Buyer and Seller Tips
Useful information to assit you with your business purchase or sale


Buying a Business

Buying an existing business will provide you with a better chance of success than starting a new business for the following reasons:

• A location has already been chosen
• The market has been tested for the products it sells
• Pricing has been established
• Suppliers are in place
• Employees may already have been hired.
• A customer base has been developed
• Equipment has been purchased
• Systems have been put in place for managing the enterprise.
• If the company is not making as much money as you think it should the information about how the company is being run is available and you may have skills the current owner lacks to resolve the issues.

Try to buy a business that matches your skills and experience.  If a key employee cannot perform their duties for a time, you may need to step in and take their place.  Perhaps your talents lie in marketing or communications, these will be needed to grow the business in the future.

Make sure that the business you choose will create enough money for you to live on.  You may love what you do but it also needs to pay the bills and provide you with enough to expand your business and have a rewarding life.

Due Diligence

• You will need to complete a due diligence exercise. This detailed investigation should cover things like strengths, weaknesses, growth opportunities and any issues or concerns.
• You can start investigating a business before you speak to the seller. The internet can be a useful tool in this regard. 
• Research the industry and the competition it faces to establish growth opportunity.
• Check the legal rules that are in place for operating a business in the industry you have chosen.
• It is good sense to make a checklist of everything you need to investigate about a business as well as how you are going to do it.
• Give the seller a list of  information you will need from them in order to complete your review.
• Once you have made an offer you will have access to the financial and operating records of the company.
• Remember that the financial records do not tell the whole story – investigate anything that doesn't’t look right .  Ask the seller to explain and then decide whether it could be resolved and if not what impact will it have on the profitability of the company.  Perhaps it is something that could be solved in the future without being damaging in the sort term.

Buying a Franchise

Buying a franchise re-sale is a good option if this is your first business.

• It is already established and has a proven successful strategy.
• Has an existing customer base
• Investigating a franchise is easier than a regular business
• Franchise laws differ from one state to another so you will need to hire an attorney who specializes in franchise law.
• If you buy a franchise whether it's re-sale or not the contract may give the Master Franchiser the right to buy it from you when you are ready to sell.  The master franchiser may not be happy with the buyer you choose to sell to.  It may be that they don’t want too many re-sales in a particular region.  This is why it is important to have an attorney well versed in Franchise laws to go through the contract with you.

If you are buying a Franchise that is not a re-sale then:

• Make sure you get a copy of the master franchiser’s contract to see what may be a problem in the future.
• The main mission of a franchise is to sell more of them. Part of the contract will be that the master franchiser gets first option to buy the business when you are ready to sell. Re sales cut the number of new franchises he is able to sell.
• The Master franchiser could become your competitor by selling to someone else in your area thus creating competition from your own brand.  You need to ensure that there is a distance definition Within the contract
  
  

Do I Need a Broker?

• Business brokers usually represent the seller.  they can however assist you with document chasing from the seller and obtaining the correct documents to close the deal.  Some may share other business for sale lists with you in states where the there exists a multiple listing service.
• The broker will take your concerns and questions to the seller in the initial stages.   If you are going to be asking hard questions it is useful to have a broker do it for you.
• The broker will not be able to help you choose the right business.  Finding the business is up to you.  The broker can point you in the direction you have asked to go and will provide you with information to get you started.  They can point out things you should look for.
• Brokers bring buyers and sellers together but they do not do the negotiating for you. 
• If  you find that you and the broker are not communicating effectively then try another one.  You need to create a relationship with a broker in order to get the best assistance from them.
• Show the broker that you are serious about buying a business .
• Initially they will have you sign a non-disclosure document.
• Give him a list of the type of businesses you are interested in and how much you intend spending on the purchase.
• Call them once a week for updates if they haven’t already called you.

The Purchase Price

Small businesses sell for somewhere between 1 and 3 times the sellers true cash flow figure.

The following list will help a seller to get a higher price for his business.

• Clean books and clean records
• A reasonable selling price
• Seller financing
• Training and/or assistance for a fixed period  
• No specific skills required to run the business

Some businesses sell for 5 or 6 times their cash flow figure.  These businesses are often in industry sectors which are in great demand at the time. 

If a business has an automatic recurring revenue it will sell for more than the average price.   Annual contracts for services that are paid monthly are a good example.   

Calculating Price

Pre-tax profit + owners salary + perks + depreciation, minus allocation for capital expenditures
.This will give you a true cash flow figure