Melvin Feller Details Steps to Buying a Business
Melvin Feller Details Steps to Buying a Business
Melvin
Feller Business Consultants in Dallas, Burkburnett Texas and Lawton
Oklahoma. Our mission is to call and equip a generation of Christian
entrepreneurs to do business as ministry. We provide workshops and
resources that help companies discover how to do business God’s way.
When the heart of a business is service rather than self it can be
transformed into a fruitful business ministry earning a profit and being
of service to the community and their customers. Melvin Feller is
currently pursuing another graduate degree in business organizations. Melvin Feller is currently pursuing another graduate degree in business organizations.
The
process of buying a business can be boiled down to one very simple
question: Is the business you are buying the business you think you’re
buying?
Some purchases are more straight forward than others are. Often, this is reflected in the type of business you are purchasing.
If
you pick up any copy of a business newspaper or the Wall Street
Journal, you will probably read about one company buying another.
Businesses are continually bought and sold because of an opportunity
being made available or because of a strategic plan. Larger corporations
buy businesses to take out a competitor, increase purchasing power or
to acquire skilled employees.
However,
as a first time buyer you are likely to fall into different
category — often driven by a desire to change your life, be your own
boss or (in some cases) make an investment that offers better returns
than other avenues (such as the stock market or a building society).
As
a first time buyer, you are unlikely to be buying a $50m software
company or a 250 employee manufacturing business. However, the process
of buying a business — whether it is a bar, hotel or childcare
nursery — is the same.
The
process might be shorter and more simplistic but it is geared around
the same principle — is the business you are buying the business you
think you are buying?
You
are probably reading this because you have considered the advantages of
buying a business over starting one from scratch. You know that your
chances of success are greater because you are already buying success.
You
are buying an established business that is already making money (it may
be highly profitable); you are buying customers and maybe employees.
You also know that if you buy a good business you have the opportunity
to make it a great one — because you will be applying 100% energy and
commitment to the project.
Step One — Defining the business you want to buy
When
larger corporations do this, they call it ‘acquisition profiling’. For
you, it will probably
manifest itself in a series of questions such as,
what kind of business do I want to buy? How do I know what business is
right for me? Where do I start?
Even
if you already know, what business is right for you it is still a good
idea to do some research? Read up on any future legislation that may
affect the business sector. For example, deregulation plans for the
gaming industry may be a wonderful opportunity. However, new legislation
on how care homes are run may prove restrictive. Know your data.
Each
trade has its own series of trade magazines and associations and you
should use this stage to
read up. If, for example, you are thinking of
buying a pub, then you should start subscribing to the Publican — a
trade magazine for the industry — and contact the Beer and Bar
Association and find out why bars fail. Get as much information about
the sector and do not be afraid to change your mind.
If
you are thinking of buying a hotel, ask yourself what makes one
successful? What examples of success do you know? Could you replicate
that? Go and stay in your favorite hotel and make notes as to why you
like it so much. It may sound simplistic to do this but it will help you
to define the business you want to buy.
In
many respects, if you have not decided on the type of business you want
to buy this can be a very frustrating stage. Being sure of the business
type is very important because it will have to be something you enjoy
and be able to do well.
However,
never forget that sometimes the true benefits of business ownership are
not what you do but the fact that you are financially independent.
Therefore, if you are unsure about the type of business, you want to buy
but confident about being your own boss you might want to consider one
of the many franchise opportunities available to you.
Please
note, at this stage you’ll also be considering how much to spend on
buying a business. Careful financial planning at this stage is crucial,
as you do not want to overstretch yourself in the purchase only to find
you do not have adequate resources to make any changes or implement new
plans. Make sure you build in some fat or slack into your budgets. Start
doing the math now.
Step Two — Targeting the business
Once
you have defined the parameters of the business you to want buy — the
market sector, size, location (are you prepared to move?), the price
range etc., you will be in a position to start targeting the right
business. There are two ways of targeting a business:
Find a business that is already listed for sale.
Approach a business not for sale and make an offer.
Our
site has thousands of businesses — most of which are represented by
leading business agents, brokers and accountancy firms. It will make
your task of targeting a business much easier than searching through a
newspaper.
However,
if the business you want to buy is not actively being marketed for sale
there is nothing to stop you from approaching the owner direct and
making an offer. Every business has its price. If you go down this route
then it is advisable to employ an intermediary who will represent you.
Many
business brokers and accountancy firms will target an opportunity on
your behalf. However, this process can be expensive and the costs should
be proportional to the size of the business you are targeting.
There
is no point in spending $50k with a top five-accountancy firm if you
are targeting a post office. However, if you are spending between $1m
and $10m on buying a business then an experienced professional will be
invaluable.
Step Three — Quick and dirty DIY due diligence
Okay…
now things are getting interesting. You have narrowed down the
opportunities and you have created a shortlist of possible businesses
that interest you. Ideally, you will have five or six targets on your
list. Before you engage lawyers and accountants and start the official
due diligence process you will need to do your own — DIY, quick and
dirty version of due diligence.
What
is due diligence? Well, it is a fancy term — used by accountants and
lawyers — to sum up the process of making sure the business is what it
says it is.
It
is no different to buying a car. The AA — are the equivalent of an
accountant — they will do a professional due diligence on your behalf
for a fee. However, before you engage the AA you will do a bit of your
own — kick the tires, check the mileage, and give it a test drive. It is
the same with a business.
Spending
time on checking out the business could save you heartache down the
line — whether you are buying a restaurant, a florist or an electrical
engineering firm. Once you have your shortlist you should get as much
information as possible about each business on your list.
This
is your chance to dig around and make sure the business is as good as
it seems. If you are buying a listed business for sale then it should
come with a sales memorandum — which will give an overview of what is
being sold. However, do not stop there.
This
is a crucial stage. You must find out the truth about the business
being sold. Any flaws or irregularities could also help you to negotiate
on the price or make your decision to walk away much easier.
You
will want to get access to financial records — audited and management
accounts. For this, you will be asked to sign a confidentiality
agreement. Do not be alarmed at this. This confidentiality agreement (it
won’t be more than a couple of pages) is a promise by you not to reveal
sensitive information to a third party and is designed to make the
seller feel comfortable about sharing the knowledge of how his business
is being run.
Remember,
the business will still be operational and no owner likes it to be
known (to either his customers or competitors) that his business is for
sale.
Beyond
financial records, you will want access to information about existing
contracts — with either suppliers or employees. You will want to
research the local area and make sure there are no legal issues that
might threaten your activity.
If
you are buying a services business you may want to test the quality of
those services and pretend to be a customer. If you are buying a hotel,
for example, you should stay there and review the standards.
This
is your chance to find the underlying cause of what is actually being
sold before you employ expensive accountants and lawyers. It is also a
crucial stage if you are going to borrow money from a lender to buy a
business. The surer you are about the business and the more evidence you
can gather to back up your case, the easier it will be to start
negotiations with a lender. From your shortlist of five or six, you
should be narrowing down to just one or two — the major target and a
backup.
Step Four — Negotiating the price
Once
you are satisfied that the business you have targeted is what it seems
to be — and that you have done as much as you possibly can to understand
what it is you are going to buy — you can start to talk about buying
the business. In addition, inevitably this will mean a conversation or
dialogue with the business owner or intermediary (agent, broker, and
accountant) about the price of the business.
It
is important to note that at this early stage of discussions, the price
remains subject to contract. This means you can make an indicative
offer that can change at some future point. Between now and when the
contract is drawn up you may discover some information about the
business that will affect your perceived value of it and you may wish to
negotiate further on the price.
A
similar situation arises in house buying. A surveyors report may reveal
information that will change your opinion of the valuation. So feel
free to talk about what you are willing to pay at this stage with the
security that you will not have to pay it once you have done further
investigation. Of course, you may find out (upon further research) that
the business is actually undervalued — and that you have a real gem on
your hands (but do not ever count on it.) In this case, you may just
want to pay the asking price.
Also,
at this stage and throughout the process, do not allow yourself to be
rushed. Do not allow yourself to be pushed into a quick sale. Take your
time. Once you make an indicative offer a business owner or intermediary
may want to rush things through. That is only natural.
However,
resist them. Remember, as a buyer, you hold most of the cards. Take as
much time as you need to find the underlying cause of what it is you are
buying. Do not let them force a timetable on you that you feel
uncomfortable about. A timetable must be structured in your favor. You
are paying. You are the buyer.
Step Five — Valuing the business
A
price is the ultimate reflection of the value of the business. Methods
used many valuation to asses a business. Most first time buyers will be
buying a property based business (such as a pub, child nursery or coffee
shop) which means that a great deal of the valuation will be based on
the property itself. A surveyors report will give you comfort here.
However,
when it comes to valuing a non-property based business or valuing the
rest of a business (the turnover of the pub, child nursery or coffee
shop) you will want to look at the methods such as (i) Multiple of
earnings (ii) Discounted cash flow (iii) Asset valuation. You will need
to take into account intellectual property and goodwill.
Because
you are a first time buyer using a multiple of earnings is a good
starting point. As a rule you can take a multiple of future profits to
land on a price. A majority of businesses that are sold are done so on a
multiple of between three and eight times the profit. So if a business
is making profits of $100k then it could be valued at between $300k and
$800k.
If
you were buying a hotel, restaurant or care home you would then have to
factor in the value of the bricks and mortar. It is a rough rule and
anything between three and eight times profit is about right for most
businesses.
There
are companies that specialize in valuing certain types of businesses
and you may wish to engage the services of an accountant with experience
in buying and selling businesses when making an assessment. However, in
the final analysis, a business is ultimately worth what you are willing
to pay for it.
Step Six — Paying for the business
There
are many ways you can structure how you pay for a business. The
simplest and most convenient way is to pay in cash on completion. You
pay the whole lump sum and the business is yours. Banks will lend up to
60% of the value of the business and you will need to find the rest
yourself.
Another
way to pay for the business is to defer the consideration.
Consideration is the legal term meaning payment. This way involves you
holding back some of the payment until a certain event or milestone is
hit. For example, if the value of the business you are buying is
affected by the renewal of an important contract — with a key
customer — then you may wish to defer full payment until that contract
is renewed.
You
may wish to agree terms with the vendor. In effect, he loans you some
of the money you need to buy the business he is selling by taking a big
deposit for the business and then accepting monthly or quarterly
payments from you the buyer over a specific period of time (three years,
five years or even longer) for the rest.
This
is a very common way of buying a business– usually called ‘loan notes’
or ‘owner financing’ and is becoming more popular in the other parts of
the world. The seller will wish to have some security built into an
agreement that will give him an equitable stake in the business should
you fail to meet payments or if the venture fails.
Step Seven — Heads of agreement
The
purpose of heads of agreement is so that there are no misunderstandings
between the buyer and seller when it comes to completing a deal. Think
of it as a roadmap that outlines how the sale will take place. It is not
the contract of sale — which comes later.
Essentially,
it is a document of terms — matters that you have both agreed on. For
example, it will include a period of exclusivity that will prevent the
vendor from talking to another prospective buyer. It will also protect
the seller by preventing you from revealing information about the
business to third parties.
Importantly, the document gives you the right to recover costs if the seller suddenly decides to pull out of the deal.
The
heads of agreement are only partially legally binding, e.g. the
exclusivity period or confidentiality terms discussed above. However,
the price of the business or the completion date or whether you actually
want to complete the deal are not legally binding. You can still walk
away, even if you have signed the heads of agreement.
See
them as laying down the foundation of the deal, setting the parameters
for it. They are designed to give comfort to both the buyer and seller.
At
this stage, you will be employing professionals — such as lawyers or
accountants. Make sure they have actual experience of buying and selling
a business. Your family lawyer or current accountant may not be the
right professional.
With
the heads of agreement, a timetable will be drawn up. Detailed
negotiations with finance providers will be taking place and information
about when and how the money will be made available will be written
into the heads of agreement.
Step Eight — Due diligence
This
is the official due diligence undertaken by professionals to make sure
that everything is as it should be. It may include commercial due
diligence to assess the business itself, legal due diligence to look at
the contracts of the business and financial due diligence to assess the
tax position.
Depending
on the nature of the business you are buying you may not need a complex
assessment. For example, the due diligence involved in buying a post
office may only be one or two days of your accountants and lawyers time.
If you were buying a multi-million dollar software company, you would
probably need a team of lawyers and accountants working over a period of
many days and perhaps weeks. However, in each case, the principle
remains the same — to make sure that the buyer is 100% sure of the
business he or she is buying.
Step Nine — Sale and purchase agreement
This
legal document will contain the terms and conditions of the acquisition
and the rights and obligations of the parties involved.
Apart
from the price, how the purchase will be financed, when and how — this
will also contain more detailed clauses. For example, you may put in a
restrictive covenant preventing the seller from setting up a new
business that will directly compete with you.
Step Ten — Completion
Congratulations.
You have signed all the forms and documents and the business is now
yours. On average it can take up to six months to go through this 10
step process but if you get it right — and that means making sure you
know as much about the business as possible before you buy it — then the
rewards can be considerable.
Throughout
the process, you should always be prepared to walk away. However
expensive or painful it might be to do so — both the pain and expense
will pale into comparison if you go ahead and buy the wrong business. It
could be the costliest mistake you will ever make.
Many
thousands of people buy businesses every year and for many it is the
start of a fulfilling and liberating chapter in their lives. You will
need a measure of good fortune, determination, organization and a good
accountant. In addition, when it gets tough and you have moments of
doubt just remember how good it will feel to be your own boss, to be the
master of your own ship.
There
is possibly no greater freedom than to be in control of your own,
profitable and successful business. Independence is the ultimate
happiness.
Melvin Feller Business Consultants Group in Burkburnett, Dallas Texas and Lawton Oklahoma.
Melvin Feller founded Melvin Feller Business Consultants Group
Ministries in the 1970s to help individuals and organizations achieve
their specific Victory. Victory as defined by the individual or
organization are achieving strategic objectives, exceeding goals,
getting results or desired outcomes. He has extensive experience
assisting businesses achieve top and bottom line results. He has broad
practical experience creating WINNERS in many organizations and
industries. He has hands-on experience in executive leadership,
operations, logistics, sales, program management, organizational
development, training, and customer service. He has coached teams to
achieve results in strategic planning, business development,
organizational design, sales, and customer response and business process
improvement. He has prepared and presented many workshops nationally
and internationally.
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