Charles Szente and Jim Renwick

Born for the storm

HOW TO BUILD, BUY AND BAKE,

YOUR OWN BUSINESS

Free Abbreviated Version

Please feel free to distribute it to
family & friends

Should you like this guide, a comprehensive 100-page manual is

available for purchase. Please email
manual@renwick-brokers.co.za for more information

A Project by "The Association of Business Brokers (South Africa)"

-i-
READERS COMMENTS

“I think it gives any prospective buyer a lot to think about” - Buks Venter

“The subject matter could easily be broadened to "starting a business" “- Leon

Theron - Vision Xq

“This is a excellent document” - Clark Boydston, President, EBS Associates

“The first thing I can say is that it is a concise and well written little book…Your
manual seems practical and gives good information” - Eduardo Martínez IIB
Spain

“Firstly, congratulations on putting together a brilliant publication. It is well

written, focused and contains relevant information. I think you are onto
something with huge value” - Helmut Wolff

“Great document!” - Erin Johnson

“This is a fantastic resource! I have someone that I will share this with
immediately.” - Paul Burnstein, Peak Business Group, LLC

LEGAL DISCLAIMER
The authors and associated contributors can in no way be held responsible for
any eventualities arising from the use of any information provided by this guide
and the sites to which it links. All information has been supplied in good faith and
we make no representation to its accuracy, leaving it up to the reader to do the
necessary verification in their own unique circumstances. The final responsibility
as to what actions to take, priorities and decisions to make remain the
responsibility and domain of the reader.

Published by Seratoa Business Publications

80 Caversham Rd, Lidgetton, Howick. (Postal: PO Box 1523, Howick, 3290)
www.seratoa.co.za, info@seratoa.co.za

In association with Renwick Business Brokers www.renwickbrokers.co.za

First edition Copyright © Charles Szente 2005. All rights reserved

- ii -
 THE STORY BEHIND THE TITLE – BORN FOR THE STORM

Did you know that eagles know when storms are approaching long before the
storms break? The eagle will fly to a high spot and wait for the strong winds.
When the storm hits, the wind will pick the eagle up and lift it above the storm.
While the storm rages below, the eagle is soaring above it – Loving every
minute of the strong winds – not the mention the view.

The eagle does not escape the storm, or hide from it. It simply uses the storm
to lift it higher. It rises on the winds that bring the storm.
– AUTHOR UNKNOWN

This guide is dedicated to eagles amongst us!

ACKNOWLEDGEMENTS

This guide had a strange journey. It started as two separate dreams that
became one vision late in 2004.

Over the years a great many organizations and people helped with
knowledge, information, advice, encouragement, opportunity and support.
There are too many to mention by name, thank you to all of you!

To our families and to Jesus without whom this vision could never have been.

- iii -
 TABLE OF CONTENTS

READERS COMMENTS ......................................................................................ii

LEGAL DISCLAIMER ..........................................................................................ii

PART 1: INTRODUCTION AND READER ORIENTATION .................................5

1. HOW TO USE THIS GUIDE ........................................................................6

2. INTRODUCTION TO THIS GUIDE ..............................................................7

3. WHY DO PEOPLE BUY BUSINESSES ......................................................8

4. WHAT ARE THE BENEFITS AND RISKS OF BUYING A BUSINESS ......9

4.1 POTENTIAL BENEFITS OF BUYING A BUSINESS: .......................................................... 9
4.2 POTENTIAL RISKS WHEN BUYING A BUSINESS .......................................................... 10

5. STILL INTERESTED? SO HOW DO YOU START ...................................11

5.1 INTRODUCTION – WHERE TO START........................................................................... 11

6. WHERE TO LOOK FOR GOOD BUSINESSES........................................12

7. INFORMATION YOU’LL NEED TO KNOW ABOUT THE BUSINESS .....13

8. HOW MUCH CAN YOU EXPECT TO PAY FOR A BUSINESS ................13

8.1 INTRODUCTION – VALUING A BUSINESS (Rule of thumb)............................................ 13
8.2 A BUSINESS BROKER VALUATION MODEL................................................................... 16

9. WHAT ADVISORS CAN ASSIST ME? .....................................................21

9.1 INTRODUCTION TO ADVISORS AND GETTING ADVICE .............................................. 21
9.2 INDEPENDENT APPRAISER ............................................................................................ 22
9.3 ACCOUNTANTS, BUSINESS CONSULTANTS AND MENTORS .................................... 22
9.4 COMMERCIAL ATTORNEYS ............................................................................................ 24
9.5 PROFESSIONAL BUSINESS BROKERS.......................................................................... 24
9.6 KEY THINGS TO REMEMBER ABOUT GETTING ADVICE ............................................. 27

10 CLOSING – FREE VERSION ....................................................................28

11. CONTACT DETAILS .................................................................................28

- iv -
 Born for the storm

PART 1: INTRODUCTION AND READER ORIENTATION

You are about to embark on a great journey of discovery, about yourself, your world and
your dreams.

This abbreviated version of our business buyer’s manual has been written especially for
you, the prospective buyer. It is an extract from our full manual, but will still provide clear
guidance as to what is involved when purchasing a business and what is required to
ensure that you are going about it the right way. Whether you are a first time buyer or
have had a business before, the same logical steps have to be followed to give you the
best shot as a good and lucrative buy.

Most buyers we deal with have had a life long desire to own their own business, but
without expert advice, knowledge and knowing what procedures to follow, this decision
could prove to be catastrophic and could result in you losing your entire life savings.

We trust that as you study this abbreviated guide you will gain valuable insight and
knowledge. But being an abbreviated guide means, that by its very nature, it is not
comprehensive and its generic. It is vitally important that you gather as much
information as possible, and do your homework regarding any business opportunities
your are investigating.

Remember no one should force you into a situation you are not comfortable with. You
need to make the decisions that best suit you, your passion and your circumstances.
Ultimately the decision is yours, not theirs, yours. You may ask others for their opinions,
but they can never make your decisions for you.

God bless you and may your journey be fruitful, rewarding and enjoyable!

5
 Born for the storm

1. HOW TO USE THIS GUIDE

PLEASE READ THIS CAREFULLY!

Please read this entire guide, as well as any other information regarding buying a
business you can get your hands on before embarking on the process of buying a
business, or as soon as possible after starting to look. Each section in this guide and
the full manual contains information that can add tremendous value and
understanding – but only if you are aware of them before going through the process
of buying a business. In addition the steps outlined in this guide and the full manual
are not necessarily sequential, as some actions might happen before others, at the
same time or not at all, purely depending on each unique situation. Being an
abbreviated guide means that many of the sections in the full manual have been
omitted.

We also recommend you start a journal or filing system, where you can make notes,
record observations, ideas or thoughts. These will later be used to not only evaluate
and buy the business but also to improve it! Imagine taking the best you have seen
in every business and putting it into the one you finally buy!

You are about to go on an incredible journey of discovery. Many before have gone
on similar journeys, but your journey will and can never truly be the same as others.

This is an individual journey, a journey only you can make. We can try and show you
what in our experience has been the best ways, but ultimately it is up to you: Your
decisions your learning and your responsibility.

The first rule of being a business owner is to take responsibility for your own
actions, decisions and destiny.

6
 Born for the storm

2. INTRODUCTION TO THIS GUIDE

Buying a business is probably one of the most exciting, potentially rewarding, risky
and scary things you will do in your life. It is not difficult to do and most people are
astonished at how easy it is to buy a business.

The trick is to buy a business that you can grow and that will deliver to all your hopes
and dreams – that is the true challenge!

It is a strange and exciting process and I am glad that in some way we can share it
with you. Probably the first thing you will need to get used to is that people will be
more interested in your ideas and business plan, than your resume. This does not
mean your experience and knowledge is not important, no not at all. But it is
important for very different reasons: You have to know what strengths and
weaknesses you have in terms of the business you want to acquire.

You definitely should not buy a business simply because the “Net” profit is lucrative
or it’s doing a good turnover. So the second rule of buying a business is

Don’t buy a beauty salon ……..if you are a mechanic

Don’t buy a coffee shop……….if you can’t fry an egg

Even if you are looking for a healthy net profit, remember that you are reliant on your
skills to succeed in the long term. Even if you have staff you will be required and
should be able to stand in for one of them at any given time. The sad truth is that
many people buy a business, then sit back and relax, which inevitably costs them
dearly.

In this guide and in the full version we look at the process of finding and buying a
business: The benefits, the risks, where to start, the support available, how much it’s
going to cost, how to evaluate the business and discuss other important factors to
consider. We then assume that you have identified a prospective business and you
are ready to take control- an area that is practically always overlooked in this kind of
manual.

7
 Born for the storm

Though the focus is on buying a business, the steps followed relates closely to
managing the business, as many of the actions taken in managing the business is
the result of the information generated from evaluating and deciding to buy the
business. Initially you might analyze the business of your choice from a buyer’s
perspective, but the same analysis is valid as a business owner that wants to guide
and lead their business to greater heights.

If you are a person who cannot or does not like making decisions without assistance
- Don’t buy a business! From the time you start thinking about owning a business
your life will be filled with decisions that need to be made.

3. WHY DO PEOPLE BUY BUSINESSES

People buy businesses for many varying reasons. Some people buy a business as
an investment, or for tax write offs - while others buy businesses for their children or
to secure their own future. It may just be case of keeping up with the neighbours,
dreaming of being your own boss or perhaps you are one of the lucky ones to inherit
(or win in the national lottery) a small fortune and you need to keep yourself out of
trouble. The main reason people buy business seems to be to make money, and lots
of it!

I guess the real question should be: what are your reasons? Are you looking for
secured employment, is it a financial requirement, Do you feel stuck where you are
and buying a business seems like a good idea or have you been retrenched and
simply cannot find any other options?

It’s important that you know what your expectations are from the business, not just
the money, but the lifestyle issues as well. What exactly do you need the business to
provide for you?

The next key point is to know that no currently operating business will meet all of
your expectations. It might need some work to get it from where it is to the point you
want it to be. You may be asking then why not just start a business from scratch?

8
 Born for the storm

In some instances it may indeed be better to start a business from scratch, but in
most instances it’s more advisable to purchase a going concern. Simply because the
risks of failure are lower, the associated capital costs could be substantively less and
you would have immediate cash flow, but more of on that later.

4. WHAT ARE THE BENEFITS AND RISKS OF BUYING A BUSINESS

Let’s take a closer look at some of the potential benefits of buying a business.

4.1 POTENTIAL BENEFITS OF BUYING A BUSINESS:

POSSIBLY SMALLER CAPITAL OUTLAY:
There is always the possibility that you may be able to purchase an existing
business with established profits for less than if you were to start a new concern.

IMMEDIATE PROFITS AND CASH FLOW:

You don’t have to wait approx 10—18 months before establishing profits and
becoming a cash generator.

STARTUP ISSUES ARE ALL READY IRONED OUT.

Some of the teething and start up problems may have already been sorted out,
and processes are beginning to become streamlined.

EXPERIENCED STAFF:
The business comes with ready established staff. Recruitment can be expensive
and very time consuming.

COMPETITION
Your entry into the market does not increase competition. Increased competition
normally drives prices down as well as profits.

Many more potential advantages are discussed in the full version of this document,
and these are only a few examples of the main benefits. In some instances however
these identified benefits may not be applicable or not be benefits at all – for example
a poorly located business. It is vitally important to be aware of the potential down
side when buying a business.

9
 Born for the storm

4.2 POTENTIAL RISKS WHEN BUYING A BUSINESS

Having identified some of the potential benefits, let’s take a closer look at some of
the risks associated with buying a business.

LOCATION:
The business could be located in the wrong premises, and new premises might
be required to ensure ongoing success.

LEASE:
The rental may not be market related and escalation per annum too high. The
lease could also contain very negative terms & conditions.

PROBLEMS AND LEGACY ISSUES:

You may be taking over major problems that the previous owner has created
and/or has not told you about. E.g. a key customer leaving!

REASON FOR SELLING:

Check this out thoroughly as this could be the biggest con of all – for example:
o Lack of manpower is an indication that owner cannot run the business
appropriately.
o A Manager run Business netting R40—50,000 pm. Reason for selling: -
other business interests – get real, would you sell?
o Owner emigrating but not prepared to sign a restraint of trade.

It is however important to know that there are many valid reasons for people
selling businesses. Sometimes they just bought a business that was wrong
for them, or they are tired. We have met many managing directors that after a
couple of years of building and growing a business just feel its time to move
on.

These are just some of the potential problem areas that are covered in the full
version of this document.

10
 Born for the storm

If you want to make sure about the business you are purchasing, ask your broker or
seller to arrange a sit-in period for you so that you can be sure that the business is
doing what the owner claims. Quite often the seller will agree to this providing you
sign an offer to purchase, conditional to your sitting in the business and conducting a
due diligence to verify all aspects of the business.

5. STILL INTERESTED? SO HOW DO YOU START

5.1 INTRODUCTION – WHERE TO START

As with many things in life, its starts with you: You need ask yourself the following
questions:

What income do I require from the business to live on?

How much money can I raise (cash, policies & bonds) for a deposit?

What type of business would suit me and I find interesting?

How far am I willing to travel?

How many hours do I have to spend in the business to make the required

income?

What impact will the business have on my family life and leisure time?

How do I relate to people? Am I an introvert or an extrovert? and

What skills or expertise do I have in terms of my desired business, and very

importantly, which skills don’t I have?

Many businesses fail because owners are unaware of the issues that could make a
business fail. Often, a business is organized around the owner’s specific expertise,
such as sales, finance or production. This expertise can prevent business owners
from recognizing crippling issues in other areas of the business.

N.B. If you decide the purchase the full manual, in it you will get the opportunity to
take a long hard and honest look at your skills and experience. If you don’t have all
the required skills or you have specific weakness in an area of business – it’s not

11
 Born for the storm

necessarily fatal. However not knowing your weaknesses and skills gaps or not
doing something about them could well be!

Having answered the questions regarding yourself and having an understanding of

your own strengths and weaknesses, you should then be able to develop and
implement an action plan to address your identified weaknesses. Having done that,
you should then be ready to start looking for a business that could meet all the
needs you have identified.

6. WHERE TO LOOK FOR GOOD BUSINESSES

When looking for potential business there are a number of ways you can source
prospects.

You could:
Look in newspapers under the businesses for sale column,
Place an advertisement in the newspaper,
Search on the internet,
Contact a business broker,
Contact other agents,
Speak to family and friends (for their contacts) or
Directly canvass businesses that appeal to you.

Often people go to a business brokerage not knowing what type of business they are
looking for. This courts disaster as they could end up buying a business the broker
wants to sell i.e. the business with substantial commission attached to it and not the
business they are suited for.

Don’t buy what the broker wants to sell you just for the sake of buying a business.
Look for and get the business you want and deserve. It probably won’t be 100% of
what you want, but then why would you buy a business that you do not feel you can
grow and develop?

12
 Born for the storm

7. INFORMATION YOU’LL NEED TO KNOW ABOUT THE BUSINESS

As a minimum you should get the following information about the business:

How long has present and any previous owners had the business?
The last 6 months VAT returns: Clarifying discrepancies with the provided
sales figures. Banks use VAT returns to validate the declared sales figures,
Details of the staff compliment and their period of service. Being wary of high
staff turnover,
The current positioning of business and its product. Will it sustain its market,
and how is it positioned in terms of competitors?
The reasons for sale. Being suspicious of reasons such as “lack of
manpower”, “Immigrating” or “Other business interests”. Always verify all
responses and specifically exclude them contractually to protect yourself if
required,
Do the Sales figures given include or exclude VAT. This is very important as it
substantially affects the business net profit.
The Current gross profitability: Ensuring that the gross profit the seller claims
is correct. In the full manual we discuss how to verify the Gross Profit. It is
extremely important as most sellers do not have a clue as to what their real
Gross Profit percentages actually are.

Sometimes the information the owners have, or even the mandates on a broker’s
systems could be out of date by up to 2 years. Hence all the numbers and details
must be re-confirmed. If you are really interested in a particular business you could
always ask your broker or arrange personally to get the required and updated
figures.

8. HOW MUCH CAN YOU EXPECT TO PAY FOR A BUSINESS

8.1 INTRODUCTION – VALUING A BUSINESS (Rule of thumb)

The profit a business generates for you is arguably the greatest determinant of what
a business is worth, but naturally it has to be adjusted according to the length of time
we could reasonably expect to make the same profitability.

13
 Born for the storm

You could be asking, “But what about the business assets?” Well most small to
medium sized businesses are not particularly asset intensive, and in business,
unlike normal life, assets are really only worth the income they generate. This does
not make them worthless as they do provide some collateral when it comes to
raising finance for your purchase. The exception to this is discussed later in this
chapter.

Please be aware that business valuations are not an exact science and is at best a
calculated guess: The reason for this being that most valuation models are based on
historical financial performance and assumes that the historical performance of the
business will continue into the future. But as as we all know it is virtually impossible
to predict the next 30 minutes, let alone the next 2 years.

As general rules of thumb, we could use the following valuation ranges as a rough
guide as to what we could expect to pay for a prospective business.

For a small to medium sized private business we could expect to pay 16 to 30 times
monthly net profit e.g.

Net profit (NP) Approximate Approximate

Before tax Value (16 x NP) Value (30 x NP)
R 5,000 Between R 80,000 & R 150,000 selling price
R 10,000 Between R 160,000 & R 300,000 selling price
R 20,000 Between R 320,000 & R 600,000 selling price

For small to medium franchise business we could expect to pay 20 to 40 times

monthly net profit e.g.
Net profit (NP) Approximate Approximate
Before tax Value (20 x NP) Value (40 x NP)
R 5,000 Between R 120,000 & R 200,000 selling price
R 10,000 Between R 240,000 & R 400,000 selling price
R 20,000 Between R 480,000 & R 800,000 selling price

14
 Born for the storm

From a return on total investment point of view a factor of 24 is the same as earning
50% interest per year, and a factor of 54 is a return of 20% per year. That compares
very favourably to a bank risk free rate of only 2-10% per year.

You may very well be asking why there are such big differences in value between
the various sizes and types of business. Well as mentioned before it has to do with
peoples risk perceptions. The perception is that small and medium sized businesses
are more risky than franchises who have (should have) better support for the new
owner; Also a franchise typically seen as an easier resale prospect.

But how do we determine the actual value of the Net profit multiplier i.e. the number
with which we multiply the Net profit with to get the approximate business value. This
is a very complex subject, but in principle we have to determine how long the current
net profits can be kept at reasonably the same levels.

This time period varies for each business and can be influenced by many different
factors, for example:

Do the products match the area the business is located in?

The condition of the business assets e.g. delivery vehicles or other required
equipment how much can they still produce?
How much of the business is built around the current owner’s relationships
with customers or suppliers,
The position of the business (good or bad),
How long the business has been established as well as how long the present
owner has owned it,
Is the rental market related, is there a renewal option in the lease & is the
yearly escalation market related?
What contracts are in place to maintain sales?
What legislative changes could impact the business? e.g. expected law
changes determining what you can or cannot charge for your products and
services, new licence requirements etc,
Environmental changes e.g. direct environment changes, new competitors,
or road changes reducing your drive by traffic,

15
 Born for the storm

Social changes e.g. Habits and trends or demographics of buyers,

Technological changes e.g. tape to compact discs, VHS to DVD, or
Economic changes e.g. the available money of buyers etc.

This implies that each situation is unique, and must be carefully evaluated on many
fronts to ensure the risks are adequately defined and clarified. Only then can the
valuation be done and Even then it’s an educated guess, an estimate, and not a
guarantee!

Another point to consider is that the buying price may not be the total cost of the
purchase. Whether you get the money from a financial institution or use your own,
careful consideration must be given to the cost of ideas you wish to implement, the
expected operating costs, cost of advisors, stock costs, expected legal fees etc. This
would have to be included into the investment required to purchase the business.

Ultimately, risk aside, any business is only worth what a willing buyer is
willing to pay for it, and a willing seller is willing to sell it for.

Let’s now take a closer look at a valuation model you could use to establish an
approximate valuation of a business you are interested in.

8.2 A BUSINESS BROKER VALUATION MODEL

Once again, please remember that it is impossible for anyone to give a 100% correct
valuation on a business as there are too many factors which have to be taken into
consideration. Listed below are a few of the factors that can impact seriously on the
valuation of a business.

For improved accuracy, most reputable brokers would use three different valuation
methods, and then average the values. Examples of evaluation methods being;
Extra earnings potential, Return on investment and Payback period. Let examine
these methods by reviewing and then discussing a typical example.

16
 Born for the storm

8.2.1 BUSINESS VALUATION – ILLUSTRATIVE EXAMPLE DETAILS

The details below are based on the normal details you would receive if you where
interested in purchasing an accounting practice that the owner has had for 8 years,
the business being a work from home (WFM) type of business.

Assets consist of:

3x Personal computers, 3x steel filing cabinets 3x printers,
4x 6’ x 6 drawer desks 2x overhead projectors 1x fax machine
3x electronic calculators 4X Typist chairs 1x Photo copier

Total value of assets R80,000

Stock consist of Folders, A4 paper etc, valued at R10,000

The total monthly operating expenses including Salaries for 3 accountants,

telephone, Rent for the portion of the house being used, bank charges, vehicle
expenses etc = R48,000
The business does the books of 83 clients.
Total income per month at R850 pm per business = R70,550
The average cost of materials per month is R 5,000

So Total Monthly Income R70,550

Cost of materials (sales) R 5,000
Gross Profit R 65,550
Less expenses R 48,000
NET PROFIT (Before tax) R 17,550

But how would you value this business? Lets look at the broker valuation and then
discuss each point.

17
 Born for the storm

8.2.2 BUSINESS VALUATION – ILLUSTRATIVE CALCULATIONS

Business Brokers Valuation
Prepared by: A.N. Broker
Date: 15 April 200x

Name of Business: A B C Accounting

1. Extra Earning Potential Valuation (First valuation)
Net Asset Value ( R 80,000 ) + (R 10,000 ) = R 90,000 (a)
Assets Stock
Interest @ 9% (of a) = R 8,100 (b)
Salary p/annum (if you worked in the industry) = R 60,000 (c)
Total (b + c) = R 68,100 (d)
Annual “Profit” (profit x 12) before tax = R 210,600 (e)
Extra Earnings Potential (e – d) = R 142,500 (f)
EEP Factor 1.2* yrs x `EEP (f) 142,500 = Goodwill = R 171,000 (g)
Value (a) + Goodwill (g) = R 261,000

The Extra Earning Potential is the extra value one expects, over and above earning
a salary and receiving risk free investment income from banking the money you
have available to buy the business.

2. Return on Investment Valuation (Second valuation)

Annual “Profit” (profit x 12) before tax = R 210,600 (a)
Less Annual Salary = R 60,000 (b)
Actual “Profit” (a - b) = R 150,600 (c)
Value = (e) / ROI factor = R 150,600 / 0.45 = R 334,665

Return on Investment is the rate of return one would expect from investing in the
business, whilst taking into consideration the risks associated with the business.

3. Payback Period (Third Valuation)

Monthly “Profit” before = 17,550 x 18 = R 315,900
The Payback Period uses an experienced guess at the number of months one would
expect take to pay for the business out of monthly “profit”.

18
 Born for the storm

4. Estimated average value

Taking the totals from sections 1+ 2+ 3 we get = R 911,555
This is then divided by the number of valuations (3 in this case) to yield the
estimated Average value i.e.

(R261,000+R334,665+315,900) = 911,555 / 3 =
A TOTAL BUSINESS VALUE OF = R303,851

N.B. The total valuation would be inclusive of the 10% broker or sales
commission

In some instances the asset values need to be carefully appraised and compared to
the business value. Should the asset value be more than then business value the
Asset value should be used, and the sale is then deemed an “asset sale”

8.2.3 BUSINESS VALUATION –METHODS DISCUSSION

When we use the above formulas there are certain “cap rates” that apply to valuing
the business.

In section 1 the salary per annum is assumed at a net annual of R60, 000. What
we are trying to establish is if it is worthwhile for the purchases to buy the business,
or to rather go and work as a manager in a similar business, without taking risk and
earn interest income.

Extra Earnings Potential (EEP)

The extra earning potential is the extra value one expects, over and above a salary,
whilst taking into account the investment income you could received by banking the
money.

We derive the EEP Factor cap rate to determine the goodwill of a business as
follows. Firstly we need to know how long the seller has owned the business. The
following table details the factor to be used as guides! Good will is a sticky subject,

19
 Born for the storm

and you need to carefully consider the quality of the business reputation and brand
value, and even then use, with a healthy dose of common sense.

1 – 5 years 1.1 x EEP

5 – 8 years 1.2 x EEP
8 -10 years 1.3 x EEP
10 years + 1.5 x EEP

Further we need to understand how much of the business is built around personal
contact, and the interpersonal skills of the owner. If the business is of very personal
nature and involves high people contact and interpersonal skills, then the owner of
the business is the goodwill, and if he sells, a substantial amount of business could
be lost. Examples of this could be an accounting practice, Lawyers practice, General
Practitioner etc where the owner is a high profile hands on operator. In this case we
need to reduce the factor.

In our example the factor used was 1.2 as the owner was a manager and not a
hands on operator. If he was a hands on operator the factor could have be reduced
to compensate for the potential loss.

Return on Investment (ROI)

Return on investment (ROI) method is the rate of return one receives from investing
your capital into the business, whilst taking into consideration the risks associated
with that business.

An ROI value of 50% means that within 2 years you should recoup your initial
investment. An ROI of 33% would equate to 3 years. In our example, section 2, your
annual salary is deducted from the annual profit of the business. The residual is then
divided by the chosen cap rate of 0.45% which implies a 2.5 year return period.

20
 Born for the storm

Payback period
The Payback Period method uses an experienced guess as to the number of
months one would expect to take to pay for the business out of the monthly profit.

It has long been the perception that a business is worth 20 x its monthly net profit
but in fact this is a thumb suck, especially in the light of the various factors which
impact the value of a business. We recommend a cap rate of about 18 months.
Reason being, if one starts a similar business from scratch it could take
approximately 18 months to realize a reasonable net profit, so why then would you
buy a business for more than that? It must be borne in mind however that it is only if
the all the factors as discussed are reasonable, only then can this cap rate be used.

NB When valuing a franchise operation different cap rates are used. These
rates are predominantly influenced, by how franchisors feel their franchises should
be valued, and may not be reflective of reality. There is also the perception that
franchises are less risky than private businesses. This may be theoretically true, but
is highly dependant on the nature and value of the franchisors support!

9. WHAT ADVISORS CAN ASSIST ME?

9.1 INTRODUCTION TO ADVISORS AND GETTING ADVICE

Forget about Father, Mother, Brother, Sister, Uncle, Aunt or any other suspect
advisors unless they presently own, or have owned their own business in the past.
Further forget about estate agents who do not regularly assist in selling businesses.
They probably won’t have the required tools, knowledge and skills to give you the
support and service you need.

There are however a number of valuable organizations and individuals that provide
support services to assist would be business owners. As with yourself the
professionals you should be using have spent many years perfecting their craft, and
have to earn a living from it. In some instances you could, if you have the skills, do
some of the work yourself, but someone who has been doing it for a long time and
has the required experience and qualifications should be able to add significant
value to the process, especially in areas where your own skills may be weak. Your

21
 Born for the storm

true challenge, as with all great CEO’s is to get together a team of professionals that
will ensure your business has the best chance of success. Yes, do as much as you
can as this will save you money, but don’t lose track of time and the value service
providers add.

In this section we look at some of the roles, support and expected costs of service
provider for purchasing a business. This section is merely indicative and as with all
things the specifics of each deal can greatly impact the cost associated with, and the
type of services rendered. The costs referenced here are therefore indicative and
must be confirmed to ensure you cover all the expected costs of the transaction.

The timing of these costs are important as well, as sometimes the costs will be cash
up front and sometimes the costs may be on risk, i.e. commission or earnings based
on successful conclusion of the deal. In other instances the costs maybe free - Well
free to you, as the business seller is paying for the cost. The key is to be open to all
the potential ways of getting the services you need without breaking your cash pile!

9.2 INDEPENDENT APPRAISER

The specific business you are buying may require the services of an independent
appraiser in order to verify the value of assets so you can raise finance from
financial institutions.

Qualified independent appraisers charges up to 3% on the basis of asset “value

found” and naturally their absolute costs will be higher in businesses where there are
high amounts equipment and fixed assets.

9.3 ACCOUNTANTS, BUSINESS CONSULTANTS AND MENTORS

When using an accountant & consultants preferably use a chartered accountant or
other suitably qualified consultants. People who will have your best interests at heart
and someone who will give you an honest, un-biased report on the critical aspects of
the business

22
 Born for the storm

This does not excuse you from understanding the financial statements or business
processes. After all it will be your business to run and not theirs. So if you are a little
rusty on finance, marketing, operations, labour law etc. review some literature to get
yourself back into shape - Mentally that is.

Use business consultants that have the required business acumen, good
qualifications, solid experience and who are familiar with the industry you are
interested in. Business consultants can provide excellent support to the business,
but it should only be for the short term, in order to get you and your business going.
There after only for specific interventions.

Business coaches and mentors can also be particularly useful to guide you and
assist you with keeping focus on the job at hand. Just like consultants their business
skills are important, but their competence as a mentor or coach i.e. having a proven
methodology is just as much so! Their methodology must ensure that your focus is
maintained on your objectives, not just clocking up hours.

Business consultants and specialist normally bill per hour. This rate can be anything
from a few hundred to a couple of thousand rand per hour. Other times and
depending on the nature of the business, the agreement can be on a retainer basis.
Normally this works out cheaper than the per-hour rate and the consultant and their
associates spend a certain amount of time each month supporting your business
dealing with the various projects you have identified during a gap analysis process:
The cost of a retainer normally being equivalent to a junior to mid level employee’s
salary per month.

One of the benefits of using consultants is that sometimes the gap analysis process
is done free of charge, and obviously that can provide you with great information to
start managing your business effectively.

Consultants that are familiar with your business also provide you the freedom to
have them stand in while you are on a well deserved break, or an intellectual ear for
any issues you may be facing but cannot discuss with anybody employed at the
business.

23
 Born for the storm

You do however need to shop around, and even speak to government agencies to
find out if they do not offer subsidized schemes for assistance.
Your broker should be able to assist in linking you to the support required.

9.4 COMMERCIAL ATTORNEYS

Please do not use divorce attorneys, even if they are close family friends or
relatives, rather use an attorney that specializes in commercial contracts: Someone
that can assist with reviewing the legal details to ensure that all legislative
requirements have been met and that you have been adequately protected.

Attorney’s costs vary greatly from a few hundred rand per hour to a couple of
thousand rand per hour. It is best to get an estimate from the attorney prior to giving
them the work, and then to hunt around for the best value. The most expensive
attorneys often do not provide the best value and service.

Also enquire as to what part of the process you could do for them, as they will be
charging you their rate even if a clerk does the work, e.g. dropping of and collecting
documents (another way your broker could assist of course). You want to use them
for what they are good at, not typing up documents, but reviewing agreements to
ensure that all legal precautions have been taken to ensure both buyer and seller
are protected

9.5 PROFESSIONAL BUSINESS BROKERS

9.5.1 INTRODUCTION
Call it bias, but surely a good business broker, who specializes in business sales,
has to add tremendous value to the business purchase transaction. They know the
area and they should know businesses in the area as well as how they perform
compared to other businesses– Knowledge that is worth gold!

They are the one group of service providers that should be able to guide you through
the entire business sales process.

Let’s take a closer look at how a good broker should be able to assist you.

24
 Born for the storm

9.5.2 THE BROKER’S ROLES IN SOURCING BUSINESSES FOR SALE

Brokers can source businesses from multiple sources and as such can be a good
source for business options. They normally have a database of business for sale,
but can also directly canvas businesses that could suit your profile. Saving you the
effort and embarrassment of having to do so yourself.

The broker can also be the contact between yourself and prospective business.
Allowing you to orchestrate events in the back ground, and have time to think
through responses, gain information about the prospective business and maintain
some anonymity if required.

9.5.3 THE BROKER’S ROLE DURING THE BUYING TRANSACTION

Bear in mind that normally a business brokers mandate is simply to marry up a
buyer and a seller. Once the seller and purchaser have signed the Memorandum of
Agreement, they acknowledge that the broker’s obligations in terms of the sale of the
business has been FULLY discharged and that the broker is not responsible in any
way for the carrying out of the terms and conditions of the agreement. However a
good business broker should offer the following FREE services to you upon request:

The drafting of Sale and Purchase agreements protecting buyer & seller,
Assistance with obtaining the services of an independent appraiser to value
the assets of the business.
Assistance with the obtaining of financial statements, VAT returns,
management accounts and bank statements of the business from the Seller,
as well as the present lease agreement and franchise documents if
applicable,
Assistance with compilation of a comprehensive bank approved business
plan,
Assistance with compilation of bank approved cash flow projection,
Assistance with compilation of a comprehensive curriculum vitae should
buyer not have one,
Assistance with the Collating and checking of all documentation before
submitting to financial institution for their consideration,

25
 Born for the storm

Continued interaction on behalf of Buyer, Seller and financial institution

should either party request such interaction, and
Once the deal has been approved by the financial institution to also assist
and provide guidance with regards to the business and VAT registrations.

The broker should also have the resources and network to assist with employment
contracts for staff, legal requirements, and any other business services required to
assist the buyer to purchase and start managing their own business.

9.5.4 BUSINESS BROKERS COMMISSION AND COSTS

Normally the brokers costs are covered for from the money paid, by you, to the
seller. Their commission is typically included in the selling price so is technically
“free” to you. However if you employ an additional broker during a deal, either as a
2nd broker to represent you, or to facilitate a private deal the costs is typically
calculated as per the services required. This is a typical contractual clause indicating
the cost of business brokers;

“XYZ BUSINESS BROKERS acting as agents for the Seller have carried out their
mandate and are the effective cause of this sale; and the Seller shall pay the
agent's commission calculated at the rate of R______ plus VAT
calculated on such commission at the rate applicable from time to time, which
commission shall be deemed to have been earned upon the signature of both
parties to this agreement and shall be payable on the proposed effective date, and
the agents are hereby entitled and authorised by both the Purchaser and the Seller
to deduct and/or claim payment of the commission from any deposits or payments
made by the Purchaser in terms of clause 3”

These services could cost anything from 5-10% of the purchase price. If you are
engaging a broker to act as your agent, the brokers could split the commissions
meaning that it costs you nothing extra!

26
 Born for the storm

9.5.5 FINAL THOUGHTS ON USING QUALIFIED BUSINESS BROKERS

Brokers can add tremendous value and save you untold frustrations during the
purchase process. They can run after the business owner and compile the resource
documents you need to make your decisions and apply for financing. But there are
many brokerages out there who will simply take your money, on the basis they
matched buyer and seller without ensuring the deal has been concluded.

ALWAYS DEAL WITH BROKERS THAT WILL HELP YOU ALL THE WAY AND
ONLY CLAIM THEIR COMMISSION ONCE THE TAKE OVER OF THE BUSINESS
HAS BEEN EFFECTED.

9.6 KEY THINGS TO REMEMBER ABOUT GETTING ADVICE

At the end of the day, you are the one who must make the decision whether to buy
or not. After all, you are the one who is going to be running the business and making
all the decisions everyday.

It is important to realize that all of your professional advisors will be focusing on the
negative aspects, or risk in the business. Legally and professionally they are trained
to say no.

This is not a bad thing, it means you can make an educated decision, carefully
weighing up the risks (negatives) and the benefits and make the best decision for
yourself.

If you can’t make your own decisions rather don’t buy or start a business. Stay
working for a Boss.

27
 Born for the storm

10 CLOSING – FREE VERSION

We hope that you found this introductory guide interesting and useful – it’s only the
start though! There is still so much more, in the full manual you will get a number of
templates, tools and will also learn

How to develop your personal profile and action plan

How to addressing weaknesses
About negotiating a deal with your service providers and getting the best
out of them
How to evaluate the prospective businesses both financially and non
financially
How to choose the business that suits you
About some of the finance options available to purchase a business, and
their requirements
About making an offer on the business
About the 20 key documents required to finalize the deal
About the standard clauses that should be in the sale and purchase
agreement as well as samples of additional clauses
About managing your business in the first few months
About Bringing your business plan to life
About general uses and main benefits of the business plan
About The contents of a business plan, and
putting your plan together

For more details on purchasing the full version of this document please email
manual@renwick-brokers.co.za for more information, and order details.

11. CONTACT DETAILS

Should you wish to contact us or source a member in your area please visit
www.renwickbrokers.co.za for more information.

28