Why would you BUY ANOTHER BUSINESS?
What should you think about?
DFK ANZ - AFTA@Work Newsletter article - Thursday 30 October, 2015
By David Sharp, DFK ANZ - Sydney
There plenty of excellent reasons to buy another business, it can improve the profitability of your current business, it can reduce risk and volatility, and it can introduce economies of scale that allow you to achieve results that would not otherwise be possible… but it can also be a disaster.
Here are 11 issues to consider in deciding whether to buy another business.
- Bigger is not always better. There has to be a specific reason for investing in another business. Just because the business is there and the price is right, does not mean you should buy it. However, the process of investigating an opportunity is always worthwhile. If nothing else it makes you think about your business and whether is operating as well as it should be.
- Make sure the seller is serious; don’t waste your time if they are not. If they are serious they should request you sign a confidentiality agreement. Treat this agreement with respect, it is a legal document. Also treat the seller with respect, remember they have lived and breathed this business and its sale is very important to them. Acting in a professional manner will set scene for future negotiations.
- Request business history documentation. The seller should provide you with detailed financial statements and tax returns for at least the last three years, a description of the business, any history and key facts you need to know, a copy of the lease of the premises, lists of customers and key suppliers, details of software used and copies of any franchise agreements. If information and documents appear to be incomplete, inaccurate or missing, if documents are withheld or can’t be found, there may be a problem that is being hidden. The more transparent the process, the better the outcome will be.
- Time to compare. Consider how the business compares to your business, consider its employees vs your employees, its products vs your products, its location vs your location. Will it allow your business to improve? or will you bring it up to your level.
- What savings could you make in the sale business? Could you increase its profits by reducing its costs. Maybe you could reduce back office space and use yours. Do they sell products that your sales people could add to their portfolio, could you remove it's sales force and overheads increasing its profitability even more?
- How would you merge the two businesses? Are there similar cultures or are they very different? The merging process does require very careful choreography, two good business can both fail if all issues are not careful considered in the merging process.
- How much is the business worth? In considering how much to pay look at what your profit is expected to pay vs the existing profits. Do not pay for the improvements you will make, pay for how the business is operating for today. Obviously, however, the more profit you will be able to extract the more you will be able to pay.
- Buyer beware - If you're told that there is cash being collected that's not on the books be very careful. If they are not honest in this regard what else may they be doing that is illegal. You simply cannot verify cash unless it is being banked. So if it's not in the books and in the bank it's not worth anything.
- To share or not? Often you will have a choice of buying shares in a company or the business out of the company. If at all possible avoid buying shares in a company. You will inherit any skeletons that are in that closet, better to set up a new company or use your own existing company to buy the business. This makes the deal simpler and much safer.
- Use a lawyer to draft or review the purchase and sale agreement. Make sure the seller provides correct representations and warranties to protect you if anything goes wrong.
- Most importantly involve your accountant. A second set of unemotional eyes will challenge you and ensure that the purchase does make sense and will add value. Most importantly accountants being accountants it is their business to make sure you don't over pay for the opportunity.
If you are considering buying a business, feel free to discuss your ideas with a DFK Australia Accountant. Over the years we have assisted our clients with buying and selling thousands of businesses and we will help you make to correct decision to build your existing business and wealth.
Contact us at 1300 DFK ANZ.
David Sharp - Sydney