Things to remember when you’re buying a business
Buying a business? Add these two items to your due diligence checklist. DYDD. Do your due diligence! Finally… it’s taken months to get here. You’ve identified the business you want to buy. You’ve got financial statements and they check out. The owner is amenable to your purchase offer. In fact, the owner will actually sell… at a fair price… with no hassles or unnecessary delay! You’ve scraped the necessary money together. You’ve plundered your savings and gotten a loan from the bank. You even convinced your rich uncle to cough up a little dough. The opportunity is a perfect fit. You are excited about the company and the industry. It’s go time… Heck, I’m even excited! But wait… You may not have considered everything. Did you remember two of the most commonly overlooked areas of business purchase / sale transactions?
Control of the Premises Risks associated with controlling the premises will depend to great extent on the type of business you are looking to buy. For a construction company, industrially zoned land of an appropriate size can be hard to find and may be key to processing material and other general operations. For a retailer, there may be concern about retaining the flexibility to relocate and take advantage of today’s lower retail rental rates. Just a few of the questions you may want to ask include: Does the current business owner also own the premises? If so, would he/she be willing to provide a lease of appropriate length, at market rates or better, with options to renew? Does the business require a specific classification of land zoning or must it be in a specific location, for example close to cruise ships or near international business? If the business leases its premises, is the lease transferable? If not, you run the risk of having to relocate the business immediately or soon after acquiring it. Further, the business may be more difficult to sell on to the next buyer. What would be the cost of relocating the business? Recouping costs for plant improvements as well as furniture, fixtures and equipment is notoriously difficult. Although market rates may be lower than that of the current lease, you may effectively be prevented from relocated due to ‘switching costs’.
Off balance sheet obligations to your employees As per clause 23 of the Employment Act 2000, companies are obligated to pay a severance allowance to any “employee who has completed at least one year of continuous employment”. As many of us know, this money is due when an employee is made redundant. However, what is often overlooked is that this money is due even if the employee loses their job due to “the winding up or insolvency of an employer”. Oops. Financial statements and other records generally don’t disclose this. Depending on the number and tenure of the employees you inherit, if you were to purchase a business today and close it down tomorrow, you could owe a lot more money than expected. Did you consider the possibility of inheriting this financial obligation when negotiating the purchase price and terms? Here’s how to calculate the obligation for each employee: Determine the tenure and current pay rate for each employee Allocate “two weeks wages, for each completed year of continuous employment up to the first ten years and three weeks wages for each completed year of continuous employment thereafter up to a maximum of 26 weeks wages”. Remember that this obligation does not arise when employees leave voluntarily, so the allocation you calculated might over-represent the amount of money you would actually be liable for. You will however have better perspective on your potential downside risk. Ultimately, your decision on whether or not to purchase the business will be based on a combination of financial analysis, experience and ‘gut feel’. However, effectively managing your downside risk will help you sleep better at night.