Why Buy an Existing Practice?
It is usually safer and more profitable to buy an existing business than to attempt to start a new venture. According to surveys around one in four new businesses fail within their first year. This may be attributable to a number of factors including unproven concepts, poor research, lack of working capital, and poor management.
Advantages to Acquiring Existing Businesses
Some of the advantages in acquiring existing businesses include:
The opportunity to review the business’s past financial records, including tax returns, balance sheets, profit and loss statements and any other financial data. This information can be utilized in determining the company’s future prospects and growth potential based on actual past performance rather than the profit forecasts and conjecture which often accompany the start up of a new enterprise.
The amount of working capital required is often less in an established business due to the existing cash flow being generated. People starting new businesses often underestimate the amount of capital required to start the venture and to cover any unforeseen contingencies.
An existing business is usually accompanied by an experienced and skilled workforce who are familiar with the operations of the business and its customers and suppliers.
Gaining an established client base is a considerable saving in both time and expense that a new venture faces in attracting an adequate number of clients to support the overheads of a new operation.
Licenses, Certificates, Permits, Leases etc are often transferable and represent a considerable saving in time and costs associated with providing information and conforming to statutory regulations when applying for them in a new venture.
Sources of finance to purchase existing businesses are more readily available than the venture capital required for a new enterprise. Banks and other financial institutions prefer to lend money for businesses with a proven track record.
The Sequence Of Events
Buying a business is a major investment and should be approached in a systematic
and organized fashion. The key to success is in utilising the services of trained professionals at every step of the process. Friends and well-meaning relatives are not usually qualified to provide the specialised advice needed for a business acquisition.
Who Can Assist?
Use the services of a professional Business Broker who is experienced in coordinating the sequence of events necessary in purchasing a business. A Full Service Business Brokerage will present businesses that have been thoroughly screened and that have provided all of the information necessary to compile a comprehensive Business Information Profile which can be matched to your specific search criteria.
Engage an accountant to assist in the due diligence process and to advise you in matters of taxation, record-keeping, formation of the most suitable purchasing entity and other financial considerations.
If this is not your area of practice, obtain legal advice for assistance with the documentation, searches and any statutory compliances necessary in the transaction.
When you meet with a business broker be prepared to discuss your background, your work or previous business experience and your qualification and financial ability to purchase a business. This will greatly assist the broker in helping you to find a business that fulfils your needs.
You will need to prepare a personal resume and financial statement which will be required by lending institutions and landlords who may form a part of the purchase process.
You will also need a practice management certificate. Some sellers are prepared to assist or supervise a buyer who is not yet able to sit for the PMC exam for a period of time but still wishes to be self employed as soon as possible. We have facilitated sales where the buyer still needs up to two years of supervision. I am happy to discuss the methods used in this type of transaction.
Define Your Acquisition Criteria
- What type of legal work are interested in?
- Is there a specific practice you are interested In purchasing?
- Are there any categories of law you are definitely not interested in?
- What income do you need to achieve to maintain or improve your lifestyle?
- What preference do you have in terms of geographical location?
- Are you buying a business for immigration purposes, if so what criteria applies?
- What are you prepared to spend if the “right practice” comes along?
- When would you like to be in your new practice?
Review of Practices for Sale
After signing a Confidentiality Agreement you will be presented with any of practices that match your search criteria. Business Information Profiles may now be reviewed with the broker and preliminary questions answered.
After reviewing the information in the profile and determining which business you believe best meets your investment criteria the Business Broker can arrange an inspection of the business at a time that is mutually agreeable to all parties.
The broker will also attend the inspection to introduce you to the business owner and facilitate the flow of information and provide guidance with regards to the next step in the process.
Remember all of the information you obtain about the business is strictly confidential.
Only discuss this information with your professional advisers and partners, reminding them also of the confidentiality of the material.
In most cases the employees, clients, landlords and lenders of the business may not be aware that it is for sale. Premature disclosure may have a damaging effect on the business being sold for which the seller could have recourse against you under the terms of the Confidentiality Agreement you have signed.
Offer to Purchase
At this point you have reviewed the information and financial summaries of the
business and you have met with the owners and toured their business facilities. You may have involved your accountant and solicitor in the review of the information provided so far. If you are satisfied that this business meets all of your criteria this is the time to make a formal offer of purchase. The offer can be presented on a form provided by the broker called a Proposal to Purchase.
This form provides you with the opportunity to specify the conditions you require to be met during the Contract Phase, for example: a due diligence inspection to verify the financial information, a finance clause to allow you time to organize a loan, acceptance by the landlord etc.
If the offer and conditions on the proposal form are agreed to by the seller then a formal Contract is entered into and a deposit is paid and held in the business brokers trust account. A Contract takes the business off the market, allowing you the time you need to prove the figures, meet the landlord, and talk to your bank manager without the threat of another purchaser snatching the business away from you during this time.
During the Contract Phase you may expect to receive copies of tax returns and other business documents. At this time it will also be appropriate to be allowed access to the landlord or his agents, the employees, (at the seller’s discretion) and perhaps, in certain types of businesses, key clients or suppliers towards the final stages of the Contract process.
The business broker will coordinate the expedient flow of information between the principals and their advisors, landlord, finance broker and others to ensure a smooth passage and the resolution of all issues prior to the settlement day.