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Buying a Business – what you need to know


Before buying a business, the first rule is to do your homework. Information is the key if you wish your business to succeed. Kimberley Kong, of N Legal, outlines the crucial steps you need to follow in order to get a new business off to the best start.


Step one – determine your options Establish your level of interest in particular business to determine if it’s right for you. It is important to begin your research by asking the seller some basic questions:


• What does the business do – who are its competitors?


• Why is the business for sale? What are the weaknesses and strengths of the business?


• Do the current owners have management accounts and has the business struggling in the last six months?


• What have been the annual net profits of the business for the last two years and to date?


Step two – are you paying the right price? Once the purchase price (including assets included in the price) has been established, you should determine if this price is supported by the profits of the business. A good rule of thumb is that the valuation should be no


higher than three times the annual net profits. In terms of assets and liabilities included in the


purchase price, specific assets may include real estate (property), customer lists, contracts and equipment. However, you must also take into account the debts and liabilities of the business that could also be passed on.


Step three – financing options Once you and the seller have decided on a fair price for the business, it is time to think about how you will come up with the money. The first thing to consider is whether the current owner will offer seller financing. Seller financing is an attractive aspect of any business


acquisition because it shows that the owner believes in his own business/product. Seller financing usually covers about ten to 25 per cent of the purchase price of a business but it may cover more. If you require a bank loan, you need to look at your


own credit score. Banks will normally require a deposit of 25 per cent or more.


44 CHAMBERLINK July/August 2016


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