Business Buyers

Don't buy the wrong business or overpay.

Why is the business for sale?

When buying a business this is a critical question that must be answered.

The answer will only be discovered by proper assessment and asking the hard questions.

Once you have the answer you have strong negotiation leverage.

Some of the reasons why businesses are for sale, as opposed to the reasons you may be given face to face.

Cash flow problems, due to the inability to finance rapidly increasing sales, and/or the inability to pay creditors
The business has heavy borrowings, so when there is a downturn in the market, or interest rates increase, profits may slide.
Need for substantial additional capital, or need to bring in new equipment to remain competitive.
A partner is leaving and the remaining owners cannot afford to pay out his share.
Price cutting by competitors is forcing them out of business.
Performance has peaked and the owner wants to sell on a high, particularly if competitors are coming in with a newer better product.
Lack of qualified management, or inability to attract them to the business.
It may be a family business with no one in the wings to take over.
A key staff member has left and a suitable replacement cannot be found.
Current owners are burnt out and want out. Typically, one or more of points above being present can cause burn out.

How do you uncover the real reason for sale and what should you examine and ask?

Examine the most current Profit and Loss, cash flow and balance sheets.
Examine existing cash flow and profit & loss budgets.
Examine the current business plan.
Speak to the businesses key customers and suppliers.
Ask key staff members how they believe the business is performing and how they feel about staying with the business.
Ask the vendor's acting solicitor if there are any existing or pending legal actions and ask for his reply in writing.
If a franchise, speak to a range of current franchisees about their experience to date and what they think about the franchisor and its delivery on representations.
If an industry association exists, find out what trends they predict, what research they may have and ask for the name of an expert you can speak to.
Have your solicitor review any material contracts, such as premises lease, supplier and customer contracts, equipment leases, trademarks etc.
Examine competitor marketing and expansion behaviour to obtain an insight into potential threats.
Ask industry players what they believe future trends, threats and opportunities to be.

What else should you ask and enquire into?

Is the vendor prepared to sell on vendor terms, which is basically payment of the purchase price plus interest over 2-5 years?
Are the business systems and operating procedures well documented or are they all in the head of the owner or key staff?
Ask what the current owners background and core competencies are.
Ask about all key staff, backgrounds, skill sets, current salary packages and if they will stay or need to stay with the business.

When you request information and make enquiries take note of the responses and body language as this in itself provides great insight.

If, in your research and assessment, you find a problem that you can fix, then consider buying the business, but only at a price that reflects the cost of solving the problem.

Frank A Pizi, Principal of Pizi Group which specialises in business buyers services, business coaching, retail tenancy advisory and growth strategy. Ph: (03) 9387 0722 or 0411 700 022. For more details on the Pizi Group, click on their CEO Online Advisor Network listing.
First published: 4 October 2002.
Last updated: 6 October 2005.