Tip of the day for start-ups
According to Standard Bank, often start-up entrepreneurs make the mistake of trading from their personal bank account. This makes it harder to differentiate between your personal expenses and business expenses. It also doesn’t allow you to build up a credit risk profile for your business, which is an important factor should you ever want to approach a bank for financing.
The 14 Best Bullet Points for Buying a Business
- Financials – go deeper than just the AFS and bank statements
- Tax implications – know what you’re in for, CGT, STT, VAT
- Why selling – talk to the seller, what does your gut tell you?
- Management – experience, right fit, stay on, make or break
- Business model – FMCG vs few customers & expensive goods?
- Advantages – patent, brand, tech, process, contract, unique?
- Marketing – perception, research, are the phones ringing?
- Growth – realistically rising revenues, beating inflation?
- Profits – more SOH at YE reduces cost of sales and increases PNL
- Debt – low debt to equity ratio signifies lower risk
- Payment turn – cover from when paying for stock to getting paid?
- Legal – any pending proceedings or obligations?
- Exit – consider your exit right from the start
- Partners – if any, sign buy-sell agreements
Where to look for a new business
- Business brokers – saves time and info readily available
- Yourself online & classifieds – potential bargains and pitfalls
- Dealing through brokers are preferred for the inexperienced
- Different turnaround times
- Different legal requirements
- Different workforce obligations
How to buy?
- Are you just looking for the assets and the clients?
- Or everything, including the brand, assets, liabilities, and staff?
- Advantages & disadvantages & different agreements for each
- Nature of sale determines the info the seller needs to disclose
What must the Seller disclose?
- Full disclosure on all business aspects during negotiation
- Financial statements and management reports
- Existing contractual obligations to be taken over
- Any legal proceedings, current or past, which could affect
How to determine the Offer price
- A multiple of the net profit before interest and tax EBIT
- Determine future income from financial and contracts
- Ensure you know the implications of buying an assessed loss
- How long?
- What training?
- Staff aware?
- Consider all practicalities.
Advantages of buying a business
- Groundwork have been done
- Growing pains can be behind you –
- Problems resolved and issues rectified
- Easier to get finance with a track record
- Customer base
- Proven systems
- Reliable income
- Reputation and brand
- Business plan and marketing in place
- Existing employees and experience
- Problems that arose have been addressed
Disadvantages of buying a business
- Might be expensive
- Budget for legal, accounting & professional fees
- Business might have been neglected
- Need more cash invested to fix it
- Honor commitments from previous owner
- Staff might be resistant to change, low morale
- Reputational risk or mismanagement
Keep in mind during the valuation process
- Financials – sales growth, good cash flow, low debt
- Employees – may have invaluable expertise & knowledge
- Customers – talk and find our about their experiences
- Suppliers – insights to business relationships
- Location – critical for retail, to attract sales
- Objective – outside independent assessment
- Research – is critical, do your homework
9 Mistakes not to make when buying a business
- Buy the wrong business – no skills, interest or experience
- Insufficient due diligence – do you research upfront
- Don’t know the value – because you’ll pay too much
- Overextending yourself – and bury yourself in debt
- Ignoring the brand – image may be built over years
- Not protecting assets – keep your personal assets aside
- Making immediate changes – don’t alienate personnel
- Not negotiating – every single detail, from assets to IP
- Not promoting – continue promoting and advertising
Sources of funding for buying a business
- Angel investors – private, high risk high return
- Government – slow & cumbersome but low interest
- Grants – strict requirements but no repayment
- Private Equity – pooled investors
- AHV – Angel Hub Ventures
- AIN – Angel Investment Network
- BPART – Business Partners
- Vantage – Vantage Capital
- Horizon – Horizon Equity
- Ethos – Private Equity Investments
- NEF – National Empowerment Fund
- DTI – Department of Trade and Industry
- SEFA – Small Enterprise Finance Agency
Key components of a business plan
- Executive summary – elevator pitch
- Company description – with punchy mission statement
- Opportunity, industry & market – describe your customer
- Business strategy – your brand, niche, penetration
- Management & Operations – founders, skills, responsibilities
- Marketing plan – product, price, position, promotion
- Financial plan – 1yr projection, cashflow, breakeven, PNL, startup expenses