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Buying a business – what should you be looking for?

Provided by Business Partners Ltd, South Africa's leading investor in SMEs


Buying a business seems to be an easy way to enter the business world. However, it can be hazardous if you do not know your way around the financial figures or legal aspects. Remember, buy only where you have skill to manage and develop the business.

When negotiating with the seller it is important for you to have the following questions answered - What is the real reason for the sale? No one is going to sell the goose that lays the golden egg. What are you buying? Before deciding on the final purchase price, carefully consider the following:

  • Insist on the most recent audited financial statements – if they are older than three months they must be viewed with care. Much can happen in that period like selling off stock or assets, decrease in turnover or contingent liabilities.
  • Ask for interim statements and if possible look at the bank statements and VAT returns. With this information you can check the trend in turnover as well as the business’s gross profit margins.

What about Good will? Accountants regard good will as the difference between the book value of the assets and the buying price of the business.

Real good will is the above average net profit of the business which has manifested over a number of years. It would be unwise to buy an existing business at a higher price if you could set up a new business with a well located premises, procuring new equipment and become profitable without paying the goodwill of a poor business.

Calculating the buying price can be a complicated process but there are a number of methods used to do this. It is wise to consult with your accountant and attorney to ensure that you get the best price possible. Use several methods and do a comparison to the asking price. At the end of the day it really comes down to negotiating between what the seller wants and what you can afford or what the business can afford.

There are a number of matters to be aware of when buying a business:

  • Evaluate the turnover achieved by the business very carefully. Is the business overly dependent on one or two major clients? Are there special longer terms of payments for large customers that will impact on your cash flow after take-over? What is the turnover trend - upwards or downwards - in the business?
  • Does the business use special technology to produce its merchandise for sale?  What is the cost of maintaining and upgrading this technology?
  • Ask for a copy of the lease agreement if the business is renting premises. If it expires in a few months it's likely that you will be faced with rental increases. Usually you must obtain the consent of the landlord before buying the business and it would be wise to consult the landlord about terms of a new lease
  • Let the seller sign a restraint of trade agreement
  • Do not buy the creditors or debtors of the business. Not all creditors could be disclosed by the previous owner or the debtors could be bad
  • Consider the advantages of advertising the sale of the business in the newspapers in both official languages as well as in the Government Gazette, 30 days before the sale comes into effect. This is done in accordance with Section 34 of the insolvency Act and protects you against those unseen creditors
  • Stock must be checked and reasonably valued. Old or damaged items must not be taken over
  • The value of the stock must be calculated at cost price and a stock take must be done on the day of takeover. A minimum amount of stock must be agreed upon and stated in the sale agreement
  • List all moveable assets in the business and ensure it is stated in the deed of sale. Check the items the day you take over
  • The equipment must be checked by a knowledgeable person for faults, and wear and tear
  • Calculate the outstanding leave pay of all employees at take-over date. Remember to check other staff benefits such as medical aid, pension, bonuses, etc.
  • Check with local authorities for licensing requirements, permits and zoning
  • Are there unfulfilled contracts?
  • Are there guarantees or obligations to others?
  • Are there any pending damage claims or lawsuits?
  • Are there any matters pending with government departments?
  • Are you buying a company, CC or sole proprietorship? Each have there own set of legal requirements

In all of this there are important people to consult which include the suppliers of the business, Bank mangers, Tax experts, Attorneys and Accountants. And of course if you require funding you must consult your financier.

Buying a profitable business can be very rewarding and provide you with the opportunity to be your own boss, but be aware of the pitfalls. If you are thorough in your investigations you should be able to enjoy your investment. 

Copyright © 2016 Business Partners Ltd.  All rights reserved.

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