Wednesday, March 11, 2009

Buying a Business in South Africa

Buying a business can often be a much easier alternative when looking to become a business owner. When faced with the question of whether to start a business of your own or buy an existing business, the second option, providing that you follow the correct process and do your homework, can be a much less risky option. Chances are though that the reason the current owner is selling the business in the first place is that it may not be growing as fast as anticipated. Lets have a look at a few of the advantages and disadvantages that you need to consider:

The main reason to buy an existing business is the drastic reduction in start-up costs of time, money, and energy. In addition, cash flow may start immediately thanks to existing inventory and receivables. Other benefits include pre-existing customer goodwill and easier financing opportunities, if the business has a positive track record.

The biggest block to buying a small business outright is the initial purchasing cost.
Because the business concept, customer base, brands, and other fundamental work has
already been done, the financial costs of acquiring an existing business is usually greater then starting one from nothing. Other possible disadvantages include hidden problems associated with the business and receivables that are valued at the time of purchase, but later turn out to be non-collectible. Good research is the key to avoiding these problems.

What else do you need to consider at this point. Depending of course on the type of business you are buying, the following 8 points can serve as a guideline:

1. Do a detailed review of the financial statements?
2. What are the monthly payables and receivables?
3. Who are the employees?
4. What is the customer demographic?
5. Is it in the right location
6. What are the appearance and condition of facilities?
7. Who are the competitors?
8. Is the registration, licenses up to date?

Financial Statements
Review the financial statements and tax returns for at least the past three years. These should be audited from a CA. Never settle for financial statements that are reviewed or compiled. These are based solely financial information supplied by the company and have not been audited by a certified public accountant professional.

Payables and Receivables
Is the business paying its bills. Net 30 is standard. If bills are being paid 90 days or more past due, there may be cash flow problems. Are there any liens against the business?

How critical are the employees to your success? What are their work habits? Are these
people that you can work with? How long have they been with the company? Will they
stay? What incentives do they have? Can they be easily replaced? What are their
relationships with customers? Will customers follow employees that leave? Are there any employees who can take over if necessary?

Customers are the most important asset are buying. Do they have a special relationship with the current owner the holds them to the business? How long has each customer been in place? What percentage of total income are they? Will they stay or leave? Are there contracts in place?

Is the location critical to the success of the business? How good is it? Is parking an issue?
Does the business rely on walk-in traffic? What the future for the area?
Appearance of facilities How well is the business maintained? Is maintenance required?


What is the competition like? How competitive is the industry? Exactly who are the
competitors? Are price wars a factor? Has the competition changed recently? Have any
gone out of business? Why?

Registration and licenses
All business legal documents must be transferred. Don't do this without an lawyer!
Lastly never consider buying a business without getting professional help. A business
broker, a CA and an lawyer are critical investments in your buying a business success. To even consider buying a business without them is very foolish.

In addition to the above, you may find that where the business has got a stable or successful track record, the bank, although still needing a business plan from you, may be much more willing to support you with funding for the business as the risk factor is easier to predict.

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