Buying a business ranks as one of the most important and sometimes stressful endeavours one can embark on. It is a pursuit that for many occurs only a handful of times in a working lifetime. Accordingly, it is imperative to be mindful of various traps during the negotiation process. Following are a few that I see on a reoccurring basis.
“The Business Runs Itself”
Vendors are incentivised to understate their involvement in a business and will typically not pay themselves a commercial wage for the operational input they provide. By representing they have little involvement, the potential purchaser may be seduced by the appearance of inflated profits. My suggestion is that a business acquisition should be evaluated separately from ‘buying a job’. In reality, a good business should be able to derive sufficient earnings in addition to paying a commercial wage for the personal exertion of the working owner.
The selling price is $xxx plus stock
Despite some theoretical limitations, the concept that stock is included on top of any agreed business value is widely accepted and promoted by business brokers. I suggest further investigation prior to settlement. Items contained in stock often include large quantities of items which are obsolete and should be excluded when determining the consideration to be paid. Further, it is important for a business to derive a reasonable return for the assets employed in the business (inclusive of stock). I recommend this analysis is always undertaken before pricing negotiations are concluded.
Employee Entitlements Are the Purchaser’s Responsibility
Mature businesses often have a number of long serving key employees which purchasers seek to retain to minimize acquisition disruption. The risk here is often not present in financial statements presented by a vendor. I always suggest an analysis of Long Service Leave (“LSL”) obligations is undertaken. Any significant entitlements should be used as leverage to reduce the asking price of the business. Where the vendor is to be retained for a period post settlement, care should be given to ensure the purchaser does not inherit LSL obligations in respect of the former owners.
I have been involved in the Due Diligence process for both Buy Side and Sell Side transactions and would be happy to assist you during this critical time.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.