Buying A Business
Buying an existing business is less of a gamble than starting one, because someone else has done much of the legwork for you, having already established a customer base, hired staff, and negotiated a lease.
You will also have immediate income from the first day because of existing stock and suppliers.
- You must search for a business in the newspapers, on the web and by word of mouth.
- Is it going to be in an industry you will enjoy working in 24/7, because that is what will be required;
- Will it give you the income you need after paying loans;
- You should choose a business that you’re excited by as it is easier to succeed in business when you love your work.
If you have decided to buy an existing business and you have enough enthusiasm to increase the present profits, you will want to be sure you are making the right decision in your new venture. Only you can decide the right business for your needs, so you need to follow the advice below.
You have had a business account for years and presumably you have spoken to your business banker.
- The banks do not believe in goodwill. So, you could start a business from scratch and spend years building it up to be a profitable operation and all it is worth in their eyes is half the value of the assets.
- Banks claim the moment the Seller walks out the door, so does the profit. What a joke! Under certain situations this could be a problem, but even that can be overcome.
- Whatever the real value of the assets is, banks will only lend you half.
- Banks don’t really want to be involved in lending money to finance the purchase of a business but they are being pushed by Government. They see it as high risk.
This is hard to believe, but banks won’t reveal how much they have lent to finance businesses and, more importantly, how many businesses they have actually financed.
Maybe you have approached one of the Government Funding Institutions and they’ve told you how easy it is going to be. All you would need is a 10% deposit and they will finance a business of up to R15 m. The problem is that most businesses do not generate enough income to repay a 90% loan plus pay you an income. We could fill these pages with failed applications through all the institutions.
Business financing is different to house finance. The interest rate is normally prime plus 3% which amounts to ± 12% and the period for the loan is 5 years, possibly 7 at a push. For every R1 million you need to borrow, your repayments are ± R22 200 or on 7 years, R17 600 per month. In addition to this, the business must be able to pay you a salary.
How do we approach the problem?
With most businesses, it is extremely tough to borrow money from a bank using just the business as collateral. Goodwill can’t be financed and you will only receive half the asset value. So, in effect you need to come up with security of 60/70%.
Other points to keep in mind:
- Family member to stand guarantor;
- The seller may allow some of the price to be paid off;
- How much tangible security can you offer?
- A second bond on your house.
An experienced business broker would be of extreme importance in guiding and advising you through the whole process
- Will the bank believe you have the skills and basic ability to run the business successfully? If you lack knowledge about the industry, it could be detrimental to your business.
- Can the business repay the loan and pay you a livable salary.
- You need to draw up a realistic business plan with a cash flow projection.
- You will need to show audited financials and management accounts.
An experienced business broker could be extremely important in guiding and advising you through this whole process.