What do buyers need to know
There is a lot to consider when buying a business for sale.
Does the cash flow and effort required reflect fair value and align to your goals, what are the risks and benefits of the business for sale?
In essence you are buying yourself a job, and as it is going to cost you money as well as a dedicated commitment of your time, you need to consider the following.
- What experience do you have in this industry
- How long do you expect to own the business
- How much do you need to earn after business expenses for yourself
- What hours per week do you want to commit to working in the business
- How much do you pay to buy a business that meets your needs
How much can you borrow and at what terms
Financing a trading business for sale is by far the most difficult type of funding request you can present to a bank and requires a lot more detail to reduce the risk and increase the interest to the lender. This is an area that CPI Finance (part of the CPI Brokers group) has over 20 years’ experience to help pre-qualify your ability to borrow to buy a business for sale.
Lenders will generally consider the following:
- Your contribution to the purchase (Generally a bank will only lend up to 50% of the valuation of the trading entity, and more on buildings & new plant)
- Your experience and background compared to the business
- Your management ability and history
- Other income or security not associated with the business
- Financial reports of the business, trends, ratio’s and projections
- Lease or franchise terms
- Your business plan. Why are you doing this, what is your plan going forward
Depending on the circumstances of the vendor, they may offer to sell the business with a lump sum upfront and the balance to be paid over an agreed term. This is a case by case basis.
While this can help with the vendor securing a sale on the business, it also increases the risk to the vendor. Based on this, commercial lending terms by vendors are usually set at a higher rate than bank finance. This is an area that CPI Brokers can discuss with you.
What is the trading trend of the business and its profits
When you buy a business, in most cases you are buying it for the cash flow, and need to dig into past financials, current BAS (Business Activity Statement) or interim reports as well as industry outlooks to gain a feel for the trends of the business and identify opportunities for growth etc.
Due diligence should be performed by an accountant for accuracy and interpretation of the figures, however you need to exercise a little care in that you are looking for a review of the business for sale and not trying to find problems that may not really be an issue.
Review of trading figures can include the following:
- Sales trends and margins. Are they growing, stable or reducing
- Stock. Has there been abnormal stock movements influencing the profits
- Plant or fit-out. Has there been any recent years capital expenditure, and is there any upgrades needed
- Benchmarking. The figures may be able to be compared to industry benchmarks
Do you have the expertise to run the business for sale
Having experience in the industry that you are buying is a distinct advantage and may reduce the frustration of a steep learning curve as well as allow you to see opportunities in the current operation. However, you should do a swot analysis on your strengths and weaknesses and see if the business is aligned to your personal circumstances.
As an example, you may be an award winning baker, you understand the hours, the workflow and the product. But, if you don’t understand the bookwork and bas, then there is a clear advantage if a business purchase already has experienced staff completing these activities.
Some considerations may be:
- Are you able to confidently run the business for sale on a walk in walk out basis
- What handover and ongoing support is offered
- Will key staff stay in the business
- Are systems and processes in place and well documented
What is the legal structure you are buying, and what do you need
You need to be clear from the outset what you are actually buying. Are you buying only the trading name or the existing Proprietary Limited Company and trading name etc.
Depending on the situation you will more than likely need a combination of a solicitor and an accountant to perform due diligence, registrations and changes as well as taxation advice.
Typical entity examples are:
- Sole Trader – You run the business under your own name, all profits come back to you personally
- Partnership – 2 or more people or legal entities operate the business and share the income
- Company – A legal entity that is governed by a constitution and has appointed officers and shareholders
- Trust – A legal entity where the trustee being individual’s or a company does business for the benefit of the beneficiaries