THE BUSINESS PLAN
A business plan is normally essential to the process of purchasing a business. A good business plan always defines the businessí specific mission and objectives, new ownership, sales focus, market, strategy, management team, and financials. This is particularly important when you are purchasing an existing business, because there is so much uncertainty involved.
Start with existing information
Start with the information you get from previous owners. Ideally, during the purchasing process, you received a business plan from the previous owners. One of the important functions of a plan is to define business prospects, therefore, sophisticated business sellers normally use a business plan as a selling document. It should contain information about business history, financial history, previous management, and possible prospects.
Proceed with caution
If you do have such a plan, provided by the sellers, proceed with caution. Assume the sellerís plan was developed to sell the business, not to manage the business, and is like to be very bullish. Question the assumptions. At every point that you possibly can, compare the sellerís plan for the business with its past financial information, market data from objective sources, and whatever other reality checks you can find.
You should have always have financial information. Normally youíll have past financial statements, and copies of tax forms, at the very least; few transactions take place without some basic financial information. Use this financial information as a basis of comparison. Question the information sources: copies of tax forms, if they are real, show what the sellers have told the government. Do they match the financial statements coming from the accounting? How reliable are the financial statements? Have they been audited by outside accountants? Is the seller willing to allow an audit?
Growth forecasts are immediately suspect. Compare projected growth to past results. If the seller shows a future much more rosy than the past, ask why? What assumptions justify the change? Why was this business for sale? If projections are optimistic, then why is the business for sale? However, sometimes sellers have good reasons ó needing capital, aging, divorce, for example ó so donít automatically assume that all growth projections are false. Try to understand why owners are selling a business, and how this affects their willingness to produce real numbers, and how it affects your own possibilities to make this purchased business work for you.
Donít underestimate the importance of reality checks. Donít rely on second-hand information. Where possible, spend time at the business in question, talk to customers, eat at the counter, use the service. For retail locations, for example, you can spend some time outside the store, count the customers, see how many go in empty-handed and how many come out with bags.
Make estimates. Count the business for some sample hours, and then calculate what total sales might be by multiplying your estimated average purchase value per hour. Financial due diligence is an imperative, as it will provide the keys to identifying financial and accounting discrepancies.
Plan a new business or an existing one?
Is you plan for the business you purchase, you start by making an important choice: business plans can be either for start-up new businesses or for already-existing and ongoing business. When you buy a business from somebody else, either option is acceptable. This is a choice you make.
The main difference between the two options is the existence in the plan of either a start-up table, or a past performance table. In a new business, a start-up table establishes opening balances for starting expenses, and financial balances including initial capital, debt, and assets. For an existing business, a past performance table shows past history of profit or loss, and balances of capital, debt, and assets.
How to decide?
Either way can be acceptable. Here are some suggestions:
Does the previous history build your business reputation? Would a loan or a new investment be more likely based on the previous history, or less?
When you are purchasing a strong business with a good past, use that strength as an asset by developing a plan for an existing business. Develop a plan for an ongoing business, use the past performance table to set your balances, and include a section on company history.
If youíre purchasing a failed business (presumably for a good price), then start over, with a new plan, built for a new company. Set your start-up table for a new business, and treat the business as a new business when you describe its history (or lack of history), ownership, and strategy.
The better the information available from the sellers, the more advisable that you develop the plan as a plan for an existing business. In the worst cases, when you have little information available, then you donít really have the option of starting with past performance, because you donít know about past performance.
Consider the name. If you plan to keep the business name, lean towards a plan for an existing business. If you are planning to change the business name, then youíre more likely to be better off with a new plan, not an existing plan. The naming decision is often a tip-off to the same variables that affect the plan. The factors that make you want to keep the name will make you want to use past performance and develop a plan for an ongoing business.
Ultimately, itís your choice
Remember a business plan is always your plan; not the consultantís plan, not the expertís plan, but your own plan, for your business. As you look at the business youíre purchasing, decide what makes you feel best about it, and make that the choice for start-up or ongoing.
For experienced legal advice when purchasing a business, contact business lawyer Christopher Neufeld at Chris@PurchaseBusiness.ca or by telephone at 416-887-9702 [Toronto]; 403-400-4092 [Calgary]; or 905-616-8864 [South West Ontario].
The information presented herein is intended for information purposes only and solely as a general guide. The information is not intended as legal advice. It is a summary of selected/potential issues and does not represent a definitive or complete statement of strategies and law relevant to scenarios that are highly particularized, fluid and rarely, if ever, certain and fully disclosed. The information may not address the special needs, interests and circumstances of a particular scenario, with a single factor potentially necessitating an entirely different approach. Scenarios differ and you are strongly urged to seek specific professional business and legal advice.
Neufeld Legal P.C. is strategically positioned to effectively serve key Canadian business markets, with offices located in Toronto, Calgary, Mississauga and Burlington. As such, we are capable of effectively serving the western Greater Toronto Area (GTA), including downtown Toronto, Mississauga, Burlington, Oakville, Hamilton, Brampton, Milton, Guelph, Kitchener Waterloo, Cambridge, London, St. Catharines and Niagara Falls, together with the city of Calgary and southern Alberta. Copyright 2010.