Buyers and Sellers BEWARE

“The business will be in more demand if it operates independently, as client dependence on the current owner will not give potential buyers confidence they will remain loyal once the key player has departed,” O’Brien emphasizes.
He and others caution that it can take time to sell a business, so you should always remember to be upfront, honest and realistic with buyers: cover-ups can be exposed and will lead to the buyer bailing.
BDO Spicers’ Haines says ensure all key contracts and titles to assets exist and are up to date, and evaluate the need for capital expenditure (prior to sale) by considering the cost/benefit (and need) of that expenditure on the value of the business.
Buying a business
The experts are agreed: this is the toughie right now. Just how well is any business you buy now going to fare over the next short while, of what will almost certainly be tough trading conditions? What you can bring to the party to ramp up the business will make or break your bold move. Remember the human capital too.
“When buying a business, its financials are a key indicator of its viability and performance.  Most should already be reflecting the impact of the current tough conditions, and there is strength in knowing where the business’s bottom line may be,” says O’Brien, on viewing the upside of tough times.
You also need to understand yourself; potentially another bash for the ego. Assess your passions, skills, knowledge, experience and strengths – research what business size and sector is the best match.
“In the process of looking, you’ll need to keep asking yourself whether you have the skills, ability and passion to make this business a success.”
BDO Spicer’s Simon Peacocke is another well-thought-of guru in this game. “Buyers should consider demand for the products/services of the business. Who are the customers, the sector? Is it doing well, or poorly? What are the long-term trends and what are the competitors doing?”
Play it right and you can find SMEs at low prices that will increase in value once the economy begins to recover.
Peacocke recommends using business brokers to help assess the market, but also encourages the direct approach – particularly if you have experience and knowledge in a specific sector and know the size of enterprise you are after. Or perhaps involve your accountant as the ice-breaker.
He cautions that business valuation is a specialist skill and to constantly remind yourself a business broker acts on behalf of the vendor. 
“Your accountant can tell you how much a business is worth using different methods – the most common being capitalisation of earnings in which a multiple is put on future maintainable earnings. Depending on the sector, you can use another method as a cross-check.”
Buyer beware
Other caveat emptors include: being quite precise about what (and who) stays in the business and what disappears. Are the debtors included? For instance, values differ widely depending on whether you are buying a business and its debtors, or just buying the business. Valuation should also take into account the risk of future earnings continuing.
“So, if you suspect that the vendor is heavily tied-up in achieving these future earnings, negotiate a change. ‘De-risking’ can involve an Earn Out, where the buyer agrees to pay a percentage of the asking price up front and the remainder once the company achieves its forecast earnings,” says Peacocke.
Get an expert involved in the complex and make-or-break due diligence – they do it for a living and a reputation. They are also emotionally detached. As a buyer, you should also do your own due diligence looking at the sector, customer-base, long-term demand for products and location of the business you’re looking at – because this is your future commercial environment.
Peacocke has some good news on the treacle-swamp that is Money and Banking 2009.
“While banks are tighter on credit, they are still keen to lend to SMEs, but will generally look for some property-backed security. Look at your equity and gear it at ‘prudent’ levels. Ensure you don’t take on too much debt, allowing for working capital and some cash reserves.
“Attracting private capital is also still an option. There are plenty of private investors out there looking to back people buying smaller businesses,” he says.
Finally, have your lawyer go over the sales process and the signed agreement, with a restraint of trade agreement to protect you against the vendor setting up down the road. And, never overlook the opportunity to structure the acquisition in the most efficient way. Why not?                       
Kevin Kevany is an Auckland-based freelance writer. Email [email protected]