BUYING A BUSINESS - BASIC GUIDELINES AND INFORMATION
Introduction
Buying a business - basic guidelines and information - is intended as information for the first
time buyer and buyers with some business experience. Detail explanations on the subject under
discussion falls outside the scope of this “Basic guidelines” and should you require further
information kindly contact your business broker, Frik Liebenberg at 082 556 8368 or
074 373 1888
1. Reason for buying a business
Be sure that your reason for buying a business is logical, and based on facts.
To be relieved of stress from your present work situation is generally not a
good reason to buy a business.There are no stress free businesses. It is
advisable to have the support of your spouse in this venture, especially if you are a first time buyer.
2. Choice of an agent/business broker
A business broker should have a working knowledge of contract law, financial statements/
balance sheets (and be able to read between the lines) be able to value a business
and have practical business experience. An agent selling houses IS NOT AUTOMATICALLY
QUALIFIED TO SELL BUSINESSES. Your business broker should spell out the process
and implications of the transfer of a liquor licence, cost of stocking and running the business.
Your business broker should be able to act in a consultancy capacity for a considerable
period (+/- 1 year) after handover to assist you with difficulty you might experience after
your purchase.
The following questions may be asked by the prospective buyer to the business broker to
ascertain whether the business broker is suitably qualified to assist him or her in purchasing
a business.
1) Do you operate from a registered business with a formal office?
2) How long have you been a business broker? (remember a residential estate agent is
not automatically qualified to sell businesses)
3) Are you registered with the Estate Agency Affairs Board?
4) Are you registered with the Institute of Realtors?
5) Did you complete business broking courses i.e. “IRSA Business Broking Course”?
6) Can you evaluate financial statements and read between the lines?
7) Can you do a professional valuation of a business? (Not by the magic multiplier method)
8) Will you assist me for at least one year after purchase and are you qualified to
evaluate and identify problems in a small business.
9) And most important, have you ever owned a business? (If not, you are talking to
a marriage councilor, who never was married)
Remember, you are placing your life savings in the hands of your broker. Does your
broker look after your interest, or after his own wallet?
BUYING A BUSINESS - A COMMITMENT
Don`t buy a business if you are not prepared to make a total commitment. That is a financial
and personal commitment. Nobody will make a commitment on your behalf while your money,
job and assets are safe and secure. The risk in business is real, and there are no guarantees,
however the reward are out there for the person who is prepared to take a calculated risk and
strive for self - actualisation.
Cost of buying a business
If a business is advertised for say R100 000,00 you will need more than R100 000,00 to
purchase the business because of “Hidden Cost” which are not always spelled out by
ignorant or dishonest agents.
The “hidden costs” are made up of the following:
A) Rent deposits
Your first month`s rent payable might be higher than anticipated.
Most lessors require two times your monthly rent i.e. one months rent
in advance plus one months rent as deposit. (If your rent is R3 000 your first payment
can be R6 000.)
B) Electricity deposit
Some buildings, not all, will include the electricity deposit in your rent deposit. Otherwise
you may be liable for a deposit which is +/- three times the average usage i.e. if your
electricity usage is likely to be R1 000/month you may be liable for a deposit of R3 000.
It might be more or less, dependant on the situation.
C) Stock
Your business broker should find out what is the optimal stock value for running the
business most efficiently.
Then: - if stock is included - calculate the fast moving stock value you must add to the stock
which is included and add this to your hidden cost.
Then: - if stock is excluded - add the total stock value required to run your business, to
your hidden cost already calculated.
PLEASE NOTE:
The prospective buyer must realise that when a seller, sells a business, and the contract
reads that the purchase price includes a specific value of stock, that value of stock
should be in the business at the time of the handover. But the seller will most likely
deplete the fast moving stock and refrain from buying stock or consumables if it`s not
really necessary. That means, when the buyer takes over the business, it could be
that he or she will have to purchase a specific amount of stock. It is therefore
advised that the buyer does not rely on the value of stock in the business at time of handover
to generate profit and a turnover as previously, because of the unbalance in fast moving
stock and slow moving stock.
It is therefore of extreme importance not to put down your last cent and expect the
business to give you a good return. Examples of above could be for instance that the
purchaser who takes over a restaurant, will have to replace all the cooking oil at a
considerable cost, because the seller will stretch the oil as far as possible. Package
material, cleaning material and popular items on the menu will not be in stock and items
which are kept in stock exclusively as a service item will be in abundance, but
unfortunately slow moving.
D) Working capital
Most businesses fail primarily because the owner has run out of cash to sufficiently stock
and maintain the business.
A professional broker can establish the cash you need to run your new business.
The cash required/working capital differs from business to business i.e.
Small Take Away R 15 000
Small Bottle store R 25 000
Small Fuel station R100 000
(Above are typical examples only and should not be used in your calculations without
investigation)
Example
Your purchase price of R100 000 can grow as follows:
Purchase price R100 000
Rent deposit R 6 000
Electricity deposit R 3 000
Stock say R 3 000
Working capital R 15 000
TOTAL R127 000
This indicates the importance of calculating your hidden cost, because you will hardly
secure a lone or bridging finance if you are just started out in your business and is short
of working capital.
Purchase contract
The seller has the right to appoint an attorney to draw up the contract and the buyer is
liable for payment.
When we draw up your contract, there is no charge for the contracts unless you appoint an
attorney to verify the contract (which is advisable).
E) Lease agreement
Your lease agreement is very important and should be verified by a lawyer. Two regular
roguery in lease contracts falls under the “option to renew” clause and transfer of lease
clause or sub - lease clause or sale of business clause.
Stamp duties and admin fee may be charged by the lessor.
Financing of a business (if required)
Financing for the purchase of a business is extremely difficult to obtain.
No financial institutions will grant a 100% loan
Sufficient security in the form of fixed property will be required. Remember, a house recently
purchased can hardly be given as security. Proof that the business can cover the loan and
support the buyer is required.
A comprehensive business plan must be prepared and should include at least the following:
1. CV of buyer
2. History of the business and competitor analysis
3. Income statement and balance sheet
4. Cash flow analysis
5. Information with regard to product, price, promotion and distribution strategies
6. Target market
7. Capital available (Buyers commitment)
8. Capital required - detailed purchase price and “Hidden Cost”
9. Lease agreement (Example)
10.Purchase contract
11.Asset list and values
12.Staff details (Expertise and wages)
(This can be prepared by your business broker at a nominal fee)
Unfortunately, smaller sole proprietors mostly do not have acceptable financial figures because,
hidden profits which the seller has been making, usually in the form of undeclared earnings and
other benefits, are not declared in the financial statements. They can theoretically not be
included for evaluating the business.
This is where the sophisticated buyer who knows what he is doing, come in. He knows the
risks, returns and value to him. Financial institutions usually do not have the working
knowledge of these type of businesses, and unless you have sound first hand experience
in this field, the figures will look unacceptable and a loan will not be granted.
The decision to purchase
Your decision to purchase are influenced by numerous facts. Beware of the so called
“Experts” who spread rumours and advice - especially those who never owned a business.
Once the parties have agreed to enter into a transaction, an offer to purchase should be drawn
up. Remember, an offer to purchase becomes a binding contract when signed by all parties.
At least the following should be recorded:
- The outline terms of the agreement
- V.A.T. and sale of a “Going concern”
- Definitions
- Asset list
- Stock
- Effective date
- Domicilium
- Purchase price + payment
- Occupation
- Insurance
- Debt
- Employees
- Section 34 of the insolvency act
- Conditions precedent
- Guarantees with regard to sellers
- Right to sell the business
- Ownership
- Training
- Suppliers
- Restraint of trade
- Validity of offer
Handover of business
Your broker should be present during the handover procedure to ensure:
- All the assets are in place and in working order.
- Stock taking is done to acceptable accounting procedures and correctly valued.
- All conditions of the contract are adhered to and all suspensive conditions are met.
- To act as mediator in the event of a dispute between the buyer and the seller.
- A formal handover document signed by all parties must be completed to ensure all parties
are satisfied and all monies are handed over.
- Any amendments or new agreements signed and accepted by all parties.
- All registrations and licences are in place.
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