When buying a business, what you see may not be what you get, writes Hendri Pelser

When Mpho Radebe*, the owner of Future Bricks in Pretoria, bought his business, he didn't get what he paid for. It ended up costing more than twice its worth.

"I was desperate. I was looking for a business to buy for more than a year and a half. I was tired of looking and I needed to change my life circumstances," he says.

He admits that he didn't check every detail.

"I entered an industry I knew nothing about. I received a list with the business's equipment and its value. But these values were not reasonable and I did not double-check the condition and the capacity of the machines."

Mpho soon realised that the machines did not do what he was told and that their capacity was nowhere near the quoted figures.

"It comes down to knowledge, and I assumed the seller was being honest. I did not want to start a new business and wanted a going concern that made money. The financier also took my word on the price of the business and the equipment, and that was my fault.

"I went through the books, but I accepted the figures and production capacity as given."

Making Lemonade

Mpho ended up paying R1.8-million for a business he now knows was not worth more than R900000. He also had to put another R400000 into the business to replace machinery and expand capacity.

But he has made his peace with his mistake and says that the business is slowly starting to realise the potential he always saw in it - last year turnover topped R8-million, whereas the previous owner could not achieve a quarter of that.

"I saw the potential of the business, but we paid too much for it. Always look for the real reason the business is for sale - no one sells a business that is doing well. The reason they give you for selling is never the truth. But, don't let this put you off, because everyone manages a business differently. If you see the potential of the business, then build on that."

180 Degrees

At the other end of the spectrum is Makelello Phinias. She recently concluded a deal to buy a Sandwich Baron franchise in Midrand.

While the deal went through seamlessly, it took Makelello more than five years to find a business she was ready to invest in. She would identify a business based on an advert and inquire. But she did not realise the secrecy in which many deals are shrouded.

"They (the seller or broker) never wanted to answer the question why they were selling without me signing a disclosure agreement. I did not like the way they went about it. It felt too cold for me and I was not comfortable," she says.

"If I'm dealing with someone who does not trust me and writes me off, then I don't respond very well. This is a life-changing decision and I needed to feel comfortable."

Makelello, a chef, wanted to buy a business that would draw on her expertise. A friend also owns a Sandwich Baron and she became interested in the concept.

But she took her time to conduct research and spoke to at least four different franchisees before making a decision.

Homework

"I did a lot of research to find out how many stores there were, how they were performing and what the brand was like. I also set up meetings with other store owners to check out how they were coping and how they found running the business.

"This was a business transaction that would affect the next five years of my life, and I needed to know that I was dealing with people with integrity."

She also investigated the business's location and decided it was a good choice because of the strong local business and residential markets.

"It takes a lot of patience, and do not think that you know everything.

"Research is very important. Speak to as many people as possible. It takes a lot more out of you to be self-employed than to earn a salary."

*The name of the entrepreneur, the business and its location has been changed to protect his identity.

Questions to ask

• How long has the business been around?
• Is there a lease to take over and when will it have to be renegotiated?
• Do stock purchases and turnover match?
• Does the gross profit margin make sense?
• Is the business in the right location?
• Are the assets in good condition?
• Are you willing to walk away from the deal?
• Does the deal sound too good to be true?