Buying a business is a major decision. It will not only affect you financially, but it may also be a lifestyle decision.
If you have decided that now may be the time to go into business for yourself, working with an industry specific business broker can provide you with the professional assistance necessary for a smooth and successful transaction.
Why should I use a Business Broker?
A professional business broker can be helpful in many ways. They can provide you with a selection of different businesses suited to your criteria, many of which you would not be able to find yourself. Some of those who buy businesses end up with something completely different from the business they first enquired about.
Business brokers are also an excellent source of information about small business and the business buying process. They are familiar with the market and can advise you about trends, pricing and what is happening locally. Your business broker can assist with many of the details of the business sale process and will do everything possible to guide you in the right direction including consultation with professionals that may be able to assist you.
What Should I Look For?
Buyers purchase accommodation businesses for many different reasons. For most people it is a major decision in life, often facilitating a change of careers which may be profit, lifestyle, or potential driven, or a combination of all three.
Before you start looking for a business, you need to do some due diligence on yourself and your capability to purchase. Writing a business plan will make the decision process a lot clearer and is usually required by a lender during the application process.
You should only consider those businesses that you would feel comfortable owning and operating. You need to consider only those businesses you can afford with the funds you have available.
For some buyers, there is a big difference between how much they want to spend and how much they can actually afford. If borrowing from the bank to buy, it is a must that the business you purchase has the ability to produce enough income to repay the bank (first and foremost in their eyes), produce enough income for you to live on and for you to make a profit.
Some of the main considerations when purchasing a tourism business are:
- How much do you have to spend (usually dictates how much you can borrow)?
- How much do you want to earn after you’ve repaid the bank interest.
- Do you want a freehold or a leasehold?
- Its condition, whether it is on the coast or in the country – yield and price will reflect this.
- What is it that you require in a residence – will it be big enough for your family?
- Do you want a business with a restaurant?
- How far is it from your relatives or loved ones?
Using the above parameters will enable you to establish exactly what it is you want to buy. You should be looking at a business purchase with an eye toward what you can do to make it more productive and profitable before you eventually sell it again. You should not consider any business purchase purely to buy yourself a job.
The Nitty Gritty
You can generally borrow money to fund your purchase from banks on the following basis:
- If purchasing a freehold going concern, depending on the current economic environment, a bank may lend between 60 - 70% over a 15 year period.
- If purchasing a leasehold, a bank may lend you 50% over a 15 year period or the length of the lease should the term be shorter.
- If purchasing an investment (bricks and mortar only), 65 - 70% over a negotiable term.
- The purchase costs of stamp duty, solicitor and accountants fees etc. are to be covered with additional funds.
How is the sale price calculated?
Depending on location and condition, for example:
- Freehold going concern motels are offered for between 13-17% yield with most selling at around a 15%.
- Leasehold motels are offered for between 30-35% yield with most selling within that range.
- Investment motels usually sell for between 9-10% yield.
What Happens When I Find A Business I Want To Buy - What Is The Sale Process?
- Now you have established what you can buy and have found a business you like, the broker should provide you with an information memorandum, a document that gives you details of the many features of that business and a summary of the last financial year with add backs. Add backs bring the profit and loss statement back to a format that can be qualified and measured against comparable businesses. Add backs may be of a personal or non-recurring nature and may include costs such as borrowings, directors’ fees, interest, depreciation, one-off repairs and maintenance etc. that are not directly related to day to day operation of the business.
This information memorandum should be written in a way as to give not only you, but your accountant, solicitor and above all, your lender a comprehensive snapshot of that business. Your independent advisors do not have time to inspect the business you are thinking of buying, so it is important that this document also gives them a comprehensive view of whether the business may be right for you. With the review of additional profit and loss and BAS statements, a reasonably accurate assessment of turnover can be made within a short period. Lenders will require access to all income and expense information for the past three years to gain an indication of how well the property may perform in the future.
- If you and your professional advisors are comfortable with the due diligence so far, your next step is to inspect the property. The main things to consider at the inspection are:
- The overall condition of the property and whether it requires any repairs or alterations.
- If the business is part of a franchise or chain, consider the franchise fees and benefits of being part of it. For the first time operator they can add significant support.
- Look at the business from the current vendors’ perspective, ask what opportunities there are that they see.
- Check out the local competition.
- If you like what you see and are confident that the business may be for you, you can make an offer to purchase. You should by now have determined what you can afford, what the property is worth to you, and be prepared to pay that amount if necessary.
It is also important to advise the broker of any terms and conditions you require so all factors can be considered with your written offer. The deposit accompanying your written offer is a show of good faith on your part and shows you are serious about the purchase. The deposit is typically held in the brokers statutory trust account and is 100% refundable up until unconditional exchange of contracts. It can also be invested if requested to do so.
- If, after some negotiation, you and the vendor agree on a sale price, the broker will prepare a sales advice. This is a document that is sent to buyer, the vendor and both parties’ solicitors with everyone’s details, the initial terms and conditions of sale and the agreed price. This enables both solicitors to contact each other and prepare the necessary documents to complete the sale. The buyer may require an additional short period of due diligence, after which the exchange of contracts for the business can be successfully completed.
- Between exchange and final settlement, there are a number of steps to meet depending upon the financial institution you are using if any, and your requirements. Some of the more common are:
- Valuation of the property.
- Finalising the franchise agreement if applicable.
- Obtaining insurance.
- Clarification/negotiation of leases.
- Surveying the property if not already done so.
- License and permit application/transfers.
- Setting up bank accounts.
- Credit card accounts.
- Corporation document.
- Taking inventory.
It is common for some training to explain the systems, operational requirements and property/business needs as part of the process either prior to, or after settlement for a period of between 3 – 7 days depending upon the experience of the purchaser and their needs.
- At settlement the bank makes the loan to you. You use the loan plus your contribution to pay for the property. The seller, via your solicitor gives you a deed for the property and a bill of sale for the furniture, fixtures and equipment and you take over operation of the property. If there is an element of stock to be paid for, it is at this time that is settled.