Deciding to purchase an existing business requires that you evaluate the benefits and disadvantages, even its history, which predicts the viability of the venture in future. Crucially, an excellent operating history can heighten the probability of a flourishing business and facilitate easier financing. On the other hand, a poor public reputation from past owners and overstating the amount of goodwill are some probable disadvantages.
Enquire from the seller or their broker about how they arrived at their asking price. Even though there is no magic number – typically, a business is worth as much as the buyer decides – a majority of businesses will sell for 2-4 times earnings after subtracting wages to the owners.
Some of the critical records you should be provided with and review include;
• Financial statements for the last two financial years (Income statements and statements of financial position)
• Financial statements for the current year
• Business Activity Statements (BAS) of the previous four quarters
• Last income tax filing (though this is not compulsory for enterprises in the hospitality sector accountants may deem it important)
• A detailed list of all assets included in the sale
Normally, physical asset inspection and assessment of their value should be done as the sale process progresses.
Are the financial records accurate and reliable?
Conduct a comprehensive review of the financial records to ascertain their accuracy. For instance, compare the coffee sales to the number of kilos of coffee bought. Also, you may check website visitors to evaluate whether the numbers align with the information provided.
Normally, if you are only buying the assets of the business, employee obligations are not shifted to you as the new proprietor or shareholder. Rather, the seller will discontinue their employee contracts on the final day. Then, you can decide to offer new employment agreements to the terminated staff.
Based on the nature of the enterprise, the trial is a crucial stage in confirming revenues and how the enterprise runs. This particularly applies to operations such as restaurants and cafes which normally feature a huge percentage of undeclared cash revenue (the reason why we state that tax returns are unreliable). Throughout the trial period, the sales must be equal to or higher than the average sales reported in the latest financial statements. Two weeks is the standard period needed for a trial.
Making an effort to come up with a cogent business plan and financial projections will assist you to form an objective assessment of the business and determine the factors that will drive performance. The plan should be your reference during the buying process and after you take over operations.
No one would ask a brain surgeon to conduct their heart operation. Just as with the surgeon case, you cannot entrust an inexperienced lawyer in business sales transactions to review your sale terms. Look for a lawyer who focuses on business sales and who has experience on commercial leases to review the contract and counsel you on the terms around your commercial lease and sales contract.
Generally, the proprietor of any enterprise acquires a lot of goodwill over years of running the enterprise. As they run the business, they establish important client relationships, and this can be lost if they suddenly cease supporting business operations.
To mitigate this risk, it is advisable to include a clause that establishes a transaction and training duration in the sales contract. This allows the previous owner to pass on client relationships by introducing you to current customers and avails them to clarify any business issues you might experience.