"Easy come, easy go" is how most people would describe their various business ventures these days.
Everybody appears to have settled in for a long ride through this global economic crisis, resignedly accepting financial loss as an unavoidable pit stop. Spooked business owners are busy unloading going concerns while speculators are making hay by snapping up every business that's for sale, often taking shortcuts to hasten the transfer of ownership.
If you are the seller in a similar scenario and you aren't vigilant, you could end up selling your business for so much less than what it's actually worth. On the other hand, if you are the buyer and you neglect to do your research before agreeing to take over the business, you could end up with a lemon.
IF YOU ARE BUYING A BUSINESS, here are some steps you can take to protect yourself:
IF YOU ARE BUYING A BUSINESS, here are some steps you can take to protect yourself:
1. Make sure the business is right for you. It's very tempting to conclude a cheap sale on the spot and be able to tell everyone that you are now an entrepreneur. However, many companies have gone bankrupt simply because the owners didn't know how to run them or didn't care enough about anything but the profits.
To avoid being duped by opportunistic employees, suppliers, and even customers, consider buying a business only if it's something you are knowledgeable and passionate about. If your line is fashion design, for instance, you shouldn't even think of buying an auto repair shop.
2. Consult experts. Talk to other people who own the same kind of business; you can draw on their experiences to make an accurate assessment and forecast for your business. Don't scrimp on your payroll; have an attorney and an accountant on board and consult them every step of the process. Otherwise, you could end up making irreversible and costly errors in your decisions.
3. Conduct due diligence. You need to obtain and carefully examine the seller's financial statement and records. Have your lawyer and your accountant look into the profit-and-loss records, tax returns, balance sheets, and supplier's records for the past three years as well as into the current receivables. Have the business appraised including its assets, inventory, and brand. This will provide the basis for the offer that you'll make to the seller.
2. Consult experts. Talk to other people who own the same kind of business; you can draw on their experiences to make an accurate assessment and forecast for your business. Don't scrimp on your payroll; have an attorney and an accountant on board and consult them every step of the process. Otherwise, you could end up making irreversible and costly errors in your decisions.
3. Conduct due diligence. You need to obtain and carefully examine the seller's financial statement and records. Have your lawyer and your accountant look into the profit-and-loss records, tax returns, balance sheets, and supplier's records for the past three years as well as into the current receivables. Have the business appraised including its assets, inventory, and brand. This will provide the basis for the offer that you'll make to the seller.
There are many factors that go into determining the value of a business, but the best and the simplest indicator is its ability to consistently generate profits. However, poor performance doesn't always mean that a business is inherently unprofitable; it could simply be the result of mismanagement. On the other hand, consistently poor performance despite changes in management is a very loud alarm that you shouldn't ignore.
4. Examine the lease contract. If the business already owns the land and the building on which it stands, then you don't have to worry about this. Otherwise, make sure to have your lawyer go through the lease contract with a fine-tooth comb. If the lease contract appears disadvantageous to the lessee, ask the lessor if he would agree to execute a new one. If the lessor insists that you continue under the terms of the existing contract, maybe you should shop around some more.
5. Consider franchising. The advantage of buying a franchise is that it's ready-made, it has a proven profitable business formula, and you can get support from the franchiser in all areas of your operation. The disadvantages are the possibility of huge franchise fees, bad location, absence of total control over your own business, and negative brand association in the event that the franchiser gets in trouble with the law. You can eliminate or at least minimize some of these risks by carefully evaluating the franchise locations and finding out if any lawsuits are pending against the franchiser.
IF YOU ARE SELLING YOUR BUSINESS on the other hand, here are some tips:
1. Assess the value of your business. Hire a reputable accounting firm to do the job. Go over your assets, inventory, receivables, and profit-and-loss records for the past three years. The business valuation will give you an idea of exactly how much your business is worth, and it will boost your confidence in asking for a fair asking price.
2. Form your transition team. Hire an attorney who's an expert in corporate law, mergers and acquisitions, and contracts. Hire an accountant. And hire a broker/intermediary if you have no buyers in sight; he or she will find them for you and bring them to the negotiating table.
3. Prepare your selling memorandum. This is a document that provides your prospective buyer with information needed to understand your business. Make sure to draft it in a need-to-know format (but don't give too much information away) and always show your business in a positive light. Before showing your selling memorandum to anyone, have everyone concerned sign an ironclad confidentiality agreement first, including everyone on your transition team.
4. Prepare the letter of intent. This is a letter that signifies your willingness to sell your business to a particular person and his or her willingness to purchase it from you. After the letter of intent is signed, you can move forward in your negotiations; only then should you reveal more about your business to the buyer. Make sure that you are protected by nondisclosure clauses, just in case the potential buyer backs out.
5. Prepare for the due diligence review. Expect due diligence to be conducted by your prospective buyer. To save time, prepare all the necessary documents in advance. Have the past three years' worth of books of account and tax returns ready, and compile all documents in support of your business valuation.
4. Examine the lease contract. If the business already owns the land and the building on which it stands, then you don't have to worry about this. Otherwise, make sure to have your lawyer go through the lease contract with a fine-tooth comb. If the lease contract appears disadvantageous to the lessee, ask the lessor if he would agree to execute a new one. If the lessor insists that you continue under the terms of the existing contract, maybe you should shop around some more.
5. Consider franchising. The advantage of buying a franchise is that it's ready-made, it has a proven profitable business formula, and you can get support from the franchiser in all areas of your operation. The disadvantages are the possibility of huge franchise fees, bad location, absence of total control over your own business, and negative brand association in the event that the franchiser gets in trouble with the law. You can eliminate or at least minimize some of these risks by carefully evaluating the franchise locations and finding out if any lawsuits are pending against the franchiser.
IF YOU ARE SELLING YOUR BUSINESS on the other hand, here are some tips:
1. Assess the value of your business. Hire a reputable accounting firm to do the job. Go over your assets, inventory, receivables, and profit-and-loss records for the past three years. The business valuation will give you an idea of exactly how much your business is worth, and it will boost your confidence in asking for a fair asking price.
2. Form your transition team. Hire an attorney who's an expert in corporate law, mergers and acquisitions, and contracts. Hire an accountant. And hire a broker/intermediary if you have no buyers in sight; he or she will find them for you and bring them to the negotiating table.
3. Prepare your selling memorandum. This is a document that provides your prospective buyer with information needed to understand your business. Make sure to draft it in a need-to-know format (but don't give too much information away) and always show your business in a positive light. Before showing your selling memorandum to anyone, have everyone concerned sign an ironclad confidentiality agreement first, including everyone on your transition team.
4. Prepare the letter of intent. This is a letter that signifies your willingness to sell your business to a particular person and his or her willingness to purchase it from you. After the letter of intent is signed, you can move forward in your negotiations; only then should you reveal more about your business to the buyer. Make sure that you are protected by nondisclosure clauses, just in case the potential buyer backs out.
5. Prepare for the due diligence review. Expect due diligence to be conducted by your prospective buyer. To save time, prepare all the necessary documents in advance. Have the past three years' worth of books of account and tax returns ready, and compile all documents in support of your business valuation.
Also, prepare your incorporation papers, tax and business permits, licensing agreements, lease contracts, supplier contracts, customer contracts, and other relevant contracts. Create a good impression with your prospective buyer by having your financial information prepared by a professional accounting firm.
Be prepared to answer questions like, "So if your business is doing so great, why are you selling it?" Have your reasons ready; they should be plausible and shouldn't put anything in a bad light.
Don't forget to conduct your own due diligence review. Find out everything you can about your prospective buyer's credit record, solvency, and business reputation.
6. Give your business a facelift. Repair what needs to be repaired, clean up the clutter, throw out the junk, window dress to the full extent that you can. Don't give your prospective buyer any reason to give you a low offer; impress him or her with a clean, orderly, fully functional, and well-managed business.
7. Negotiate price and terms of payment. Refer to your business valuation report; it will help you decide what your bottom line is. Don't go below your bottom line. A bad economy is no excuse to give away your business for a song. Remember that an economic crisis is an opportunity in disguise. Just as there are hundreds of spooked entrepreneurs like you lining up to sell their businesses, there are also hundreds of speculators out there looking to buy a business. If your prospective buyer withdraws, simply push your broker to find others.
8. Close the sale. After all the preliminaries are over and while the prospective buyer is still sitting at the negotiating table, have your lawyer draft the business purchase agreement. The buyer may insist that his or her own lawyer draft the agreement; that's fine, but be sure to have your own lawyer go over it very carefully. Check the terms of payment and use a magnifier on the fine print. To avoid violation of the Bulk Sales Law (Act No. 3952), give your buyer a list of all your creditors and amounts owed, if any, and give your creditors advance notice of the sale.
6. Give your business a facelift. Repair what needs to be repaired, clean up the clutter, throw out the junk, window dress to the full extent that you can. Don't give your prospective buyer any reason to give you a low offer; impress him or her with a clean, orderly, fully functional, and well-managed business.
7. Negotiate price and terms of payment. Refer to your business valuation report; it will help you decide what your bottom line is. Don't go below your bottom line. A bad economy is no excuse to give away your business for a song. Remember that an economic crisis is an opportunity in disguise. Just as there are hundreds of spooked entrepreneurs like you lining up to sell their businesses, there are also hundreds of speculators out there looking to buy a business. If your prospective buyer withdraws, simply push your broker to find others.
8. Close the sale. After all the preliminaries are over and while the prospective buyer is still sitting at the negotiating table, have your lawyer draft the business purchase agreement. The buyer may insist that his or her own lawyer draft the agreement; that's fine, but be sure to have your own lawyer go over it very carefully. Check the terms of payment and use a magnifier on the fine print. To avoid violation of the Bulk Sales Law (Act No. 3952), give your buyer a list of all your creditors and amounts owed, if any, and give your creditors advance notice of the sale.
- By Reeza Singzon, Entrepreneur Philippines Magazine, April 2009
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