Some useful tips that Abelas & Co Business Brokers advise a buyer should be aware of and the tasks they should perform prior to consideration of a Business purchase. It is very important that the proper procedures are followed when buying a business, in order to protect both you and the seller.
The following serves as an outline to the typical questions which may be asked.
This relates to the Gross sales for any given period, this may be a weekly, monthly or annual figure. What is this Turnover, and how can the Vendor validate this?
They should keep a record of all sales. Most Vendors will show this information only if the Buyer shows they are serious about the Business and not usually given in the first instance. You may need to arrange a follow up visit in order to obtain further information. It may also be possible for the Vendor to request a deposit prior to giving such information.
Is the Vendor willing to provide a trial before settlement? This is where the purchaser is given the opportunity to monitor the sales activity for the Business during the given period (typically 2 weeks) to ensure the takings are what were originally stated. This is usually undertaken after exchange of contracts. In the event the takings are not there, the purchaser will have the option to rescind the contract.
Cost of Goods sold (GOGS)
Relates directly to the cost of all purchases used for re-sale this will reflect the gross profit (GP) margin. GP margins will differ considerably depending on Business category. For example a Convenience Store will typically have a higher COGS and lower Gross Profit margin than a café. It’s a good idea to ask to see the purchasing invoices, this is one method of validating the sales through the Business. This is a time consuming task and most vendors will not allow you to remove the invoices from the place of Business. this process is usually undertaken after establishing that this is the Business for you and not at first inspection.
Apart from the cost of goods there will be numerous other costs relating to the daily running of the business such as. Rent, Council fees, Electricity Gas, Insurance Packaging, GST, Staff costs just to name a few. Again it’s an idea to ask the vendor to validate all these expenses by showing statements/Bills etc.
Lease Term, options, size, permitted uses ensure there is adequate time for you to trade, a 5 + 5 year term would be ideal where a term less than 2 years would be considered to be high risk.
Does the Business comply with Council regulations and have all the relevant permits required to trade? Will these licences, permits, etc be transferred by the settlement date?
The hours of operation need careful consideration. It pays to ask what hours are involved, not only the hours of operation but the preparation times required.
Stock, equipment, always ask for an inventory in the event of proceeding with a sale.
Restriction of Trade
There needs to be an agreement for a restriction on the Vendor from trading within a given radius of the Business and time of settlement. This can be negotiated depending on the area as densely populated areas such as the CBD may suggest a lower radius than areas outside of this.
There is no general rule as finding the true value of a Business will vary subject to many differing factors depending on the bottom line/Profits. Ultimately the profit will give an indication of what the true value should be, a higher return typically will indicate a higher Value, however this is a complex issue and all the aspects of the business need careful consideration before coming up with such a value.
Ultimately you will both need to agree on the purchase price before any work can be undertaken. If the Vendor’s price is too high for the purchaser for whatever reason then this may not be the best Business to be pursuing.
If there is a large amount of stock, have you and the Vendor appointed a professional stock taker?
Do you have a bank account in place and cheque books, deposit slips, etc, printed?
Have you arranged insurance cover?
Are you aware of how much stamp duty you must pay on the purchase contract?
Has the settlement date been confirmed in writing?
This article should not be taken as professional advice. It is strongly advised that you consult a professional Business Broker & Solicitor before undertaking to purchase a Business.