Interesting article from one of my clients The Mardent Group.
With a number of employees being made redundant, there is an increase in people looking to ‘buy a job’. For many, it’s the first they have contemplated this and there are some common mistakes made during this process.
Regrettably, there is very little information available from objective sources on what to do, how to do it, and what the costs are. The Mardent Group explains 5 of the common mistakes people make when buying a business:
1. Getting the Price Wrong - there are various valuation techniques used to establish the price of a small business. The most common term discussed is a ‘multiple’, that is the price of the business is a ‘multiple of its profit’.
For example, the price is set at a 3 times multiple, means that if the business is making a profit of $300,000, then the price is $900,000.
Buyers need to investigate and understand why particular businesses attract certain multiples. Why is a retail shop priced at a 1 times multiple while a manufacturing operation might be at 4 times?
Before accepting (or rejecting) the price of a business, investigate where its revenues come from and how is it managed or operated, how long has it been in existence and does it have a loyal customer base or contracted income. Each of these items will determine the valuation of the business.
Don’t assume that because one business is asking for more than others in the same industry that ‘they are wanting too much’, the business might be a much better operation than its competitors.
2. Using Accountants and Lawyers Too Early - this mistake can cost thousands before a business is even under contract. Do as much analysis and investigation of the business prior to taking anything to your Accountant and Lawyer.
With a bit of time and effort a lot of investigation can occur before jumping on the $350 per hour train. This is especially the case in contract preparation. Prior to a contract being prepared, why not have a simple Heads of Agreement that outlines the main points of the deal being proposed. If the buyer and seller can agree on the main points, the details can be sorted out later.
This way the business can be secured and investigated without the cost of lawyers arguing over specific clauses for weeks. (This arguing recently cost one of our new clients over $30,000 in fees and the purchase didn’t go ahead. If only he had spoken to us first.)
3. Paying 100% Upfront - every seller would love 100 per cent of the sale price in cash. As a buyer and also from a banking perspective this presents a risk. There are many stories of businesses being ‘dumped’ and then purchasers finding out undisclosed details later on that affect the value of the business. Why not try to offer a good percentage upfront with some of the purchase price paid out of profits over a longer term of up to 5 years. A vendor that accepts this deal shows that they believe in their business and its on-going viability.
4. Not Having a Formal Stock-take - after the long negotiations, due diligence, lawyers and accounting fees, stock-taking can be an arduous task. For some industries such as newsagencies, having an external Stock-taker complete this prior to settlement is the norm. For many though, the vendor and the purchaser will often agree that ‘the number in the computer system is right’.
Nothing could be further from the truth. Stock figures are consistently manipulated, incorrectly entered and manually adjusted at tax time to suit the business owner.
An external professional stock-take could save you thousands of dollars. We often hear of owners paying $200,000 at settlement for stock and realising a month later that they are only carrying $130,000. For the sake of a few thousand dollars in fees, they just lost $70K.
5. Not Meeting Major Customers and Suppliers – buyers may think they don’t have the right to meet with the major suppliers and or customers of a business. In fact some vendors will tell them there is no way this will happen until the contract is unconditional. But what if you find out later, that the largest customer is about to leave (this happened to a business buyer we know – it halved their profit) or that the business suppliers will not offer the same good credit terms to a new owner.
Good transition management from both sides will ensure that every relationship is managed with care and that potential new owners are introduced to key suppliers and customers. How would you feel as a large customer of a business, if the first you knew about a new owner was a when you visited, and the previous owner wasn’t there anymore. (Kind of sounds like the letters you get about your new bank manager doesn’t it?”)
Without proper management, the new owners are put at risk of cash shortfalls due to a lack of credit terms, and customers that may start to look elsewhere because no one cared enough to tell them the business was being sold.
And by the way, it IS their business to know, they ARE the business.
Todd O’Neill.
Todd’s career in banking and finance spans 20 years and several countries. After starting with one of Australia’s big four banks, Todd headed over to the UK and Europe where he gained valuable experience with high profile companies Accenture and The Industrial Bank of Japan. Todd returned to Australia and started his own finance broking company. He holds a Masters in International Business.
The Mardent Group are lead advisors and business finance brokers to the private company market-place. Their one-day workshops for business buyers, “How To Buy and Finance A Business” are being held in Brisbane, Sydney and Melbourne throughout September, October and November. For more information visit http://www.themardentgroup.com./
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