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Necessary Reading

What to look for when buying a business
1. How long the business has been in business.
A business with a long track record means there are good reasons to be operating. It will be well known in the area, and people will be used to patronizing the business or using its services. The longer it has been in operation, generally, the better the business.

2. How long the present owner has owned the business.
The longer the present owner has been in business, the more likely he or she has been successful. People don't stay in business if they are not making money.

3. Why the present owner is selling.
The more valid the reason for sale, the more realistic the seller will be in considering your offer. However, keep in mind that after five or six years or more, people do get restless, "burn-out" sets in, and people look for new challenges. Why the seller is selling is an important question - get the answer.

4. Why books and records are important.
The financial records are a good indication of how well the business has been doing over the years. Keep in mind that tax records are not designed to show the business in the best light: no one likes to pay more taxes than they have to, and owners of businesses are no different. Generally, tax returns are a worst case scenario. You need to be able to look at the expenses and discover which ones are non-cash items, such as depreciation, and business use of home and vehicles. We will point these items out to you; however, when in doubt, seek outside assistance.

Bear in mind that financial records are only history. There are no guarantees that they will or can be duplicated or repeated. All of your profits are future. In the final analysis, the financial records of the business are an indicator of what the business has done; what you do with its future is up to you.

5. How to determine if the seller is reporting all income.
The simple answer is - that you can't! Not reporting income is against the law. You should consider only the income that the seller can show you. We all know, of course, especially in cash type businesses, that there is the possibility that the seller is not reporting all of his or her income for tax purposes. Many sellers will tell you about how much they are "skimming," but you should ignore their statements, since they have no way of proving these amounts. In determining whether a business is the right one for you, you should base the decision on the figures actually supplied to you by the seller.
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Critical info to consider before you decide to buy that business
1. A track record should show profit for at least the last three years
Financial statements should be audited, but if this is not the case, an audit will need to be conducted by a mutually agreed auditing firm. Smaller businesses may not have audited statements, in this case insist on management accounts and financial statements at the very least, and let your accountant have a look through them.

2. Due diligence
Even if the audited figures are available, once the buying price has been agreed upon, a due diligence audit needs to be conducted. In this period you will be entitled to request further documents and other information as may be reasonably required by you to make a fully informed decision to commence with the transaction.

3. Obligations to third parties
Check that there are no outstanding contracts, guarantees, sureties, or obligations to other parties. Look out for law suits, disputes or matters pending with SARS or other government departments.

4. Government Gazette
In some instances the owner may try to hide certain creditors from you. It is always recommended to advertise the sale of the business in the Government Gazette to avoid nasty surprises once you take over the reigns.

5. Check out the customer base
Are there customer contracts in place? Look at the customer mix; are there one or two large customers who represent the 'life-blood' of the business without whom the business will falter? Ensure that none of your valuable customers are about to exit their contract with the company.

6. Look through the lease agreement
Your lease is very important, and it may be a good idea to meet with the landlord. Your place of business may be one of the main reasons affecting the business profitability. Instead of a straight cession of the lease, its preferable to conclude a new lease with the landlord on terms no more onerous than those currently being enjoyed by the seller.

7. Staff contracts
Peruse all staff contracts, pension schemes, retirement information. Familiarise yourself with the bonus structure and incentive schemes. If possible, interview the staff, they're one of your most valuable assets!

8. Restraint of trade
Ensure that your contract contains a restraint of trade against the seller of the company. You don't want him selling to you and then opening up in opposition to you across the road!

9. Further points
If possible, call a number of creditors.
Once again, if possible, request a bank report and visit the bank manager.
Look for trends in the debtors book. Avoid debtors who consistently don't pay.
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Franchise? Consider this...
1. Collect as much information as you possibly can
Attend franchise expos, exhaust the internet. You need to develop as much first hand knowledge as you can. Your future depends on it!

2. Evaluate the industry
How is the industry of which this franchise forms part performing? Is it a growing industry? How does your franchise compare to its competitors?

3. Assess the value of the brand
You're essentially purchasing a brand. What differentiates it from its competitors? Why would consumers choose your brand? How is the brand positioned in the marketplace? Study the logos, uniforms etc, this represents the core values and culture of the organisation you're wanting to become part of...

4. Research the franchisor
Lay your hands on as much info as possible about your franchisor, the system, contracts, rights and obligations of franchisor and franchisee etc. Don't be afraid to ask for information. Let your attorney read through the contract, allow your accountant to peruse the forecasts. Speak to professionals before you commit yourself to your franchisor.

5. Evaluate the contract
Determine your fees and royalty structures, marketing contributions, including the initial franchise fee. Are you bound to only buy products and services through your franchisor? Does your franchisor source suppliers who offer competitive rates? Know what your total investment will be, and avoid nasty surprises before its too late.

6. What are your rights as franchisee?
What rights do you receive as franchisee? These might include territory rights, trademarks, patents, copyrights and confidential information. Is your territory exclusive? Understand your rights in terms of renewal, termination, transfer etc.

7. Franchisor support
What does your franchise agreement say about ongoing support? What training is provided? Make sure you getting your money's worth...

8. Contact existing franchisees
Call as many franchisees as you can. Try and track down those that left in the past year. Find out why... Find out how much money they're making. Are they happy with the system, the franchisor, the brand? You'll quickly hear in their voices if they're not entirely happy!
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Thinking of selling your business?
Selling a business is a complex process. Evaluation, financial statements, preparation of the business for sale, marketing the business, negotiating the various details, and closing the deal (just to name a few), are all crucial components to a successful sale of your business. Each phase requires a different set of skills and experience from a qualified business broker. And in the meantime, you still have to run your business on a day to day basis! It is absolutely crucial for business owners to fully understand the process of selling their business and how to maximize the business value at the time of the sale.

Selling a business commonly includes the following steps:
1) Developing a value proposition strategy
2) Building a marketing plan
3) Introducing potential buyers to the business
4) Negotiating details of a deal
5) Preparing a Letter of Intent
6) Due diligence
7) Closing the sale

Evaluation Criteria:  [...if you're not a techno-geek,  you may want to skip this section!!]
The most widely used Evaluation Criteria when buying or selling a business is the following:
• Payback Period
• PE Ratio Method
• Compound Annual Growth Rate calculations (investment versus business enterprise return).
• Net Present Value is the value of all your future cash flows discounted in today’s rands at your weighted average cost of capital (WACC) – calculating the net present value of future cash flows of an enterprise which measures the economic value to be generated by the project at the time of the investment which indicates the difference between present value of cash inflows and the present value of cash outflows.
• Weighted Average Cost of Capital business assets are financed by either debt or equity. WACC is the average of the cost of capital or interest rate of financing that investors require to put money into the business and each of which is weighted by its respective use in a given situation.
• Benefit / Cost Ratio:  cost – benefit analysis is a tool for assessing whether or not the input costs of an activity can be justified by the outputs and outcomes.
• Internal Rate of Return is the project’s IRR needs to be above the benchmark discount rate for the project to be viable. The IRR is a discount rate that will result in a NPV of zero.
• Hurdle Rate:  in general if the IRR is greater than the projects “cost of capital” or “hurdle rate”, the project will add value.
• Break-even analysis:  the break-even point indicates the level of sales required to cover all expenses.
• Operating Profit: this is the total profit before interest and taxes. This is often called Earnings before Interest and Taxes or EBIT.
• Present Worth Payout measures the time that the net investment will be at risk.
• Nominal Payout Years or Payout Period or Payout Time is defined as the minimum length of time theoretically necessary to recover the original investment in the form of cash flow to the project based on total income minus all cost except depreciation.
• Present Worth Index measures the efficiency of invested capital (for every rand invested, how efficient is it producing).
• Discounted Cash Flow is a valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flows analysis uses future free cash flow projections and discounts them (most often using weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

ALPHA Business Brokers can take the weight of the selling process off your shoulders. Should you feel that you're ready to sell, don't hesitate to email Gert immediately at gert@aprops.co.za for a confidential interview. 
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