Over the years I’ve seen so many Small Businesses sell out for much less than…
A 10-Step Plan to Buying a Business
You’ve brainstormed business ideas, had numerous coffees with supportive friends, drawn up a business plan and delved deep into your savings.
You’re finally ready to buy the business you’ve been planning for ages. You’re in good company: there are over two million Small Businesses in Australia, accounting for 33 per cent of Australia’s GDP. And while there is plenty of advice out there, it can be tough to find what’s useful for you and your business.
That’s why we’ve put together this no-nonsense 10-step plan for buying a business:
1. Research your industry.
You probably have a good roadmap for your business by now, but have you researched the forecast figures and the long-term prediction for the broader industry? Going into the buying process armed with facts and figures will help you through the offer and negotiation process.
If you’re buying a bricks-and-mortar business, investigate future infrastructure for the local area. For example, will new works affect foot traffic in the area? It’s worth finding out. Another useful research tool is Google AdWords Keyword Planner. Use keywords about your sector to see how saturated the market is online, or whether there is one player dominating the industry.
2. Find a business to target.
Now it’s time to home in on a business to approach. Before you do, turn yourself into a private investigator and assess the business with an eye to a preliminary valuation. Pose as a customer to see how it all works, and get a feel for the kind of neighbourhood you’ll be trading in. Now is also a good time to check out any competition in the local area.
If you’re looking at buying an online business, do a Google search to see where it sits in the rankings and find out about their online reputation.
3. Make the approach.
Once you’ve found your ideal business, it’s time to make the approach. Do this in writing or if you’ve already talked to the owner, either yourself or your broker should follow up with a formal offer. If your ideal business isn’t on the market, there’s no harm in approaching to see if they are willing to sell. Every business has a price; paying it depends on whether you think it’s worth it.
4. Make an offer.
When you have an overall picture of the business, have made the initial approach and conducted a preliminary valuation, it’s time to begin a price negotiation. Again, you can do this through a broker, in writing. At this stage, any offers are not legally binding.
5. Evaluate the business.
Once you and the seller have reached an initial agreement on price, the next stage is vital; an in-depth evaluation of the business. Generally, assets will make up the bulk of your valuation, from real estate to machinery, equipment and perhaps stock. Other considerations will be turnover, profitability, loyal customers and brand reputation.
At this point, it’s a good idea to bring in an accountant.
6. Heads of Agreement.
The lawyer representing the seller will now draw up the first iteration of a Heads of Agreement (HOA) contract, which sets out the terms agreed for the sale. Although this is still not a legally binding document, it serves as a useful roadmap for both buyer and seller.
Terms set out in the HOA can include:
- Agreed payment terms.
- Who is responsible for which items, e.g. any improvements needed to the premises.
- Periods of confidentiality.
- The condition of equipment and any stock.
- Assurances about the number of customers and the revenue generated by the business.
- A timetable for completion.
Your lawyer will negotiate terms with the seller until both parties are satisfied. After an agreement is reached and contracts exchanged, you’ll be required to pay the deposit.
7. Due diligence.
Completing your due diligence is a critical part of the purchase for the buyer. It’s how your advisory team will verify the items in the HOA before it becomes legally binding. If anything raises alarm bells, you can still walk away from the sale.
Your team will look at items such as:
- Income statements from the business from the past three years.
- Records of accounts receivable and payable.
- Balance sheets and tax returns, including business activity statements.
- Profit and loss records.
- Cash deposit and payment records, as reconciled with the accounts.
8. Sale and purchase agreement.
You are now in the final stages of your sale and are required to sign the Sale and Purchase Agreement (SPA), a legally binding document that means each party is now obliged to go through with the sale.
Depending on your situation there are a few different ways to pay. Most business purchases are completed with a straightforward payment-on-completion agreement. For a substantial business, there may be multiple mergers with a stake in the sale. Other financing options are private capital, angel or seed investors, banks, loans companies or even crowdfunding platforms.
If you have followed the steps above, you will have your completed final documents, signed the contracts and agreed payment. All you need to do now is hand over the cheque and pick up the keys to your new business acquisition.
Congratulations, you have become the owner of a brand-new business! Now the fun can really begin.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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