What is the buying process
There is many steps to buying a business for sale
Having an idea of the process involved in buying a business for sale is important and should include the following milestones.
Pre-qualify your purchase ability to be able to make an offer
Knowing what you may or may not be able to borrow prior to searching for a business for sale not only makes sense, but gives you a powerful tool to allow you to enquire about a business with a degree of confidence.
Funding a business for sale purchase may be through the following or a combination of.
- Cash – If you hold enough cash, then you have pre-qualified yourself
- Existing income & equity – This method is the least risk to a bank
- Using the new business as security and income – This is the most common form, but also the hardest to get approved by the bank. This really needs to be discussed with a finance professional such as CPI Finance to consider your personal circumstances.
- Vendor finance – The vendor 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.
In all cases, this is an area that CPI Finance can discuss your personal circumstances to help pre-qualify your borrowing ability.
Sign a confidentiality agreement and obtain an information memorandum
When buying a business for sale you will need access to the sensitive and confidential information provided in the Business Memorandum to gain an understanding of the business financials, operating procedures, leases, licenses and unique market position, so as to make an informed decision. However before this can happen you must understand and sign the Confidentiality Agreement.
Typical clauses that you must agree to may include.
- Protect and not share or disclose the information
- Not disclose the identity of the business for sale
- Not approach the business, staff or suppliers
- Destroy all copies of the information on conclusion
Negotiate a mutual sale agreement through the business broker
Following review of all the information, you would sign a “Contract for Sale of Business”. The contract states not only the price you are willing to pay for the business for sale, but also the conditions such as finance, training days and restrictive operating covenants to name a few.
This is where the broker comes into play to negotiate a mutually acceptable outcome for both parties.
Engage a solicitor and accountant for contracts and due diligence
A solicitor and accountant may have already been engaged prior to now to review the information, however once you go to contract you now need to formally engage your professional advisors to complete the process for you.
A Solicitor would be typically engaged to review and amend things like the sale contract, lease contracts, legal or franchise documents, bank guarantor documents, searches and settlement etc.
An accountant would typically be engaged to review and advise on things like entities, due diligence of the financial information, tax advice and post settlement bookkeeping and taxation reporting.
If the contract is subject to finance, then you need to have your finance approved prior to the date in contract. As this is a business purchase, you typically need a longer finance term than what you would generally have on say a house.
This is an area that CPI Finance can assist with access to our extensive lender panel including the major banks, financial institutions and smaller niche lenders.
Complete pre-settlement conditions such as stock-take
Prior to settlement and according to the conditions of the contract, there may be a need to do a stock take, or plant and equipment inspection, confirmation that all tax and staff entitlements are paid up etc. This is an area that your solicitor will work with you to confirm prior to settlement.
Implement post-settlement training etc.
Depending on the business for sale, there may have been training provided prior to settlement, but may also include things like the vendor staying in the business to show you the ropes for a period of time, or perhaps engaged as a consultant to the business. This is a case by case basis.