To Buy or Not to Buy

Are you ready to negotiate? Remember 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.

Before signing the contract of sale, have you made the offer subject to finance, record inspection, receiving necessary licences and rights and other transfers?
Buying an established business can be the easiest way to start in business but it can also be the most expensive.

SBDC conducts regular workshops on
"How To Buy A Business"

A well run established business with a solid client base, suitably equipped premises, a good lease (if premises not owned by the proprietor) and with good turnover and net profit can provide a safe income. However, such businesses are expensive and rarely advertised. They are usually placed in the hands of a broker or accountant who has a list of clients on the look out for good businesses.

A S.W.O.T. (Strengths, Weaknesses, Opportunities and Threats) analysis of the business will help a prospective buyer determine the individual components which go to make up the goodwill factor and will make the decision to buy or not to buy a little easier.

Goodwill can be comprised of many different things; eg

contracts which will be sold with the business;

intellectual property;

exceptional location;

secure client base with little or no competition.

The buyer should identify these "goodwill components". In some cases the current owner may be unaware of them and has therefore failed to capitalise thus providing an opportunity for an enterprising new owner.

There are several ways by which "goodwill" values can be calculated. As a general rule this is linked to net profit. Usually, the lower the net profit the lower the goodwill value.

When assessing the goodwill component of the asking price, a prospective buyer should exercise caution.

In many businesses especially retailing, it is not uncommon for the turnover to significantly and immediately decline when a new owner takes over. This tends to happen when the clients' allegiance is to the person behind the counter rather than the product being sold.

Information you need about the business for sale

If you find a business which interests you the following are essential:

1. A trading and profit and loss statement for at least the most recent 2 years in which the vendor has owned the business and a balance sheet to identify assets and liabilities.
2. A list of plant, equipment, fixtures and fittings, which the owner intends to sell and the price asked. (Proof of ownership will need to be established if you decide to buy).
3. Details of any stock which the owner wishes to sell and the basis upon which the stock will be accounted for and valued at settlement.
4. If the premises are leased, a copy of the lease agreement.
5. If the business is a franchise - a disclosure document must be provided, as required by the Franchising Code of Conduct.

CAUTION

a) Not all businesses for sale are good businesses. Some are run down, some badly managed, others poorly located or perhaps suffering from recently introduced competition.

The diligent buyer will carry out a thorough check on the business and in so doing will identify whether it is likely to succeed in the future.
b) Make sure that any financial statements are prepared in a proper business like manner. Ask the vendor to certify that they are correct and that they properly represent the trading figures of the business being sold and do not include income from other businesses owned by the same vendor.

Figures provided under a "Disclaimer" indicate that the vendor or the person preparing them is either unwilling or unable to vouch for their accuracy.
c) Be prepared to spend as much time as it takes to satisfy yourself that any plant and equipment is in good working order. You may need to consult a qualified tradesperson.
Don't assume equipment is in good condition, as it can be very costly if you have to make major repairs, or even worse, replace an essential piece of equipment.

Don't sign any "offers" or pay any monies until you have been provided with all of the above and until you have taken advice.

Your accountant will be able to give you advice concerning the trading figures, and will show you how to arrive at a notional market value for the business. He/she will also provide commercial advice concerning both the offer to purchase and the lease agreement, if the business premises are rented.

Your lawyer will provide legal advice on both the offer to purchase and the lease agreement, and will ensure that you are protected by including appropriate "conditions" which if not fulfilled will enable you to withdraw from either contract without being liable for damages.

1) An independent valuer can provide you with an accurate "value" for plant/equipment being sold.
2) For certain businesses a stocktaker may be advisable. The stocktaker can determine what is or is not of merchantable quality and will provide advice on the value of any item
3)where the sale price has not been agreed between the parties
4) The Small Business Development Corporation can also provide advice and guidance as well as useful publications.

Recommended Publications
Common Questions About The Commercial Tenancy Act For Leases Entered Into On Or After 1 July 1999 $5.50
Common Questions About The Commercial Tenancy Act For Leases Entered Into Before 1 July 1999 $5.50
Leasing Business Premises $9.90
How to Negotiate Your Way to a Better Retail Lease $5.00
Buying A Small Business $21.95
Guide to Buying a Business $10.95
Buying a Business Info Pack $5.50

Lawyers:
Law Society of WA
Ph: (08) 9221 3222

Accountants:
Institute of Chartered Accountants
Ph: (08) 9322 7999

CPA Australia
Ph: (08) 9481 5944

Business Brokers
WA Business Brokers Association
Ph: (08) 9284 3434

Valuers:
Australian Property Institute
Ph: (08) 9474 2784

Professional Stocktakers
Stocktakers' Institute of Australia Inc.    Website http://www.stocktakers.asn.au

For assistance in your area call 1800 093 340 for the location of your nearest Centre.