded ? Have you checked the daily sales book to compare and verify with the bank deposit book, and the annual sales in the profit and loss account?

22.  Are all sales in reliable records?  Are the total sales broken down by product line, if applicable ?

23.   Do you know the minimum likely sales ?   The maximum likely ?

24.   Have you examined the effect of increased or decreased sales on the profit and costs?

25.   Are the fluctuations in sales due to lucky one-off sales ?

26.   What is the sales pattern year by year and month by month ? Is the pattern seasonal or related to some business cycle( such as home construction or other uncontrollable variables ?

27.   Are you certain that the sales disclosed have been generated from the business under review ? Is it possible for sales to be included from another similar business als owned by the same vendor ?

28.   Can you increase sales with the current resources - human and financial ?

29.   Do you know what costs are allocated to which product , and how a change in the product "mix" would affect costs?

30.   Has the previous owner received any payment or advance deposits etc, which are due to you as purchaser?

31.   Are there any continguencies, such as warranties or guaranteed debts or account ? Are you assuming any risks of being liable for the previous owners actions ? Will you be expected to make refunds or honour warranties to customers (even though you are not legally obliged to do so) or risk losing goodwill ?

32.  Has any inventory item been sold but not shipped, or has stock been ordered and not delivered?

33   If inventory or work in progress is to be included has a value been agreed upon at the time of offer? Have you agreed upon at the time of closing, and within what limits?

34.  Are any inventory items on consignment, with the right of return for a full credit?

35.   Are any goods and services under warranty ? make allowance for a potential claim?

36.   Have you considered what effect inflation will have over the years to come ( on sales? on costs? )

37.   Will you have to build up and fund your own accounts receivable ? Have you figured out how this will affect your cash flow and working capital requirements ?

38.  Are bad debts deducted from sales, or are they still shown as receivable ?

39.  Have the financial records for the last three years including Balance Sheets, Profit and Loss statements, tax returns, purchase and sales records and bank statements been made available ? Have these been professionally analysed?

40.  Are expenses shown ? Will you as new owner, have the same level of expenses ? Check the cash payments book to establish accuracy and disclosure of specific expenses appearing in the Profit and Loss statement?

41.   Has the owner avoided some expenses that could be delayed such as equipment maintenance ?

42.   Are there annual expenses coming soon ?  i.e. Water rates, maintenance contracts?

43.   Are there new or increased expenses you should anticipate ?

44.   Is there a chance the owner has paid expenses incurred through this business , through another business ?

45.   What expenses do similar businesses have ?

46.   Will you be able to continue buying the products from the existing suppliers ?

47.   Have you checked the business credit rating with suppliers? Will you receive an established rating ( or be trated as a new account)?

48.   Are you buying the accounts receivable ? Do you have a listing of these accounts by age ? Are you taking over some debts that you do not know the exact terms of repayment? Is his in writing ?

49.   Have you investigated the possibility of factoring your accounts receivabe ? Has an inventory been accurately shown at true value, calculating actual cost of goods sold ?

50.   Has an inventory been accurately shown at true current value, calculating actual costs of goods sold ?

51.  Have you identified that the stock turn ratio for this business approximates accepted industry standards ?

52.  Have you examined the possibility that slow moving stock from another business also owned by the same vendor has been included in theinventory of the business under reveiw ?

53.  Has the equipment been depreciated in the books and if so, how does the depreciated value relate to the asking price?

54.  Have you decided what intangibles you want - mailing lists, business name, exclusive rights, lease etc? Can these be transferred?

55.  Is any equipment leased ? What arrangements are being made between the vendor and the finance company regarding lease arrangements ?

56.    Are you likely to be offered the opportunity for ownership on maturity of  a lease ?

57.   Have you checked the terms and conditions of the lease of premises and discussed these with your solicitor ?

58.   Have you consulted an accountant on how to value the various assets for the best tax advantage?

59.   Is the staff adequately paid or do they expect a wage increase soon, bonuses ?  Holiday Pay?  Has accrued holiday pay, loadings and long service leave commitments due to existing employees been determined and adjustments made ?

60.  If the business is a limited company , are you buying the shares or assets ? Be sure to consult a solicitor on this point?

61.   If buying a share of a company or entering a partnership do you know the limits there are and do you know what authority you will have in the management of the business ?

62.   Based on past financial results, have you projected the future cash flow and profitability of the business ? What is the break-even point?

63.   Are you aware of the "hidden costs" associated with the purchase (e.g. stamp duty, legal fees, deposits and rates)?

64.   Does the contract of sale describe the assets to be purchased what liabilities are to be assumed and when is the business to be taken over?

AT THIS POINT YOU SHOULD HAVE COMPLETED THE EVALUATION OVER A PERIOD OF TIME DURING WHICH SOME DETAILS MAY HAVE BEEN GLOSSED OVER OR ONLY PARTIALLY SATISFACTORY. REVEIW THE QUESTIONS AND IF COMFORTABLE PROCEED TO THE NEGOTIATING TABLE - REMEMBER TIME IS ON YOUR SIDE IN MOST INSTANCES.

65.   Are you ready to negotiate? Remeber a business is worth no more than the highest price someone will pay and no less than the lowest price the seller will accept, with both parties being willing but not eager ?

66.   Before signing the contract of sale, have you made the offer subject to finance, record inspection, necessary licenses and rights and transfers ?

THE END.

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.Email           peter@petersfieldphotos.co.uk