Buying a business
Things to think about
Buying a business is major investment decision, so it is critical you prepare yourself properly for this process so that you make the right decisions along the way. Here are some tips:
Work out how much time you must commit to fully investigate what opportunities are available. Commit to a deadline and be disciplined in your search efforts.
Get your financial position established early. List your assets and liabilities and assess your net worth. Any funder you approach will require this information.
Establish with absolute certainty how much of your cash you are prepared to invest.
Don’t look at businesses you can’t afford. As the majority of business purchases involve an element of funding, understand how much cash you have and how much funding you can raise and only look at businesses in that range.
Educate yourself on the buying process to ensure you have the knowledge to buy the right business. Properly prepared, well informed buyers are the ones who acquire the good businesses, the others get the lemons.
Talk to one of our business brokers, tap into their database of businesses that are available and get a clear understanding of the value of any businesses you are interested in and how that value was arrived at.
Understanding how different business appraisal and valuation methods work will help you in determining your offer price for a business.
The business buying process
Once you have identified what businesses are available and might be right for you then the serious work begins.
Under the Real Estate Agents Act 2008, Bayleys agents are required to appraise a business for sale prior to entering into an agency agreement to sell it. An appraisal is different from a valuation but uses similar methodologies. In preparing an appraisal, a business broker will use various approaches and methods to establish a value for the business and often the range at which offers are likely to be received. A range is relevant because every business buyer has a different motivation. A potential purchaser’s assessment of the value of a business will be based on how they intend to use it.
This appraisal will then be discussed with the business owner to gain agreement on the value of the business and the possible range within which the business may sell. While the appraisal is confidential between the agent and the seller, it does mean that all businesses listed with Bayleys have gone through a rigorous assessment and appraisal process. Rest assured, Bayleys’ experienced business brokers will not be wasting theirs or your time with vendors who have unrealistic expectations re their business’ worth.
Achieving a successful outcome in your search for a business will be helped by an understanding of the sales process and in particular:
How an agency agreement works
Methods of sale
Information can you expect to receive and confidentiality agreements
Concluding the sale
Here are some frequently asked questions by purchasers of businesses:
Who is the typical vendor of a business?
Will I able to secure finance to buy a business?
What sort of advice should I get before buying a business?
What can I expect from a Bayleys business broker?
There will be a number of reasons why a business is up for sale and there isn’t any one typical seller. However, around two thirds of the vendors that Bayleys deals with are “baby boomers” aged over 55 looking for an “exit strategy” from businesses that they will in many instances have owned for a long time. In many cases, they will have built up a very successful business and have a wealth of knowledge and important contacts within their industry. In some instances, they may be prepared to stay on and help with the transition process or continue on a consultancy basis.
As the baby boomer bulge gets bigger, they are likely to make up an even larger proportion of sellers - offering some great opportunities for buyers.
Most business acquisitions involve a degree of leveraging and banks are currently competing aggressively in the business sales market given the economy is performing well which means the business sector is generally also performing well.
However, expect financiers to want to undertake a substantial amount of their own “due diligence” both on the business you are looking to buy and on yourself. They will want details on your past business experience and what sort of assets you have should they require additional security.
Bayleys business brokers have built up strong relationships in the banking sector and can assist with introductions if required.
Obviously getting good legal and accounting/business/financial advisory advice is essential.
We would recommend you use a lawyer or firm specialising in commercial law with a well-established track record in business sales and acquisitions.
Likewise it is important to utilise an accountant/business adviser experienced in this area to assist you with your due diligence. A good financial adviser is “gold” both in guiding you through the acquisition process and then in adding value to that business once you have bought it.
Again, Bayleys can assist with introductions to advisers who we know from experience are good operators and will offer sound advice.
We are vendors’ agents which means we act, and have a fiduciary responsibility to act, on their behalf and in their best interests.
However, every successful transaction requires two parties and satisfying buyers’ requirements as far as is practicably possible is an important part of the equation. We will listen to and take on board what you are wanting to achieve in the negotiation process and relay this to the vendor.
An important part of our role as negotiators is to endeavour to get the possible result for both parties.