Are you considering buying a business? Then it’s time to get jacked up and informed on what you need to know before you do before you approach the bank for a business loan.
Business plans are one of the major components to starting a business or buying an existing business, and also a prerequisite for a business loan. When you have a good business plan, it defines the business’ mission and objectives, new ownership, the sales focus, target market, strategy, management team, and financials.
The reason this list of items is particularly important when you are purchasing an existing business is due to the level of uncertainty involved. When you’re ready to purchase a new business, you’ll be prepared after reading the following tips on how to plan for the process.
The first step is to begin with existing data
Before you even get started, collate all the existing information of the business from preceding owners. You might even be lucky enough to receive a business plan from one of them.
The fundamental function of a business plan is to clearly define the prospects of the business. With that in mind, serious, or rather sophisticated sellers usually include a business plan as part of their selling dossier. The plan would consist of financial history, any prior management and all business information, history and prospects.
Leave naivete at the door
Remember that the sellers are trying to sell the business, therefore certain things on the plan could be inflated to enhance the appeal of the business. When provided with a plan, if anything looks out of place, request the bank statements for proper checks to ensure that everything is, in fact, a realistic representation of the business.
Whenever and wherever possible, compare and scrutinize the seller’s plan for the business with the past financial and market information from objective sources.
Have as much information regarding financials as possible
You would typically be furnished with previous financial statements, tax information, and profit and loss financials. Don’t take everything at face value.
If there is a document with figures on it, find out where it’s drawn from and request that document. For example, when provided with the profit and loss statement, request the accountant’s documents or bank statements to closely compare and ensure that the figures match.
An interesting and telling piece of information would be to see if the seller willing to allow an audit? The last thing you want to do is gear yourself up to approach the lender with finances that you’re uncertain of. The bank will pick up on red flags.
Beware the promise of growth in the proposal of sale
When promising growth doesn’t match the previous growth, it’s a good time to question this. One can simply not project a false growth chart without reason for this. Make sure this part is realistic.
You might find that they have a good reason which can ease your mind, for example, having needed capital, ageing, etc., so don’t be too quick to denounce the projections either.
One of the fundamental questions to have answered is why exactly the owner wants to sell a business that, presumably, would be doing well enough for someone else to want to buy! The answer will tell you whether to trust the figures or the way the business was being run.
Don’t trust everything you read or hear
Don’t trust everything you hear, do yourself a favour and whenever you’re able to, visit the business in question, try and get information out of the customers through small talk, use the services, or whatever is on offer.
Acting as a customer yourself will show you what others experience when they are there. Retail is even easier, you could park off at a spot near the store and simply observe! Watch for the number of customers.
Make estimates on turnover
If you have the monthly figures and aren’t sure whether they’re true or not, do a few sums to determine whether or not it’s even possible. If, for example, the monthly amount reads R250,000 per month, then divide that by four to get an average turnover per week.
Take that amount and divide it by the number of days the business is open in the week and with your answer you can easily see whether that figure is realistic given the product or service and the hours in the day. If it doesn’t add up, then you know to question their figures.
It’s time to make a choice, make sure all your questions are answered
Find out whether the business is a Pty (Ltd) or registered under a CC, then find out if there are any existing business or vehicle loans on the company name.
The structure of the sale is also important because it will explain how you are taking it over and also what you are taking over. Are you just purchasing the assets, or are you purchasing the brand or company name?
Get a good understanding of the personnel and their set up at the business and whether they come with the sale of the business.
Final step – Approach your lender for finance
At last, you are satisfied with the research of the business, as well as the business plan that you have drawn up for the lender to consider for your business finance approval.
Top tips for approaching a bank for business loan
- Have all the financials and tax details ready
- Prepare all of your personal details and information and those of all company directors or shareholders
- Prepare the business plan and cash flow projections
- Consider hiring a professional to prepare your business plan and financials
- Research the banks offerings before hand and ensure you meet their lending requirements at lease on a fundamental level
If you have done everything you can, then you’re all set! Remember to maintain a level of realism along with your abundant enthusiasm when you meet with the bank, anything can transpire, but if you’ve done your best, then the ideal solution will!