10 tips to consider before buying a business

If you’ve decided to buy an existing business rather than start your own, here are the ten steps you should follow:

1) Set your goals
It’s vital to understand exactly why you are looking to buy a business in the first place and set clear and realistic goals for it. You may wish your business to generate you an income every year. Or you may be more interested in something you can scale up and add value to, to sell again down the line.

Having a clear goal in mind will help you more sensibly assess potential purchases, and will also be a useful steer for any sales agents or other professional advisors.

2) Make sure you’ve picked the right industry
Be careful that you have picked the industry that will help you achieve your goal, rather than fulfil an unrealistic childhood dream lurking in your mind. Always wanted to own a widget factory and noticed there are five on the market? Could that be because the market for widgets died a year ago?

The best way to check the industry is to go and work in it for a while. You may even be able to do this part-time around your existing job. If you really want to own a restaurant, spending a year working as a waiter in the evenings will be the best way to test your dream, and give you invaluable inside knowledge that could save you, or make you thousands in the years to come.

3) Do your research
A quick Google search will give you dozens of websites and companies that offer businesses for sale. Spend several evenings doing your research here, to see what’s around in your chosen sector and geographical location.

Aim to put together a shortlist of businesses and then target them with even more research. Go through every page of their website; Google their name to see what others think; and track down customers to ask their opinion. You could even pose as a customer yourself to see what the company’s actually like.

4) Have an initial viewing
Now is the time to approach the business through their agent and learn more. Remember to stay subjective – just as when you’re buying property, you need to think with your brain not your heart. Listen to your gut feeling and don’t ignore it… buying a bad business is an expensive mistake to make.

Some business owners don’t tell their staff they are selling, so as not to risk them taking their eye off the ball at a time when the performance of the business is under close scrutiny. Comply with these wishes and remember to maintain a friendly, if professional relationship with the seller. They might be selling you a business they built from scratch and will want to ensure it is going to a safe pair of hands.

5) Do a reality check
Now you have the full information on the business – official and unofficial – you should take a step back and think it through. What warning signs have you seen in the business? No company is perfect, but do you have the skills to fix the problems you have seen? Can your strengths enhance this business?

Be particularly careful if the business appears to be over-reliant on the current business owner or a number of key staff. The business owner cannot be replaced like for like even by you. And key staff are the first to leave during a major upheaval – will this business survive without them?

6) Get help
You need professional help and informal help. Ask your accountant and solicitor to pore over the figures and contracts. It doesn’t matter how much this costs – better to spend a few thousand and uncover some potential horrors now, than 12 months down the line.

Ask your partner and friends what they think. By this stage you may already be too close to the business to be fully subjective, so people whose opinions you trust may be able to provide a different set of opinions.

7) Get the money sorted out
Just as when you’re buying property, you should have a budget in mind when you start to look for a business to buy and a general agreement of credit (especially with the banks’ current hesitation to lend thanks to the credit crunch).

Now you’ve got a specific purchase in mind, get the credit formalised. Lenders will generally look for full details of the business you want to buy, including three years’ accounts and financial projections. They may even ask you to put some personal assets up as a guarantee for the loan.

Other sources of finance include potentially your pension fund, any existing business, or “friends, family and fools”.

8) Make an offer
If you don’t have a solicitor, get one now. Make your initial offer by phone and always follow it up immediately in writing. Use the term ‘subject to contract’ in all communication.

This is the time to request conditions of sale, such that the existing owner stays within the business for several months during a handover.

9) Negotiate a great deal
Don’t be afraid to push for the deal you want. Not that many businesses have sellers fighting over them, so as someone with cash to splash you are in a strong position.

You and your solicitor will go through a process called due diligence, where you verify the information given by the seller.

Find out why the current owner is selling and leverage it. If they want to retire, are they really going to jeopardise the sale of the business for the sake of a few thousand pounds?

10) Buy the business
Once the lending has been settled, and everything has been transferred to you – congratulations, you just bought a business!

Now the hard work starts. You have to fit into the business and understand it fully before you can start to make the changes needed to hit your original goals.

 

How to Buy a Business – Checklist

The purchase of an existing business most often involves the purchase of the operating assets only. Occasionally, a prospective purchaser may consider buying the shares if the business is already incorporated. Also, some buyers will not purchase receivables and other’s may want to view those as a means of keeping the client attached to the business under their “new” ownership.

Regardless of which applies, you, as the purchasing party, can negotiate a deal that can include or exclude virtually any asset.

Summary

Business Evaluation
There are many methods that one may use to determine the value of the business. Asset value methods, earning value methods and combined methods are the most commonly used. Buyers should utilize a number of these to arrive at a range of prices which can be used during the purchasing negotiation.

The first step a buyer must take in evaluating a business for sale is that of reviewing its history and the way it operates. The business’ financial statements, operating documents, and practices should be reviewed. A summary of the most common items to be reviewed is as follows:

Balance Sheet

Accounts Receivable

Obtain an accounts receivable aging schedule and determine if there is concentration among a few accounts.
Determine the reasons for all overdue accounts.
Find out if any amounts are in dispute.
Are any of the accounts pledged as collateral?
Is the reserve for bad debt sufficient and how was it established?
Review the business’ credit policy.

Inventory

Make sure the inventory is determined by physical count. Manufacturers should divide inventory into finished goods, work in progress and raw materials.
Assess the method of valuation and why it was used. (LIFO, FIFO, etc.)
Determine the age and condition of the inventory.
How is damaged or obsolete inventory valued?
Is the amount of inventory sufficient or too large to operate efficiently and for how long?
Should an appraisal be obtained?

Marketable Securities

Obtain a list of marketable securities.
How are the securities valued?
Determine the fair market value of the securities.
Are any securities restricted or pledged?
Should the portfolio be sold or exchanged?

Real Estate

Obtain a schedule of real estate owned.
Determine the condition and age of the real estate.
Establish the fair market value of each of the buildings and land.
Should appraisals be obtained?
Are repairs or improvements required?
Are maintenance costs reasonable?
Do any of the principals have a financial interest in the company(s) that perform(s) the maintenance?
Is the real estate, required to operate the business efficiently? Can a lease agreement be arranged rather than purchasing?
How is the real estate financed?
Are the mortgages assumable?
Will additional real estate be required in the near future?

Machinery and Equipment

Obtain a schedule of machinery and equipment owned and leased.
Determine the condition and age of the machinery and equipment and the frequency of maintenance.
Identify the equipment and machinery that is state-of-the-art.
Identify the machinery and equipment that is obsolete.
Identify that the machinery and equipment is used in compliance with Canadian standards and determine if other equipment and machinery is needed to comply.
Will immediate repairs be required and at what cost?

Accounts Payable

Obtain a schedule of accounts payable and determine if there is concentration among a few accounts.
Determine the age of amounts due.
Identify all amounts in dispute and determine the reason.
Review transactions to determine undisclosed and contingent liabilities.

Accrued Liabilities

Obtain a schedule of accrued liabilities.
Determine the accounting treatment of:
unpaid wages at the end of period
accrued vacation pay
accrued sick leave
payroll taxes due and payable
accrued Federal and Provincial income taxes
other accruals like GST
Search for unrecorded accrued liabilities, i.e. severance pay.

Notes Payable and Mortgages Payable

Obtain a schedule of notes payable and mortgages payable.
Identify the reason for indebtedness.
Determine the terms and payment schedule.
Will the acquisition accelerate the note or mortgage or is there a prepayment penalty?
Determine if there are any balloon payments to be made and the amounts and dates due.
Are the notes or mortgages assumable?
Have personal guarantees been provided?

Income Statement

The potential earning power of the business should be analyzed by reviewing profit and loss statements for the past 3 to 5 years. It is important to substantiate financial information by reviewing the business’ federal tax returns. The business’ earning power is a function of more than bottom line profits or losses. The owners salary and fringe benefits, non-cash expenses, and non-recurring expenses should also be calculated.

Financial Ratios

While analyzing the balance sheet and the income statement, sales and operating ratios should be calculated in order to point out areas requiring further study. Key ratios are the current ratio, quick ratio, accounts receivable turnover, inventory turnover and sales/accounts receivable. The significance of these ratios, the methods for calculating them, and industry averages are available through publications such as Dun & Bradstreet and Robert Morris Associates. Look for trends in the ratios over the past 3 to 5.

Leases

Are there any option periods, and if so, is the option exercised only by the choice of the tenant?
Is there a percent of sales clause?
What additional fees (such as a common area maintenance or merchants association dues) are paid over and above the base rent?
Is the tenant or landlord responsible for maintaining the roof and the heating and air conditioning system?
Is there a periodic rent increase called for to adjust the rent for changes in the consumer price index or for an increase in real estate tax assessments?
Is there a demolition clause?
Under what terms and conditions will the landlord permit an assumption or extension of the existing lease?
Is a personal guarantee required?

Personnel

What are the job responsibilities, rates of pay and benefits of each employee?
What is each employees tenure?
What is the level of each employees skill in their position and are they employed under an employment contract?
Will key employees stay after the business is purchased?
Are any employees part of a union, or is any union organizing effort likely?
Have there been layoffs in the past year which could trigger lawsuits?

Intellectual Property

A list of trade names, trade-marks, domain name(s), logos, copyrights, patents and industrial designs should be obtained, noting the period of time remaining before each expires.

Taxes

Are CPP, EI, GST, and Income Tax payments current.
What was the date and the outcome of the last audit?

Legal Issues

Are there any suits now or soon to commence?
What Occupational Health and Safety, W.C.B., environmental and other regulatory requirements must be met? Are they currently being met?
Are all registration requirements and regulations being met?
Are all local zoning requirements being met?
Review the articles of incorporation, minute books, by-laws, and/or partnership agreements.
What are the classes of shares and the restrictions of each, if any?
Have any shares been cancelled or repurchased?
Is the business a franchise? If so, review the franchise agreement.

Insurance

What coverage has been provided for business assets, general and professional liability, business loan, business interruption, and “Key Person” insurance?
Was there a past or is there a current claim?

Marketing

Are any of the products proprietary?
Describe any new upcoming products or services and projected sales.
What is the business’ geographic market area?
What is the business’ percentage of market share?
What are the business’ competitive advantages and disadvantages?
What are the current market trends and how will they impact future sales?
Is the business name included? Is it registered?
Is there a customer list or database and is it included?

Competitors

Who are the business’ competitors?
What is their market share?
What are each competitors competitive advantages and disadvantages?

Business Web Site

Is the transfer of the domain ownership part of the agreement?
If so, the administrator must be changed with domain registration company.
Who currently hosts and maintains the company website?
Will you have the technical support to do so after the sale?
All service agreements regarding the website must be changed to reflect the new ownership.

By Canada Business

3 Things To Consider Before Starting Your Own Franchise

Even though you may be plenty excited to start your own franchise business there are a lot of things that need to be considered before you do! Franchise investments can be a great thing for many different types of business people and if you are the entrepreneurial type then a franchise may be the perfect solution to starting your own business. However, if you have tried to set up your own franchise in the past and actually failed then perhaps it isn’t the company’s fault but perhaps you should have done some fore-thinking about the franchise. But if this is your second time setting up a franchise, or even if it’s your first, here are some very important considerations that you must think about before approaching a company about acquiring a franchise:

The Market around You

The first and foremost issue that you’ll want to be concerned is the market around you and where you live. One question to ask yourself before you get started is whether or not there actually is any type of market for your franchise where you live. You may be someone that wants a particular product or service, but if there are no other consumers around the living space that you are in then chances are that your franchise will be doomed from the start. Making sure there is a need, want, or market for the area that you’ll be moving into is crucial to having a successful franchise business!

The Competition

Another issue that you’ll inevitably need to think about is all the competition that you have along the way down the starting point. It’s possible that you may not have to worry about competition if you are offering another unique type of product or service that no one else is offering, but chances are that you’ll have some type of competition no matter how fierce it is. On the other hand, though, you want to make sure that your franchise won’t be setup in a literal price war zone or else you’ll probably have to keep lowering and raising your prices just because another retail seller does!

Growth Potential

Being successful with a franchise is something that many people would like to be, however, one consideration of starting a company’s franchise is your growth potential. Is the retail store or other item you are pushing always going to be in great demand or is the market slowly dying for it? One example of a trend that didn’t last for very long is the Ty Beanie Baby craze. Even though there was a market for these products in the beginning, the demand for the toys slowly dropped until they were not popular anymore!

These franchise fore-thinking considerations are very important to not bombing out within your first year. Even though it may seem like your business will never get off the ground, if your company truly has a unique product then you don’t need to be worried about anything at all!

By James Hunaban

How much does a franchise cost?

Of course the cost of obtaining and starting a franchise depends on several variables. For instance, the type of industry, size and location are some of the differentiating factors. However, there are some basics that you could keep in mind if you are contemplating becoming a franchisee.

First of all, you will usually have to pay a franchise fee, which averages somewhere between $20,000 and $30,000. However, the fee could be less than $10,000 for businesses such as mobile and home-based businesses, or in some cases could possibly cost $100,000 or more. A few examples of these more expensive franchises include building maintenance businesses and some types of athletic training facilities.

Since you are gaining the advantage of taking part in an already recognizable business name, and usually ongoing support from the franchisor as well, franchisors typically stipulate that a potential franchisee meet other financial requirements. A predetermined amount of readily available funds that are not borrowed is usually a necessity as well as a certain net worth. In order to pay for ongoing expenses that are not covered by revenue you will also need a guaranteed amount of working capital. Depending on the type of business, it is important that the working capital cover a particular length of time, ranging from a few months to possibly two to three years until the business is in full swing. The franchisor typically provides an estimate of the amount needed.

Besides the franchise fee, other upfront costs could include professional fees such as legal and accounting services, insurance, and operating licenses. Employee training, inventory, and equipment are usually part of the startup as well. Also plan on, rent and possible leasehold improvements, and other costs involved in setting up a retail location including the purchase of fixtures, signs, and landscaping. You may also incur grand opening and initial promotional expense to get the business going.

Keep in mind that many times a higher initial investment does not necessarily mean a higher return. Often times franchises can be started with a total initial investment of less than $200,000 and sometimes even less than $50,000. Some home-based business such as handyman franchises and marketing franchises provide a decent return with little upfront cash.

Ongoing, you will need to be prepared to continuously pay royalties to your franchisor, possibly 4 to 6 percent of your revenue. Also, insurance (liability and health), inventory, and equipment maintenance would be continuous expenses. Of course, there will be employee salary and benefits. Additionally, you may be required to pay into a national advertising fund.

Before making a decision on a franchise, it is important to obtain from the franchisor a copy of the Uniform Franchise Offering Circular (UFOC), also known as the disclosure document. The upfront fees are outlined in this circular. The document should describe the initial fee which may be non-refundable as well as the other startup costs. If there are any items that you believe might be a startup costs that are not mentioned in the disclosure, be sure to ask about them.

All in all, you want to be sure your financial situation will cover expenses for you and your family during the time it takes to get the business up and running. This may take several months or a bit longer than that. Keep mind your operating expenses as well as personal expenses for the first year or two in business. In order to have the best chance of success with a franchise, it is recommendeded you contact a franchise consultant to discuss your goals and finances.

by dondasz

Top 10 Reasons for Buying a Franchise

It’s the time of year for setting goals for 2008 and preparing to start the new year with a big jumpstart of activity toward accomplishing these goals. For many people, these goals include the desire to start their own business and become the master of their destiny, and franchising can fit very well into that picture.

Here are the top 10 reasons to select a franchise opportunity if you want to own your own business.

1. Track Record of Success. Any good franchise company has developed a method of doing business that works well and produces successful results. Even better, they’re required to provide you with a great deal of information in their required disclosures so you can investigate and verify the results with existing franchisees prior to making your final decision.

2. Strong Brand. One of the biggest advantages of franchising is that the company is building a brand on a regional or national basis that should have value in the eyes of customers you’re trying to attract.

3. Training Programs. A good franchise company has training programs designed to bring you up to speed on the most successful methods to run the business. They should also have reference materials to assist you in dealing with whatever comes up while you’re running your business.

4. Ongoing Operational Support. Franchise companies have staff dedicated to providing ongoing assistance to franchisees. You’re not alone when you’re building and running your business, and you can always call on experienced people when you hit a rough spot or want to share new ideas for growing the business.

5. Marketing Assistance. The franchise company has marketing assistance to provide you with proven tools and strategies for attracting and retaining customers. Usually, the staff helps you develop the actual marketing plans and budgets for your grand opening as well as your ongoing efforts to market your business effectively.

6. Real Estate Assistance. Most franchises have manuals and other documentation, as well as staff, to help you find the right site and negotiate the best possible deal on your site. This is a very important advantage that can hold costs down and provide the best possible chance of success in any site-driven business.

7. Construction Assistance. Franchise companies can also provide a wonderful benefit in helping you design the layout of the business and select the right contractors to do your build out, as well as making sure you get the exact mix of furniture and equipment you need to maximize the efficiency of your initial investment.

8. Purchasing Power. A good franchise can take advantage of the buying power of the entire system to negotiate prices for everything you need at significantly lower levels than you could achieve as an independent operator. This applies not only to initial furniture and equipment purchases, but also to the supplies, inventory, uniforms and everything else you’ll need on an ongoing basis.

9 & 10. Risk Avoidance. This one is so important that we’ll call it both 9 and 10! The biggest reason to buy a franchise is that, if you’re smart, it will help you avoid much of the risk of starting a new business. Make no mistake–you have to do your due diligence, but if you do, you can determine with a fair amount of certainty what happen if you become a new franchisee.

As you look at this list, it not only shows a number of reasons to think about getting a franchise–it also shows you just some of the major challenges you’ll face if you have to create all these things yourself in an independent business. You do have to pay fees in a franchise that you could avoid in an independent business, but it’s kind of like the guy in the Fram Oil Filter commercials who says, “You can pay me now or you can pay me later.” You can pay the franchisor the fees, or you can pay for many expensive mistakes by not learning the lessons of others that have gone before you. Using a franchise to meet your goal of starting a new business is a wonderful approach for most people, for all these reasons and many more.

by Jeff Elgin

Ten Good Reasons Not to Buy a Franchise

Thinking about buying a franchise? Here are ten reasons why you should consider investing your time and money elsewhere.

1. Questionable profitability. Most franchise owners don’t provide much information to potential buyers regarding earnings possibilities. Even the franchisors who do supply this information usually give only average sales figures and profits before expenses are deducted, numbers that aren’t very helpful when trying to determine whether your individual franchise will be successful.

2. High start-up costs. Before opening your franchise, you may be required to pay a non-refundable initial franchise fee, anywhere from several thousand to several hundred thousand dollars. In addition you’ll have to pay a lot to furnish your franchise with the necessary inventory and equipment. It can easily take several years to recoup all these expenses.

3. Encroachment. Imagine that you’ve just spent thousands of dollars opening your own GasMart station, when another GasMart station opens across the street. There goes half your customer base. This type of thing happens to franchisees all the time, as nearly every franchisor reserves the right to operate anywhere they want.

4. Lack of legal recourse. As a franchisee, you have little legal recourse if you’re wronged by the franchisor. Most franchisors make franchisees sign agreements waiving their rights under federal and state law, and in some cases allowing the franchisor to choose where and under what law any dispute would be litigated. Shamefully, the Federal Trade Commission (FTC) investigates only a small minority of the franchise-related complaints it receives.

5. Limited independence. When you buy a franchise, you’re not just buying the right to use the franchisor’s name, you’re buying its business plan as well. Most franchisors impose price, appearance, and design standards, limiting the ways you can operate the franchise. While these standards can help promote uniformity, they can also stifle your creativity and ability to cater to local tastes or needs.

6. Royalty payments. Most franchisees must make royalty payments to the franchisor each month based on a percentage of sales, eating into the franchisee’s net profits.

7. Inflated pricing on supplies. In many cases, the franchisor can designate your franchise’s supplier of goods and services. They argue that this is to maintain quality control, but almost all franchisors receive kickbacks from the vendors. By not allowing you to shop around, you’re forced to pay higher prices on supplies.

8. Restrictions on post-term competition. Let’s say that you decide to purchase a hamburger franchise, but after a couple of years you determine that you could run a higher-quality, more profitable burger joint on your own. Unfortunately, due to noncompetition clauses built into almost every franchise agreement, franchisees are not allowed to become independent business owners in a similar business after termination of the franchise agreement. By purchasing a franchise, you may be unwittingly limiting your business opportunities for years after the expiration of your contract.

9. Advertising fees. Many franchisees are obligated to make regular contributions to the franchisor’s advertising fund. But will they use the money to advertise your franchise? Quite possibly not! Franchisors maintain broad discretion over how to administer the advertising fund. In a case against Meineke Discount Muffler Shops, for example, it was discovered that Meineke was using the advertising fund for costs wholly separate from advertising, yet the court ruled in Meineke’s favor, saying that the franchisor has no fiduciary duty to its franchisees.

10. Unfair termination. Even the slightest impropriety on your part, such as being late on a royalty payment or violating the franchise’s standard operating procedure, can be cause for the franchisor to terminate your agreement. While most franchisors are not this strict, the possibility of losing your entire investment for being late on a payment is downright scary.

by Nolo