Buyer Beware - Tips For Successful Business Acquisition
Frank Choy
Management Consultant & CFO @ Capstone Consulting | Business Strategist - Growth, Profits & Value Creation
One of the biggest decisions of your life is the purchase of a business. Like buying a preloved car, the attractive outer looks may hide problems under the bonnet resulting in significant financial loss.
In this article, we look at the pros and cons of buying a business, and the important processes involved in the acquisition. When the groundwork is done well, you are likely to be more successful in your new venture.
Pros & Cons of an Existing Business
Pros
1/ You are buying an established business which has survived ups and downs with established customers, suppliers and processes.
2/ Provided the business has solid prospects, it is easier to access finance to buy the business.
3/ You have a great opportunity to inject new energy and ideas into the business and grow sales and profits and build business value.
Cons
1/ The cost is higher than starting your own business. You are paying for equipment, inventory and goodwill.
2/ You will need to dig deeper into your savings for the deposit to fulfil bank LVR.
3/ There may be problem staff, suppliers, and equipment; these tend to have a negative effect on service levels and business reputation. More cash and time outlays are required to bring the business up to scratch.
Checklist for Buying a Business
1/ Are you ready? Business ownership is demanding; much more so than being an employee for someone else! Sometimes, intending business owners do not have the mindset and physical and mental stamina. You must be serious about good customer service. You will likely work longer hours to get your routines running well..
2/ The right industry & business
I once met the owner of a small commercial cleaning business. He had to be "on the tools" due to its small size and told me he hated cleaning. If in doubt, speak with people in the industry which you are looking to buy into. Speak to family and friends who will give you honest feedback about your suitability.
3/ Engage professional help
Do it Yourself is a likely recipe for avoidable problems; even if you are an expert in the field. A house buyer gets a professional to inspect the property for structural issues, pests, and so on. Likewise, buying a business requires:
* A Commercial Lawyer for the legal and risk management aspects of buying. You may need an Intellectual Property Lawyer if there is IP involved, and a Property Lawyer for any property acquisitions.
* An experienced CFO who can conduct analysis and forensics to make sure that the financial records are accurate, inventory and equipment valuations are reasonable, and the pricing is fair.
The CFO will also prepare with you a Business Plan and financial forecasts for the business. This will give you clarity and confidence in the future direction and potential of the business. The Business Plan will set out action steps to take the business to the next level. Key areas will be marketing, sales, technology, staff capabilities, finance and change management.
Banks and lenders invariably ask for financial forecasts and a Business Plan in order to approve you loan application.
* A Tax accountant who will look at tax implications including how best to structure the business ownership - Sole Trader, Company and Trusts. This can save you millions in the long term.
* Insurance broker if there are significant physical or commercial risks. If there are environmental or food safety risks, you may need additional risk reviews.
* A Finance Broker (property security may be optional) or your bank manager (property security required).
4/ Due Diligence
You will need the following from the current business owner in order to verify the value of the business and its assets and liabilities, along with risk management:
* An Information Memorandum (for larger businesses) outlining key information as below, including trading history, key customers, suppliers and staff, and summary financial data.
* Financial Statements for the past 3 years.
* Management Accounts for the current year.
* Tax Returns for the last 2 years and the current tax portal statement - only if you are buying the existing incorporated company.
* Shareholders Agreement is required if you are going into business with other people.
* Lease agreements - property and equipment. Check the rent period and escalation amounts to ensure that they are affordable and reasonable.
* Loan documents - if you are buying the incorporated company.
* Business Insurance policy details. Ensure that Loss of Profits is covered in the event of disasters.
* Key management staff contracts.
* Major customer and supplier contracts if any. Aged listings of outstanding customer and supplier accounts. Notes on disputed invoices. Any legal action in progress or pending. Sales and Purchase Analysis by value. Supplier pricing and alternative suppliers to mitigate risk.
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* Talk to major customers and suppliers to establish relationships and see if there are any issues requiring resolution including continuity of supply. are customers happy with the business reliability and service?
* Superannuation account to ensure that payments are up to date.
* ATO Integrated Account to ensure that PAYGW and GST payments are up to date
* List of Plant, Equipment and Vehicles (Asset Register & Depreciation schedules). Make sure that major items are sighted to confirm existence and good condition. Check Lease Finance documents and ensure lease payments are up to date.
* List of stock quantities and values. Details of old and obsolete stock to be written down in value. List of sales by product.
* Council zoning compliance. Town planning check to ensure that changes do not impact on future business feasibility.
* Workers Compensation claims. Details of any staff requiring rehabilitation and risks involved.
* Customer claims. Are these being resolved?
Due diligence is an essential exercise, and the help of a good CFO will save you from overpaying for a business which is also not adequately covered for risk management (insurances, safety, etc).
5/ Systems review
What technology does the business currently use? Do you have to invest more in new computers and software? Does the business have good workflows to ensure customer needs are met in a timely way and without service and product defects?
6/ Staff are a key part of the business.
* Is there an organisation chart - Get familiar with the responsibilities and roles of key staff.
* List of all staff by department with salaries & wages.
* Are there any significant shortcomings in staff capabilities? This can impede quick commercial success in the business.
* Ensure that key staff will stay in the business. Review job descriptions. Interview staff to keep them engaged and feeling safe with the prospective new owner. You may need to pay loyalty bonuses for key staff to stay on.
7/ Handover and Earn Out
It is vital for the incoming owner to spend as much time as possible in the business before completion of sale. This enables you to become familiar with workflows, customers, staff, suppliers and the typical daily routines.
For larger businesses, you may want to split the settlement payment so that the owner works in the business to earn out their second and final payment. Often, this amount is higher than the first because the business has increased in profitability with the new owner's business initiatives.
8/ Acquisition Financing
Unless you have heaps of money, you will need help from your finance broker or bank manager. They will need:
9/ The Sale Agreement
This document is key to securing a well-researched and structured business acquisition. It will include:
Your lawyer will guide you through this critical part of the acquisition process.
10/ A Fulfilling Journey
CONCLUSION
Going into your own business is a very different challenge from working for a salary in a business which you do not own.
Having your own business requires an aptitude which includes positive energy, resilience, grit and determination, optimism and a learning mindset. Your persona must enjoy working with people and interacting with customers, staff, suppliers and others. Your sense of purpose must be clear and unwavering. It is what keeps you going.
Buying a business is exciting and nerve wracking. Find the best people that you can afford to ensure that you buy into a business which you can be passionate about serving your customers. Proper homework, due diligence and trying out the new normal of your life is essential.
Once into your business, there is no substitute for conscientious diligent work and persistence in learning.
For a more detailed version of this document, please contact the writer.
All the best!
Frank Choy
13 August 2022
Learning & Legacy. Helping companies train their staff and experts commercialise their knowledge.
2 年Really great article Frank! I remember buying my first business and for the first 2 years I felt like a stranger in another person's home. If only I had a checklist of things I needed to do. I was underprepared but fortunately, it all worked out.
Principal at Reeve Law
2 年This is brilliant, Frank (as is expected from you, of course!). A great summary with just the right amount of detail to provide a great basis going forward for anyone looking to purchase a business!
Helps business owners refinance tax debt
2 年Great post Frank! Starting or buying a business is often one of the most important financial decisions for an individual in their lifetime, but it’s a journey often started alone and without guidance. Like buying a car or a house, you can end up with a “lemon” if you don’t undertake proper due diligence. And even if you do buy an established business that is performing well, there are ways that you can still be exposed. Some great examples are -?Loss of key staff -?Changing suppliers -?Losing a core customer to a competitor while transitioning ownership -?Not replacing equipment required to undertake business operations People become a business owner to do what they love but can make costly mistakes when making decisions that are unrelated to their craft. Frank can help develop strategies to minimise risk, avoid common pitfalls, get the business trading profitably quicker and most importantly plan, so that the business has clear predictable actions it can take to become more efficient and grow.
Excutive Chairman Beltz Mining Limited
2 年Excellent article Frank. Thank you.
Marketing & Content Strategy Consultant | I help professional service business owners with marketing strategies that create consistent growth by building relationships which grow communities |Founder- Humanizing Business
2 年An excellent overview here, Frank. And on a subject that's not spoken about much as business acquisitions, usually, occur quietly. You've really laid the steps out for a potential investor or someone who want's to buy out a business. Thank you for sharing this.