buying a business- documents to request

Hi Folks

There is a business for sale which I'm considering purchasing.

It's a service business, which 2 sole traders merged 5 years ago (after 5 years of trading) and built up to employ a third.

Their circumstances have changed & they're moving interstate. They are splitting the business in to 3.

The existing employee has bought the client list that they have been servicing. Another buyer is interested in the second portion.

The portion I'm interested in includes client list, vehicle, training & business name.

I've asked for P & L statements & history of turnover by month. They have provided me with a forecast of costs & the client list & details of their weekly bookings. There are no contracts with these clients so they can reduce or cancel the service. (There is a non compete clause in the contract)

They say it's difficult to provide info when the business has been running as one company.

I still feel I'm within my rights to ask for this info, BAS statements etc. They have been dealing with some of these clients for 10 yrs. surely their accounting software can drill down annual client spend.

I want this info so I have history and it doesn't stall my property investment too much & of course to make sure I'm not buying a lemon!

Asking price of business is around half of yearly profit.

The deposit required is a third of asking price, which I've read about 10% is the norm?

Before I bother my accountant & engage a solicitor, what exactly should I be requesting from the seller?

Thanks in advance!

 

copies of all contracts, leases, title documents to prove ownership, tax returns for 10 years, bank statements for 10 years etc.

 

A business split into 3 may not be financially viable. Thinking of costs most are fixed or largely fixed. Many costs must be replicated by each of the three or greater turnover must be attained to address this issue. Hasnt the owner just made it harder to break even let alone profit ?
Many customers will flow to competitors if they are now required to choose one or more than one supplier. If the former owners couldnt increase turnover then a new owner may not either especially with just 1/3rd of the resources and less customers - no customer list etc. Also GST will be payable on the purchase

One employee bought the client list and you still want to pay for it ? WTF. If a business I was looking at to buy sells its client list to a employee then its a sign the other parts are worth jack all or the list they sold is useless to the other guy. Who are they fooling with that ? Former employee is well liked so whats left ? It would be like Arnotts selling off Iced Vovo's and nothing else.

I would not even be bothered. The accounting records etc are all useless since you arent buying that business - You are buying "some" part of it. And I dont think anyone would know what that is. They sound like idiots.

 

Thanks @Terry_w @Paul@PFI

There are 3 patches working independently, with their own vehicle, client list etc

The client list provided to me is mine only. I don't get info on the other client lists. Think of it as buying a patch with no boundary. So I'm free to canvas for new business, just like any other competitor in the region. Noted I am concerned the current employee may have been favoured.

Each patch has its own outgoings & is profitable. I think I could run it leaner as they live off patch so they had big fuel bills, which wouldn't apply to me.

I know the patch & the market already. There is room for growth from existing clients & new, as they say they've been turning away business since they moved off patch 1.5yrs ago. So I'm very keen to see history!!

I'm essentially buying a "reliable" income & name, to start out with rather than throwing in the healthy monthly salary I get now & starting from scratch.

It's in a field I've always wanted to work in permanently... So I hope the opportunity is not clouding my judgement. I am not a fool however, I would not pursue it further unless full transparency is provided.

 

I have a due diligence checklist that I can send to you privately if you would like.

In terms of not having access to good information - the vendor's accountant can reconstruct this information with instructio from the vendor. It should not be a stumbling block.

 

Thanks @Ross Forrester. Will PM you.

 

LM, pretend your are reading this as a post from another PChat user, and then think about how you think it reads.

Selling the client to "the existing employee" sounds like the transaction is questionable to say the least.

Why don't you offer them 25% of what they're asking specifically for this reason and see how you go?

Assuming "the existing employee" is not going to prove an inconvenient competitor...

 

@lost nomad I am pleased the info I sent was of value.

 

@lost nomad, one of the first thing I would be asking for is a spreadsheet with a row for each client on the client list you are buying and a column for actual invoiced revenue by client for each of the last three completed financial years, two columns for this FY (one actuals todate, the other a forecast to 30 June) and a column for the next FY.

I would be reconciling this spreadsheet with P&Ls for the last three FY and this FY.

I would run a critical eye the spreadsheet and P&Ls to see how much BS you have been shovelled .

 

Thanks for your help everyone.

They felt I was asking too much information that they couldn't provide, so THEY declined to move forward.

Alarm bells heard loud & clear!

 

Yeah, maybe there's another reason that the other 2 are moving interstate!!!

If it's a service-based business that you've always wanted to do.. why not just start your own? If you've got capital to buy a business, then you should have enough to keep you tied-over until you've built up the business somewhat.

 

@Phase2

Thanks for the pep talk. I'd love to throw the PAYG job in tomorrow, but I cant walk away from the salary just yet.

I am doing a bit of side work (in said field) and gaining a good reputation. So I thought buying the client list would give me a base line of income whilst I built it up further. It seemed too good to be true and it was.

Onwards & upwards!

 

Sounds like you dodged a bullet anyway. AND you'll have your capital to put into your new venture..OR buy more property.. OR, as the trend has been lately.. looking into LICs as the next investment!