Every year thousands of new businesses transfer ownership. Many of these business transfers return the rewards expected to the new owner, but unfortunately many also leave the new owner with a sub-standard investment. Rob Giffard, a CPA and principal of GiffardSim Accountants in Nowra said that whilst nothing can be guaranteed in any business transfer the one consistent element to a successful acquisition is when the purchaser engages an experienced accountant to conduct a pre-purchase business appraisal. "There is a long list of angry business owners who are kicking themselves for not taking professional advice before buying an existing business," Mr Giffard said. Every appraisal is unique; however, GiffardSim Accountants approach these assignments by offering clients two levels of engagement.

The first level appraisal, coincidently referred to as a level one appraisal, involves a basic analysis of the business compared to the asking price, while a level two appraisal is much more complex and will have a wider scope depending on the client's needs and expectations.

Level one appraisals

Level one business appraisals are designed to minimise the client's financial outlay by identifying early if the vendor's asking price exceeds the potential owner's required rate of return. While the assignment is limited in scope it is still an excellent negotiating tool for the buyer, in addition it provides more certainty as to whether the purchaser should or should not walk from the deal.

The price of this assignment varies, but it is fair to say that most small business level one assignments conducted by GiffardSim Accountants range between $600 and $1,500. Money well spent if you save yourself from parting with a significant amount of capital (usually $100,000 or more) for the privilege of little or no financial reward. "In many cases a level one assignment will identify that people are better off leaving their money in the bank because the interest they would receive would exceed the return on investment from the business," Mr Giffard said.

Level two appraisals

Level two business appraisals are much more detailed. From the very start this appraisal is designed to critically test the vendor's claims which have had an influence on the decision to purchase the business. It is primarily a due diligence task, but one which will vary in scope significantly, depending on the size of the target business. These tasks sometimes can take one or two days and on other occasions weeks are allocated. Normally though, due diligence for a small business takes no more than two or three days. One thing is for sure, it's usually a costly mistake not to test any vendor claims before you sign the contract.

The price of these assignments vary but as with the level one appraisals they are considered worthwhile when material discrepancies in the vendor's initial claims are identified, and the price of the business is re-negotiated down as a result. In some cases the variances are so significant the potential purchaser walks from the deal and saves themselves from a stressful and inadequate investment.

In summary

Purchasing a business is an exciting time for most people. However, do not fall into the trap of making an undisciplined investment for the sake of being expedient or saving a few dollars on professional advice. Remember it is not only the cost of the investment that you could lose, you are also tying up valuable capital, investing your time potentially at the expense of other opportunities, as well as putting your reputation at risk. Tread carefully and approach the entire deal professionally from the start. 

If you are after more advice, or would like to brainstorm some of the potential issues and considerations, feel free to contact Rob Giffard at GiffardSim Accountants.

<ENDS>