BUYING A BUSINESS GUIDE
For most buyers, the transaction of buying a business will be a once or twice in a lifetime experience that involves an investment of a major portion of their financial worth. Why buy a business to begin with? Most successful business owners will say that owning a business gives them enormous freedom. They are their own boss and in control of their own destiny. They have increased their earning potential, and are working towards financial independence. In short, they have more choices in their lives. Good businesses usually provide good cash flow, and owners have used this cash flow to make other profitable investments such as buying property. In many cases this includes the building their business is in. The key to success however, is to buy a quality business – one where there is potential for the new owner to use their skills and energy to take that business to the next level. Often a business for sale can be poorly presented, over-priced or in a poor state. Here at McDonald Real estate we work with our clients to ensure their business is presented well and priced realistically. According to industry statistics, over 90% of the people who begin the search to buy a business fail to ever complete a purchase – even after looking for as long as eighteen months. How ready are you to buy a business? The process of purchasing a business can take some time – and will require effort, motivation and commitment on your part. Meeting with your McDonald Real Estate team can help you assess how ready you are to start this process. We can discuss what kind of business would be most suitable for you, whether you have the necessary time and commitment, and we can run through the financial arrangements that will be required of you. A POSITIVE WAY TO BUY A BETTER BUSINESS eieio.co.nz
“It makes more sense to buy a great business at a fair price than it does to buy a fair business at a great price.” Warren Buffet – Berkshire Hathaway With this in mind you are advised to gain a solid understanding of the sometimes complicated process of buying a business. We recognise that buying a business can be a stressful time; our excellent knowledge of business sales assists and supports you throughout the critical steps of the purchasing process. You will be aware that the seller and buyer are natural adversaries – the seller wants as much money as possible, and the buyer wants to pay as little money as possible. With your business brokers guidance you will need to find acceptable common ground and remember that a fair deal is actually the best deal. Finding a suitable business at a price and terms that are acceptable to you is just the start of the purchasing process. The real challenge in bringing a buyer and seller together is in closing a sale and handling the negotiations between a buyer and seller after an initial offer has been presented during the due diligence process. This is our strength. This booklet is designed to inform you about the processes involved in buying a business and the skills required for a successful purchase. Take some time to read this and if you have any questions please feel free to get in touch. A POSITIVE WAY TO BUY A BETTER BUSINESS eieio.co.nz
Protect your inquiry with total confidentiality throughout the process. Provide you with information on aspects of business appraisal and the sale and purchase process. Present a range of business opportunities to you for your analysis. The businesses we market have been through our evaluation and selection process before we decide to list them. Send you advance information on new businesses before marketing them to the public. Have you sign confidentiality agreements before supplying specific information for any business listing. Provide you with a professional information memorandum that will present the business suitable to your requirements accurately for your analysis. Act as a mediator between you and the seller; potential buyers and sellers can become anxious about what to say when dealing directly with each other. Assist you with structuring an offer to achieve your requirements without negatively affecting the seller. Co-ordinate the communication and information flow to all parties and their professional advisory teams during the due diligence process. Bring the transaction to closure to the satisfaction of all parties. Use an experienced and qualified broker to represent you in your business purchase. Going it alone could be hazardous to your wealth! A competent and experienced broker from McDonald Real Estate will: YOUR BUSINESS BROKER eieio.co.nz
Solicitor Accountant Business Banker Business advisor Choose your professional representatives and advisors for your business purchase team very carefully; they can make or break the deal. Choosing the right person or people is very important to the business buying process. In all professions there are people of varied skill levels. Take care to know that you have the right people working for you. Professionals often specialise in different categories of accounting and law such as commercial, property, matrimony etc. We recommend that the professional advisors you choose to have in your team are qualified business specialists. They will have the knowledge and experience to deal with any issues that may arise, swiftly and completely. There are many accountants and solicitors who have excellent business consultancy and advisory skills. These ‘additionally qualified’ professionals may charge more but are well worth it. It could make a huge difference to the value and process of the sale. Our brokers will work comfortably with other members of the team you select. Apart from your McDonald Real Estate Business Broker, people you may need in your team are usually selected from the following professional sectors: SELECTING YOUR ADVISORY TEAM eieio.co.nz
Uses the net performance of the business for sale purposes (i.e. real profit, not hidden value). The capitalisation rate is also the return on investment (ROI). Market expectation is usually between 30-50% EBIT (earnings before interest & tax), and before one proprietors’ income and discretionary or personal expenses. The required ROI may sometimes be higher for some businesses that are not considered mainstream and will be lower for wellestablished managed businesses. The key is to establish a correct ROI or capitalisation for a particular business after careful consideration of all factors and information relating to the particular business. Establishing a fair market value for a business is vital to the successful outcome of the sale process. McDonald Real Estate business brokers analyse each business with our thorough evaluation process. Most businesses are sold to financially motivated buyers and are valued based on the net operating profit of the business. The most common method of valuing a business is the Capitalisation of Earnings, also called the Earnings Multiplier. This method is used by most professionals and is an effective method to determine a market value for a business as a going concern, through the capitalisation of current and/or sustainable net earnings. This method provides the best ‘Fair Market Value’ and has withstood the test of time. We use this method for appraising a business if it is profitable and has a good operating history. It is widely accepted as the best approach to appraising a business being sold as a going concern and being operated by an owner/manager. The key components of the Capitalisation Method are that it: VALUING A BUSINESS eieio.co.nz
The sale of company shares (if it is a registered limited liability company). The sale of the business as a going concern including all of its assets. Inventory (finished goods, work in progress, raw material) Furniture, fixtures and equipment Real Estate (land, buildings, leases) Intangible assets -- e.g. Trademarks, trade names, patents, copyrights Goodwill Establishing a Net Operating Surplus We require at least two (preferably 3) years full financial accounts, plus the current year’s trading using Profit & Loss management accounts and a forecast budget for the next financial year. Breaking down the sale price: A business can effectively be sold by two methods: 99% of business buyers prefer to purchase the business and its assets as a going concern. The sale price will comprise the breakdown of all asset categories that may include: Financial Analysis When valuing small to medium businesses, the most popular earning base tends to be EBPITD (Earnings before Proprietors income, Interest ad Tax and Depreciation). The purpose of using EBPITD is that it separates financing and tax issues from business issues and makes an allowance for either a working owner or a manager. The Valuing Process McDonald Real Estate uses, appraises businesses using the following four steps. 1. VALUING A BUSINESS eieio.co.nz
2. Business Analysis McDonald Real Estate will conduct its own evaluation process on each business, considering all aspects that will or may have an effect on the business value. 3. Market ComparisonA significant strength in our appraisal is the comparison of the subject business with other related sales data. McDonald Real Estate has access to a wide range of current market sales through BizStats. Each business will be compared to other similar businesses that have been sold not only by McDonald Real Estate but also other brokers in order to establish a fair market value. 4. Capitalisation Rate (Earnings Multiplier)The final step in the process is to select an appropriate capitalisation rate that reflects theidentified risks and opportunities that a potential buyer may have a view on.The capitalisation factor applied to most very good business operations providingevidence of sustainable earnings is normally 30% – 60% for EBPITD. VALUING A BUSINESS eieio.co.nz
Vocational history Financial resources Business requirements Motivation and commitment to purchasing a suitable business Registering Your Interest in The McDonald Real Estate Commercial Client base. Many of our sales are concluded through our client base. McDonald Real Estate has a very good client base of buyers who have registered with us and been through the introductory stage of the business purchase process. As such they receive prior notice of all our listings. Normally the client base has the advantage of receiving advance notice of new listings. Communication to the client base is conducted by email. This has proven to be a fast and efficient way of bringing new business opportunities to your notice. Contact us now to become a registered member of the McDonald Real Estate client base if you are serious about buying a business. Protecting Your Confidentiality During the business buying process it must be understood that there will be a reciprocal exchange of sensitive financial information between the buyer and seller. During your first contact with our broker you will be asked for information regarding your: This information is entered into your client file and is then available to the McDonald Real Estate broker team. STEPS IN THE BUYING PROCESS eieio.co.nz
Business overview and structure History, current and future trends relating to the business and industry Growth opportunities Business information Major competitionMajor suppliers Marketing Contractual information Main strengths of business Reason for sale Photographs and promotional documents Before we can send you particular business information you will need to sign a legally binding confidentiality agreement that requires you not to disclose the fact that the business is for sale or any other details you receive about the business. All information remains the property of McDonald Real Estate and must be returned to us. Our sellers are also bound by confidentiality and are not at liberty to disclose any details about prospective buyers until a sale becomes unconditional. Receiving Business Information Our Information Memoranda are developed with the highest degree of ethics, and, to the best of our knowledge, include full disclosure of all relevant facts and business information to ensure an orderly and successful sale. As a registered buyer you will initially receive information on new business opportunities through an email flyer. This email outlines brief details on the new business being marketed and if this kindles your interest you can then request further detailed information. The broker will contact you and discuss the business and then if you wish to continue with your inquiry you will receive an information memorandum. The memorandum contains: STEPS IN THE BUYING PROCESS eieio.co.nz
Financial data Lease details Asset list Following receipt of the information memorandum, if you decide that the business is suitable for you then you will sign a confidentiality agreement and further detailed information is provided: Visiting the Business Meeting the owner and visiting the business is an integral step in the buying process. After you have analysed the Memorandum and if it appears to meet your requirements you will then want to explore the business workings. Your broker will schedule a meeting with the owner, the broker and yourself to discuss and show you the operational aspects of the business. This meeting is often conducted outside of normal business hours particularly if the staff are not aware of the impending sale. At this stage no formal offer to buy has been made and while every effort will be made to ensure your questions are answered, there will be business information that cannot yet be disclosed. In consultation with your advisory team you now have to satisfy yourself that you have enough information in order to make an offer to buy the business. STEPS IN THE BUYING PROCESS eieio.co.nz
You will reach the point where, if the business looks to meet your requirements, you should enter into a conditional Sale and Purchase Agreement. This agreement forms the foundation for the negotiation process and effectively secures your legal option to buy the business. This is a major step as negotiations move from a verbal discussion to a physical agreement. The broker and seller discuss the offer, price and the terms and conditions of the offer, which will almost always include a due diligence review clause inserted for your benefit. The Sale and Purchase Agreement is normally completed by the McDonald Real Estate broker on your behalf but in consultation with you and your lawyer. You should seek your Accountant and/or Solicitors advice before signing the sale and purchase agreement. The Sale and Purchase Agreement also acts as a plan for the actual sale of the business from which all parties and their respective team of advisers will put in place specified actions within or by specified times to bring the business sale to a close. The Sale and Purchase Agreement is the result of the negotiation process and will record everything that was agreed to between the buyer and seller. What goes in this agreement? To put this agreement together your McDonald Real Estate business broker will require some key information. This will include full particulars of the transaction including parties, a description of the business, the price and breakdown of assets, the deposit amount, possession date, lease particulars, turnover warranties, stock variance amount, restraint of trade and handover period. A number of special conditions will be inserted covering the scope and term of the due diligence period. SALE AND PURCHASE AGREEMENT eieio.co.nz
These will relate to finance, re-employment of staff, requirements around plant and equipment, further information about the seller’s ongoing assistance, assignment of leases, special warranties, and will include any other condition specific to the purchase of this business. These conditions are there for your protection. Once this agreement has been approved by your solicitor you will be asked to sign it and it will be presented to the seller. In a situation where there is more than one offer being presented to the seller, your McDonald Real Estate business broker will ask you to complete a multiple offer declaration. This document is designed to inform you that there is another offer being presented and to ensure you understand that the offer you have made is your best offer and that you have been made aware that you may not have a chance to make a better offer. Again, your McDonald Real Estate business broker will fully explain this to you if the situation arises. After agreement is reached and the Sale and Purchase Agreement is signed by both the buyer and seller, the brokers attention will now be on guiding you through the Due Diligence process. The broker is responsible for gathering and providing any further information required by you or your professional advisers. SALE AND PURCHASE AGREEMENT eieio.co.nz
Negotiation processes are as different as the Some negotiations are simple and finished in a The sale price has no bearing on the length or Successful negotiations can involve compromise Negotiations often include offers and counter offers, this is normal. Invariably there is always a mutually acceptable point of agreement if both parties are serious about buying and selling and negotiations are handled carefully. The following points need consideration: people involved. matter of days and yet others take months. complexity of negotiations. on the part of both parties to close the deal. Remember, there are an infinite number of ways to structure a sale so that both the seller and the buyer can achieve their respective requirements. THE NEGOTIATION PROCESS eieio.co.nz
Due Diligence is the process of investigation of the business’ financial and operational performance by the contracted buyer. The signing of the conditional Sale and Purchase Agreement is still only half way through to completing the transaction. The buyer and their respective advisers must now complete the process of Due Diligence. Now is the time for you and your advisers to verify that the information received supports the conditionally agreed to sale price. Basically, this clause means that you can complete a thorough investigation on the business in its entirety. The normal time frame to complete a Due Diligence process is approximately 10-15 working days. In some instances, a longer Due Diligence process is required depending upon the complexity of the business or other requirements such as Franchise approvals. Until the point of signing the conditional agreement, your professional advisers normally have had minimal input. You and your advisers usually have made a judgement call based on the information presented by the seller, both verbally and that contained within the information memorandum. There will always be points and issues that will require further clarification and the real challenge in the due diligence process is finding common ground between the parties. The buyer and seller and their respective team of advisers need to work together to solve the inevitable difference in positions. Once all the conditions contained within the Sale & Purchase Agreement have been satisfied, you will instruct your solicitor to confirm that the agreement is unconditional. The checklist on the following page highlights the key areas of Due Diligence investigation. DUE DI L IGENCE eieio.co.nz
Description of Business The products and/or services The primary business markets The primary customers The primary suppliers Major or primary customer testimonials The owner assets/plant list The primary business locations The leased assets Sales catalogues, brochures, flyers Advertising examples Overview of internet site (If applicable) Product specification sheets Marketing plans Partnership agreement (if applicable) Joint venture agreements (if applicable) Copies of deeds of lease & assignments Zoning approvals and/or resource consents Territorial authority (if applicable) Franchise agreement (if applicable) Pending litigation (if applicable) Profit & loss statements for the previous three years if possible Monthly sales figures for previous three years Working capital requirements Aged Debtors & Creditors lists Business Overview Marketing Information Legal Information Financial History THE DUE DI L IGENCE CHECKL IST eieio.co.nz
Projection financial statements for the next three years Work in progress (with the percentage of completion) Planned new products or services Potential new business markets and supporting documentation Emerging new technology to be exploited Key-personnel employment contracts Personal biographies of key personnel Employment contracts (if applicable) Insurance details Owner post-sale employment contract (if applicable) Business Forecasts & Staffing Miscellaneous THE DUE DI L IGENCE CHECKL IST eieio.co.nz
Once you have satisfied yourself as to all the aspects of the due diligence investigation, the agreement will be confirmed as being unconditional by your solicitor. Confirmation of sale means that the sale price is now official and the agreed transaction must, by law, be honored by both parties. You will pay a deposit to the NZRE trust account who receipts it on behalf of the seller and holds it in their audited trust account. The deposit is normally 10% of the purchase price. The deposit must be held for a period of 10 days in the trust account before the funds can be dispersed. Earlier release can be agreed upon with the approval of both solicitors. The solicitors for both parties now complete all the required legal paperwork and consents to allow the transaction to be complete and settled on the date nominated in the sale and purchase agreement. UNCONDITIONAL CONTRACT eieio.co.nz
Between the unconditional date and settlement, both parties along with their respective Solicitors and Accountants attend to the final details and legalities relating to the sale. The checklist on the following page highlights these issues and indicates generally whose responsibility the issue is – seller or buyer. There are three main areas of focus at settlement time; the stocktake, verifying the Plant and Equipment list and attending to the period of sellers assistance. Stocktake A stocktake is normally conducted by both the buyer and seller together. Sometimes this is not preferred or appropriate and in such cases a valuer acceptable to both parties is appointed to compete the task. The stock level is determined at cost; the final value must fit within the stock variance allowance agreed in the sale and purchase agreement. The settlement sum will be adjusted depending on the value of stock determined at the stocktake. Plant and Equipment The Plant and Equipment as listed will be checked off and inspected for good operational order. Any variances from the agreement could also be reflected in the settlement figure, for instance if a certain item of plant was destroyed and not present on the possession date, the value of this item could reasonably be deducted from the final settlement sum. Sellers Assistance This is normally for a period of 10- 30 working days, but the length of time required does vary depending upon the complexity of the business. The first two weeks will often require a full time involvement. The seller will often agree to consult informally or formally for financial consideration for an agreed period after the 2-6 week period of assistance. This requirement, if applicable, also varies depending upon the complexity of the business. POSSESSION AND SETTLEMENT PERIOD eieio.co.nz
Now your sale has gone unconditional this checklist may help you decide what you need to do prior to taking over your business. CHECKL IST FOR BUSINESS TAKEOVER Find out as soon as you can (from your lawyer) how much will be required for settlement including rent, rates and other apportionment and organise to deposit with him/her Seller Buyer Ensure you are registered for GST in the correct title Task Open trading accounts with your bank Organise the changeover for eftpos Check new stationary requirementsbusiness cards etc Open accounts with suppliers so you are ready to start trading from day 1 Change power accounts over- organise any cell phone account charges Check if there is a website host/supply to change Organise petty cash, you may need more for incidentals during week 1 Register new memberships with trade or industry organisations Decide if you are going to advise suppliers and customers of change of ownership and if so, prepare a letter, mail out or advertisement comparative quotes eieio.co.nz
CHECKL IST FOR BUSINESS TAKEOVER Ensure Franchise agreements are assigned Seller Buyer Find out what insurance covers are required and arrange to have them start at settlement. You may then have time to get comparative quotes. Task Start the ball rolling on Employment contracts for staff takeover Talk to the vendor about the best way to handle debtors during the take over and have a system planned, remember you may be recieving money on their behalf Ensure any keys, passwords, security codes etc are exchanged Sign over the current PO Box number Organise petty cash, you may need more for incidentals during week 1 Assign leases for premises Assign leases for vehicles eieio.co.nz
Russell Atkinson M:027 452 5544 O: 06 757 3083 E: russell.atkinson@eieio.co.nz MAKE CONTACT Kevin Hight M: 021 746 371 O: 06 757 3083 E: kevin.hight@eieio.co.nz Find us on Facebook and LinkedIn to keep up to date with the latest listings and information. Our Commercial Team is dedicated to help you in this process, contact our Team to receive the support and experience in purchasing your next Business.
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