Buying a business: due diligence part 2

Due diligence: who needs to do what and when

By now, you are getting the idea that due diligence is an important and complex part of the purchasing process. As described in part one, our goal is to identify any fatal flaws, verify that the information is reasonably accurate and confirm that this business will really work for us.

At Sunbelt, we organize a due diligence planning meeting inviting the seller, the seller’s accountant, your accountant, you and any other advisers you believe will be required during the diligence process. There will be a subsequent meeting with you, your broker, and your lawyer to deal with legal diligence issues and with the drafting of the agreement of purchase and sale and related documents.  However, in order to minimize your costs given that you may not proceed with your acquisition, we recommend that you delay the meeting with your legal adviser until after other forms of diligence have been completed.

Buying a business: due diligence

Satisfying the conditions of due diligence

We have successfully negotiated agreement upon an offer to purchase based on the information our business broker and the seller have provided.  This offer included many conditions that we must be satisfied with prior to closing or the offer becomes null and void and our deposit, refunded.

We must now plan and execute a reasonably thorough analysis of the business and the information provided. Our goal is to identify any fatal flaws, verify that the information is reasonably accurate and confirm that this business will really work for us. Professional advisers can help us with this process, called due diligence.

Our business broker will assist us in developing a diligence plan and coordinating its execution, but they will not do the diligence for us. It is our responsibility as the purchaser to do this to our satisfaction. Keep in mind that we will have to work from the existing documentation, whatever records the current owner has.

While we may need the advice of an accountant, we will need the advice of a lawyer. Accountants tend to see diligence from only a financial perspective—we need to address a bigger picture. Our accountant will help us verify cash flow, assets, liabilities, financial history and projections. They will also review tax filings, associated risk, corporate structure and potential tax issues resulting from our purchase. Have them go a step further to review financial control systems and make recommendations we can employ when we take control of the business. We also want to involve them in the preparation of our business plan and financial projections—this may help in securing financing.

Buying a business: negotiating the offer

Guided by our business broker, we have made a conditional, non-binding offer to purchase a business at a price (below market) and terms that would work for us.

We set out a time for response, a closing date, financing, training and transition, what was included and excluded, and provided a deposit for the broker to hold in trust.

We have now received a counter offer and are into negotiations.

The negotiations will be conducted through our broker—not directly. They are experienced in business acquisitions and can guide us through the process with advice and impartial sober thought.

We need to understand what is behind the seller’s changes—he or she may have changed the structure of the purchase from assets to shares.

Buying a business: the process

You have a good sense of the size and type of business you want to buy and how such a business will help you accomplish what you want in life.  You’re ready to make your vision a reality.

When you first meet with your business broker they will ask you to sign a confidentiality agreement.  Confidentiality is critically important in the buying and selling of a business and your broker will explain what’s at stake if word gets out.

They will have you complete a questionnaire that provides them with information about your goals, aspirations, history, resources and skills. They will discuss some businesses that may be suitable for you at this stage in your life, zeroing in on the best matches for your needs and means.

They may send you to visit some of these businesses as a mystery shopper on the understanding that you will reconvene your meeting after you have had a chance to review information on the businesses they have selected for you and have visited those businesses, if they are open to the public.

Buying a business: what size and type of business is right for you?

We started our buying a business series with a question—do you really want to own a business?  Know the demands as well as the benefits before you take that leap into business ownership. Assess your skills and temperament.  Do you have family support and the self-discipline, risk tolerance, focus, and vision to be a successful business owner?

How will you get into business? We looked at the most common ways—starting a business from scratch, purchasing a new franchise and purchasing an existing successful business—and the risks associated with each. No doubt you concluded that purchasing an existing successful business provided the least risk and the greatest potential.

The next question is, what size and type of business will work for you? This depends, to some extent, on your previous experience and your financial resources, lifestyle aspirations, family support and skills.

But more than anything else, it depends on what you enjoy doing. Imagine a day as the owner of a business. What do you spend the day doing? With whom do you interact?

A day in the life of a business owner

Many people come to Sunbelt asking to purchase a franchised fast food business. When I ask them what they think their days will be like, I draw a blank.

Buying a business: what buyers need to know

Those who have been following this series know that our articles so far have been focused on what business owners need to know about selling their business. Our next set of articles will focus on buyers and what they need to know to buy a business that is just right for them.

We will be starting with the very first decision a prospective buyer needs to make— do I really want to become a business owner? If so, what type of business do I want to own—will I start my own business, buy an existing business or buy a franchise? We’ll review the issues related to each option.

We’ll examine the lifestyle issues of owning a business—demands upon the owner, personal interactions, personal growth, skills development and earnings. We will look at how different sizes of business may yield different results in terms of risk, earnings and lifestyle.

Selling a business: the Offer

We have readied our business for sale, done the structuring and tax planning, addressed insurance issues, planned our life after the sale, developed a personal financial plan with our wealth planners and investment advisers, packaged and marketed the business and met with prospective buyers.  Now we have received an offer to purchase the business. The offer is a complex document and you need to work with your business broker to fully understand it.

Whichever its form—an Offer to Purchase, a Letter of Intent or a Memorandum of Understanding—the offer will be dated and signed, provide a time frame for response and commit both parties to confidentiality.  The offer will:

• lay out the price and terms the purchaser is prepared to offer;
• set a date for closing, with conditions to be met before closing (and perhaps some for after closing);
• specify how the purchase price is to be paid and when and under what conditions;
• set out expectations for the seller’s responsibilities after closing, such as training of the purchaser or continuing employment.

The offer may establish a time frame for due diligence and it may request exclusivity in negotiation for a period of time.

The offer should identify what is being purchased and what is excluded. Assuming the business is being sold as a going concern, it will identify whether the offer is for the shares of the company that owns the business or for the assets including intellectual property. It may outline requirements for retaining or dispensing with key staff members, the amount, if any, of working capital to be included in the sale and the treatment of receivables and payables.

The offer is usually non-binding excepting confidentiality and perhaps the specified exclusivity. At Sunbelt, we draft these offers to be non-binding on either party right up to closing–we do not want anyone being trapped.

The offer is often accompanied by a deposit, held by the business broker in trust until the deal is consummated or terminated. In Ontario, business brokers must be licensed realtors and the trust fund is guaranteed by the Province of Ontario.

Selling a business: what to expect

Business owners want to maximize value while minimizing risk and taxes when they sell.  But achieving this result requires planning and effort. This series will help you get there:  here’s the sequence of topics we’ll be covering in some detail over the coming weeks.

Understanding what buyers are looking for

Buyers are looking for the right business under the right terms and conditions. Most are looking for an ongoing income (a top advantage of buying an existing business) with trained employees and an existing customer base. The cash flow of the business they’re purchasing needs to be enough to cover their financing payments while still leaving them enough money to live on. In most cases, they’ll need the seller to take back a note for a portion of the purchase price.

Managing confidentiality

For most businesses, confidentiality is a critical factor in a successful sale. You do not want your staff, suppliers, bankers, customers or competitors to know that you’re selling. Who can you talk to? Who do you need to talk to? How do you protect confidentiality when you want exposure to a broad group of prospective buyers? How much information do you release and when?

Building value

We’ll cover the financial, organizational and operational issues in adding value to your business before your departure and get experts to weigh in. Every step you take to prepare your business for sale will also create a more enjoyable and more productive business environment. You’ll also be ready when the timing is right or when opportunity knocks.

Buy, build or sell a business: the inside scoop

The decision to buy or sell a business is among the most important you’ll ever make.  Friends and family are fond of giving advice. They have your best interests at heart, but do they really understand the issues related to buying or selling a small business?

Think about a good dinner conversation. Now think about it taking place around a business table. Your host is a savvy business broker who has helped hundreds of individuals buy or sell a business.  He’ll be inviting other guests who can add professional perspective to the conversation. Each will be sharing their knowledge and experience, so that you’re better equipped to buy or sell a business if and when you’re ready.

I’m the business broker who’ll be joining you each week and anyone who knows me knows I like a fine meal with good conversation! I also enjoy helping people to achieve their goals.  Let me tell you something about what we do.

Business brokers act as coaches, guiding and educating both buyers and sellers through the challenging steps of buying and selling a business. They provide expertise.  It’s the broker’s job to understand and match needs, managing the transaction and controlling the process, respecting time lines and channeling the flow of information required to bring the deal to a conclusion that works for both.

We’re part of a team of advisers you’ll benefit from knowing about.  Lawyers, accountants, bookkeepers, bankers, wealth advisers, marketing specialists, insurance professionals, and business coaches, each have valuable expertise and services to inform the decisions you will be asked to make along the way.

At the Broker’s Table will explain the processes, the sequencing of steps and responsibilities in buying or selling a business, so you’ll understand who should be doing what and when.  You’ll be able to pick up proven tips whether you’re buying or selling.  The goal as we see it is a fair deal, with price, terms, and conditions that work for both sides,  protecting your best interests in the process.