Buying a business – FAQ’s

What expert advice do I need?

Before buying a business it is essential to see both an accountant and a lawyer.

Mistakes made now can come back to haunt you later. You need advice about issues such as:

• The expected return on invested capital.
• Valuation of stock and work-in-progress.
• Inspection of the seller’s accounts, tax returns, wages books and any statements that must be given under the law.
• To make sure the seller cannot open another similar business nearby. He is selling you his goodwill — see below. You don’t want him stealing it back from you this way.

Why they are selling the business?

Sellers will offer any number of reasons to explain the sale of their business. But it is worth asking anyway, and judging how comfortable the seller is in releasing information. Sometimes the seller wants to sell the business for a reason that should discourage you from buying (eg it’s not making money!).

Make sure an accountant looks at the business’ accounts.

How much to pay?

Usually a business that is a going concern is sold with a certain payment for “goodwill.” This is the price the buyer pays for the business’s “good name” that has been built up over the period of operation.

An accountant can help you establish an appropriate figure for goodwill by examining the business’s financial accounts.

What are the sales prospects?

Among other things, you should know:

• Sales figures per year
• The profiles of buyers (eg their age, spending patterns).
• Details of the suppliers and their relationship
• Stock figures, including annual turnover.
• Actual stock value.

Profits and expenses

• Cross verify the profit figures shown by the seller with your accountant.
• Make sure the seller’s figures presented as expenses are realistic and verified
• About hidden costs
• What could be the depreciation value of the assets
• Terms of the leased premises and the duration of the lease
• Total borrowings of the business
• Business credit rating
• Monthly employees salaries
• Total liabilities
• Immediate outstanding maintenance costs

The assets

Make sure you understand what assets are included in the sale.

For instance:

• Value of the assets
• Depreciation costs
• Leasing costs
• Cash flow

Legal help

A lawyer can advise you about the following:

• Whether the business structure is suitable for your needs.
• Agreements with the seller to ensure they don’t compete in the same geographical area or the same market.
• Formulating the terms of the purchase agreement.
• Aspects like trial period, introduced into the purchase agreement.
• Analysis of the existing leasing agreements.
• Safeguard you from any further complications in terms of purchase agreement
• Information about council and other agency records to ensure there are no plans or council orders that could disrupt the business or lead to a drop in sales.
• Verification of zoning regulations.
• Explaining you about the trade requirements for conducting a business such as licences and permits
• Explain the process for transfer of business names, trademarks, etc.
• Laws that will affect your operating the business.