Established business ownership rate in South Africa is a mere 2.5 percent according to the recently released 2016-2017 Global Entrepreneurship Monitor South Africa report.
This means that just 2.5 percent of the adult population between the ages of 18 and 64 own or or manage a business that has been in operation for more than 42 months.
Given the role entrepreneurs play in job and wealth creation, this low percentage is especially concerning. However, it is not impossible to start and run a successful business in today’s environment.
There are other ways to become a successful business owner. One of which is the option of acquiring an established business, which is possibly less risky than starting one from scratch. While the owner of a start-up business would have to build up a brand and a customer base, hire new staff and grow the revenue, an existing business offers established cash flow, trained and experienced staff, tested systems and existing infrastructure, as well as a degree of brand awareness in the marketplace.
But there are also risks in buying a business and the purchase is no guarantee that it will continue to be successful. Issues that need to be carefully evaluated and researched include the reasons why the business is being sold and how well it is really positioned to compete in its industry.
Here is a list of some key issues to consider when conducting due diligence on a business acquisition. It is strongly recommended that industry expertise and guidance is sought to understand the key risk in a specific business or industry:
Insist on the most recent audited financial statements. These should have a degree of accuracy and reliability. If they are older than three months, they must be viewed with caution as material such as stock levels and asset ownership or a sudden increase in contingent liabilities can occur.
Ask for the latest management accounts and, always look at the bank statements and VAT returns. With this information you can confirm the turnover trajectory as well as the business’s gross profit margins.
Evaluate the turnover achieved by the business carefully. Is the business overly dependent on one or two major clients?
Are there special repayment terms for large customers that will impact on the cash flow after takeover? Is the turnover on an upward or a downward trend?
Use of special technology. What is the cost of maintaining and upgrading this technology and when is it due for an upgrade? Lease agreement if the business is renting premises.
Ask for the copy and check for expiry that you could face in case of increases. Check the terms with the landlord.
Restraint of trade. Sign an agreement with the seller as you do not want them to become your immediate competitor.
Debtors. Revalue or exclude them from the purchase price. Assuming responsibility for all creditors could also be a risk since not all creditors are disclosed by the previous owner, or even known.
Advertising the sale. Check newspapers and the Government Gazette to see if they were advertised, 30 days before the transaction becomes effective.
Stock. Calculate carefully and do a stock take on the day of take-over. Ensure the minimum amount required to continue is specified and damaged or expired stock identified.
Moveable assets. List them and ensure they are stated in the deed of sale. The equipment must be checked by a knowledgeable person for defects and excessive wear and tear.
Outstanding leave. Calculate at the take-over date and check other benefits such as medical aid, pension and bonuses.
Licencing. Check with local authorities for requirements, permits and zoning.
Check for existing commitments. Are there unfulfilled contracts, guarantees or obligations to others? Are there any pending damage claims or lawsuits? Are there any matters pending with government departments?
Once comfortable with the findings from the research and due diligence exercise, you can start negotiating with the seller. Agreeing on the purchase price can be a lengthy and complex process, but there are a number of methods that can be used to value the business. Again, it is advisable to consult with an accountant and attorney to ensure that the best possible price is negotiated and an effective process is embarked upon.
Ben Bierman is the managing director at Business Partners Limited