Buying a Business

A professional Business Broker can provide you with many different business opportunities including some that you may never have considered. Frequently we have people buying businesses they had never considered buying until the Business Broker explained how this business could be suited to them. Many of our Business Brokers have owned their own businesses, understand and relate to the process you as a buyer are going through and can provide you with helpful information on the business you are considering buying.

An experienced specialist Business Broker has industry knowledge that can assist you when considering buying a business and will normally have a selection of businesses for you to compare. Our brokers have prepared the necessary information, gathered financial documentation and compiled it in an information memorandum for you to review.

There is no cost to you in buying through a Business Broker; their fee is paid by the seller.

Businesses and franchises wanting to grow quickly can utilise LINK's expertize. A Buyer's Mandate authorizes LINK to approach confidentially, on your behalf as Buyer, a business you have identified to provide you with economic or strategic benefit when acquired. LINK can also seek a potential acquisition target that meets your needs. As a franchisor, you could be looking at buying an independent entity that could be rebranded and added to your chain of stores. You will enter into a contract where terms of the mandate include a commission payable to LINK based on the value of the business that is subsequently purchased.

When you have decided on a business to view, start by looking over the property – the physical environment. If appropriate, for example with a hospitality business, start with the street appeal. This creates the initial appeal to customers. Does it appeal to you? Would you like to stay there or dine there? If you are satisfied, move to the operational areas.

Think about customer movements and interaction and, if appropriate the age, condition and efficiency of equipment and fit out items.

With an agri-business thoroughly inspect the equipment, machinery and operational facilities.

The owner/manager’s accommodation is the next to investigate. This part of the inspection is much like buying a home, so you must be happy to live and work in what is offered.

From here you can step back outside and survey the grounds/layout/street access. Check out where you will park your vehicles, delivery van, extra cars and the like. Ensure this space is large enough for your needs but doesn’t impede on customers’ ability to come and go.

The financial environment requires an assessment of income, expenses, profit and value. To make a proper assessment of the financial position of the business you will need:

• at least 2-3 years of annual accounts as filed to the (Bureau of Internal Revenue (BIR)

• Value Added Tax (VAT) returns for the last 12 months

• the lease document or title

• rent review dates/periods

• an appraisal of the land and buildings (at your own expense)

The accounts offer an insight into how the business is being operated. Some expenses are not necessarily strictly related to the business, but rather a personal benefit or discretionary. It pays to examine the following:

• Advertising – are there any sponsorship or private interests?

• Entertainment – is this a necessity or discretionary?

• Insurance – is this entirely business related or does it include vehicles as well?

• Interest charges – these are a factor of funding not trading, so consider your own financial position when looking at interest charges.

• Legal costs – one time charges.

• Electricity/telephone/internet - almost invariably include personal use such as cellular phone

• Rent – amount and next review date, plus what is the rent to revenue ratio?

• Repairs and maintenance – one-time or recurring?

• Subscriptions – business or personal?

• Vehicle expenses – if more than minimal does it include running of personal vehicles?

• Wages – are they staffed positions or owners?

Your LINK Business Broker will assist you to total the declared profit and personal/discretionary expenses to ascertain the total personal financial benefit. In doing this, you will have a good view on how the business runs, day to day, and be alerted to matters that need further investigation. Invariably, a critic of the accounts and profitability leads to an assessment of value for money.

All this leads to a key question; how much should you as the buyer pay for what is being earned? There are some calculations required to determine a fair range, though it is not the scope of this article to deal with the detail of preparation of a Broker’s Opinion of Value. However a buyer should seek advice from both your LINK Business Broker and professionals who work in the industry and whose job it is to know business values. You should look at the wider market too when making deliberations on an offer, working from an informed position.

The benefits of a lease are that they can be cheaper than a Business with Property - they provide a better return on investment and the business may be resold for a profit if the Lessee improves the business. A Lessee purchases the chattels and the right to run the business for the term of the lease. This is the upfront price of the lease. The Lessee also pays the Landlord an annual rental and meets many of the monthly dues.

It is important to be aware of the length of the lease as a business with a short term lease may be difficult to resell. Many landlords will sell additional years on a lease, but they are not obliged to do so. It is very important to understand the obligations of the Lessor and the Lessee, especially to do with maintenance. A good operator can make a healthy annual profit from a lease without having to fund the acquisition of the land and buildings.

A key part of most businesses is the lease, the commercial relationship with your landlord. Ask for a copy of the lease early on once you have determined your interest in a business. Read the lease and understand it. Remember that your landlord will be familiar with every aspect of the lease, as this is the instrument that is used to determine rent income and protect the investment in the property.

Potential issues to look out for:

1. A lease should be registered against the property title so as to be able to be used as security for any finance requirements by the incoming owner. The long term nature of leases may make them suitable for use as security for finance.

2. Ascertain whether maintenance on the property is up to date. Record in writing all liability for potential maintenance hot spots with the landlord and outgoing owner before closing the purchase.

3. Create a check list of potential areas involving maintenance or the need of renovation. Include plant and equipment, general exterior weather resistance (water tightness), painting – inside and out, fencing, driveways, plumbing and wiring, toilet amenities, kitchens, telephone systems.

4. Investigate the number of remaining lease years. Often the number of remaining years may have an impact on the saleability, and therefore value of the business as the right to trade is diminished. An experienced finance lender may readily advise you if the term is sufficient to cover their lending criteria. Extending the lease is quite common. The landlord may well be approachable to extending the lease years. There is no set price for acquiring extra years.

LINK will liaise with your lawyer who will advise you on the merits of the terms and conditions in a lease and prepare the lease documents.

A benefit of a Business with Property is that you own the land and buildings as well as your business. Because the initial cost is much higher, the return on investment is usually lower than that for a Lessee. However, the property may attract capital gain. The owner of the land and property has the option of selling the business lease, which will reduce his capital outlay and provide a steady rental return.

For example, the benefits that farm operators enjoy include the fact that their business provides them with a home, and many of the usual domestic expenses, such as electricity, realty taxes, insurances etc are met by the business. The equivalent value of this can be considerable.

When looking to buy a franchise business in the Philippines, you must first make yourself aware of the franchise sale process.

Franchising is often described as being like a marriage – a long-term relationship where both parties must trust and respect one another. Like a marriage, both parties need to be passionate about the benefit of the relationship, and get to know each other well before making that commitment.

You will want to ensure the franchisor is trustworthy, ethical, and professional - a person or company that you want to do business with. Equally, the franchisor will want to check you out – selecting the right franchisees is one of the most important things a franchisor can do.

The Steps in Buying a Franchise Business

1. Planning

Firstly identify how much capital you have to invest to start your own business under the umbrella of an established brand. Your planning should include identifying the capital, skills, and resources you have available, industries that excite you, businesses that suit your lifestyle and family, and preferred locations.

2. Making Contact

With many franchises available in the Philippines, there are a lot of opportunities to select from. To speed up the process, your first call could be to LINK as we represent many franchise systems internationally and in our initial meeting we can assist you in identifying the types of franchises suited to your skills and finances. If you have a specific franchise you have already identified you want to find out more information about, then we would commence by sending you an information pack.

3. Information Pack

The information pack you receive will usually contain an introductory letter, a brochure, a Non Disclosure Agreement (NDA) and possibly an application form. The purpose of this pack is to give you a broad outline of the business and its track record - its products and services, history, and cost. It will often spell out the skills the franchisee needs, such as 'ability to motivate a team' or 'enjoys the outdoor life'. If after reviewing the information pack you like the business, your next step will be to complete the NDA and schedule a meeting to discuss it in detail.

4. Non Disclosure Agreement (NDA)

Completing the NDA does not commit you in any way, it merely shows you are serious about investigating that franchise. Most franchisors will require you to sign this to confirm that you will not disclose information about their business to any third party other than your professional advisors such as your banker, accountant or lawyer. This protects the franchisor against commercially sensitive information falling into the hands of their competitors.

5. First Meeting

The first meeting is likely to be informal and will give you time to find out more about the franchise. If you are looking to go into business with a spouse or partner, it is important that they attend the meeting as well.

Prepare for this meeting by studying the information you have already and by finding out as much as you can about the franchise. If possible, visit several outlets as a customer (ensure confidentiality is maintained), check out their website and watch out for advertising or news stories.

In return, you will be asked questions. The franchisor wants an 'overview' of you as a potential franchisee. They will ask about your relevant experience to understand what motivates you to consider buying this franchise. This first meeting should give you a clearer idea of whether this opportunity is the right 'fit' for you. If after this meeting you are interested in proceeding further, your next step will be to fill out and return the application form.

6. Application Form

The application form is not a formal contract and does not commit you to anything. Many potential franchisees are surprised by the number and personal nature of the questions in the application form – it is the franchisor’s way of ensuring you are serious. It will ask some standard questions such as your previous work and business experience, and referees. It may also ask some searching questions about any partners that may be involved and your financial position.

Why do they want this information? They need to ensure you have the funds and security to purchase the franchise, and working capital to get started. It is vital that full, honest and complete details are given to the franchisor so they can determine your chances of success.

7. Disclosure

Once your application has been received by the franchisor, you can expect a further meeting. A good franchisor will take care to ensure you are given all the factual, detailed information you need to make your decision to buy the franchise or not. This generally takes the form of a prospectus ('disclosure document').

Franchisors are cautious about making projections about how profitable a new outlet will be. While some service franchises provide guaranteed income, it is important to realize that most franchisors cannot guarantee your business results. As a prospective buyer you need an indication of sales, costs and potential return on your investment before making a decision. The disclosure document should contain enough financial information for you to evaluate the opportunity and formulate your own business plan.

Some franchisors will ask you to pay a deposit of perhaps several thousand pesos when you lodge your application, or before you receive the disclosure document. This is not uncommon, and is a technique used to identify those who are seriously interested. Any such deposit should be fully refundable if you decide not to purchase the franchise.

One of the most important things to check is whether the franchisor is a member of the Philippines Franchise Association (PFA) - their documents must meet a certain standard and they are bound by Fair Franchising Standards (FFS).

8. Interview

At this stage, you can also expect to be asked many more personal questions, in much the same way as you would in a job interview. Although you are not applying for a job, you and the franchisor are both determining whether you can work together in a franchise relationship over a period of time. Just as you have been evaluating the franchise, the franchisor will be evaluating you as a potential franchisee.

Most small businesses involve some sales activity and require good communication. Franchisors are generally looking for someone who is a team player, can follow guidelines, and listen to advice, likes dealing with the public, customers and employees.

Some franchisors prefer that you have no previous experience in that type of business, so they can train you to use their system without any preconceived ideas. They want someone who is open-minded, logical, organized, and has attention to detail.

Franchising doesn't suit some independently minded people. As a franchisee, you exchange security, training, support and buying power for independence. A franchisor may limit what you can sell, opening hours and how you promote your business. Franchisors are looking for 'intrepreneurs' rather than 'entrepreneurs' – people who are prepared to work within the boundaries of a defined system and acknowledge that the franchisor has expert knowledge of the business, while having the drive and ambition to develop and build their own business.

Be reassured by a rigorous selection process – if your application is accepted you know you have a greater chance of success. A good franchisor wants to ascertain whether you have the ability to learn to operate the franchise.

9. Franchise Agreement

If both you and the franchisor are happy to proceed, you should get a copy of the franchise agreement. This is the legal document that forms the framework for the franchise. It is a legally binding contract which defines the relationship, roles and obligations of the franchisor and franchisee. It is recommended that you seek professional legal advice before signing.

10. Other Franchisees

The disclosure document should contain a list of existing franchisees and their contact details. Our advice is to phone and visit as many as possible, and ask them the same questions you asked the franchisor. By doing this you will get an overall picture. You will get a range of opinions. Ignore the extremes, and look at the overall picture. Does it live up to the franchisor's promise?

This is also the time to investigate the franchise systems. Request a review of the manuals and a demonstration of software provided. You probably won't get to take them home, but you should be given the chance to look at them and see how comprehensive they are – after all, the system is what you are buying.

11. Professional Advice

Once you're this far through the process, you will have a clear picture of the franchise and whether you want to join it. Now is the time to seek professional advice – commercial, financial and legal.

On the financial front, an accountant is needed to verify the financial information provided by the franchisor, and to help you formulate your business plan. If you are thinking about investing your hard-earned money in a franchise, put those figures before an accountant.

You'll also need a lawyer to examine and explain the franchise agreement to you, use advisors who have experience in franchising – because not all do. Lawyers and accountants who are specialists in franchising can provide better advice than those who don't.

Don't expect your lawyer or accountant to approve or endorse your choice of franchise; they are paid to be cautious on your behalf and to point out potential pitfalls. Don't be too discouraged or back out of a franchise you are keen on until you've identified if the issues raised are real.

12. Make Your Decision

With a franchise you are not in business by yourself, but you are in business for yourself, and it will be your own business. By now you will have collected more information than most business buyers, and be well equipped to make an informed decision. Make your own decision based on your evaluation and risk assessment.

If you decide to proceed and purchase the franchise and the franchisor accepts you as a suitable franchisee, then you will be required to pay the franchise fee into escrow to secure it. Any other payments will be required as per the schedule in the disclosure document.

Congratulations – you are now part of a franchise. Setting up and training for your new business can start! Welcome to the world of self-employment. There are few joys as great as running a profitable business with the support of the right franchisor, and we hope that you enjoy precisely that.