Raising Capital
Understanding your capacity to borrow will save you time and effort in your search for a
suitable business. Given the number of facilities and options available today it may be
wise to narrow down your choices before negotiating on a business.
Considerations
There are numerous matters to weigh up when buying a business. Brokers ask Sellers to
provide them with financial data and other information in order to prepare a Business
Information Memorandum or Profile. We work with the Seller to present the available
information in a manner that assists you to address as many questions as possible.
‘Why is the business for sale?’ is perhaps the first question to ask. There are many
legitimate reasons for selling such as retirement, marriage or partnership difficulties,
deceased estates, exit due to other business interests, or perhaps burn-out. However,
sometimes the sale is driven by the expectation of an impending problem. You will need to
proceed with care.
Financial considerations are usually top of mind:
- Can the business be purchased for a reasonable price and can it provide an appropriate return on investment?
- What is the earning capacity of the business (current and potential)?
- What working capital is required for the business?
- What is the cash flow of the business?
In the next section “Determining Maintainable Earnings Available to the Owner” we explain
how the earning capacity can be calculated.
The risk profile of the business is the other essential consideration, involving:
- Industry factors
- Geography & location factors
- Competitor activity
- Dependability of –
- Income streams
- Staff availability
- Supply line
- Technology advances or obsolescence
- Security of tenure – leasehold
Determining the purchase value of the business is the stage of the purchase that may
begin to cost you money if you require Professional help.
The value is related to risk and the ability of the business to generate an income stream
acceptable to you. From a return on investment point of view the income stream is
critical in determining whether you can repay your investment in a reasonable time, having
regard to the risks and effort involved. This might vary from 1-5 years depending upon the
security of income and inherent risks.
The asking price of a business normally comprises of three components:
- Market value of Plant & Equipment, Fixtures and Fittings
- Stock on Hand (at cost) or Work in Progress
- Goodwill - the amount you are paying for the earning potential of the business based on its historical performance and future maintainable earnings
A valuation must not be considered absolute but should be used as a basis of negotiations
between the Buyer and the Seller.