The Business Purchase Process in Thailand
Everyone has an idea about how they want to approach buying a business. After all, buying a business is a big decision, and is not generally something you do on a whim. But there are at least two parties involved – buyer and seller, and often a broker. The following process promotes a smooth transition and efficient use of both Buyer’s and Seller’s time in getting to the desired result.
Prepare to Buy
Before making any inquiries, the Buyer should know:
- what type of business or businesses appeal to them
- their budget
- their preferred location/s
- what income they expect from the investment
- when they plan to buy
- their finances are in order
- who will be managing the business (buyer, buyer’s partner, a manager already in place, someone new)
Identify the Business
Identify as many businesses that meet your requirements through online searches, brokers, industry groups and business classifieds listings. Seek details (more information) and clear up any issues you may not understand in the advertisements or sale offers.
Inspect the businesses that seem to meet your requirements. The purpose of these initial inspections is really for you to get a feel about whether you like the businesses and their locations and whether you feel they will be suitable for your needs. Often, the owners will not be present during these initial inspections. Take the opportunity while inspecting to talk with your broker and/or the owners (if present) and to ask them questions.
It is normal that prior to an inspection, you will be required to sign a Non-Disclosure Agreement. This agreement is required by Sellers and your Broker to ensure sensitive information about the business, even the fact that it is for sale, is not given to other people or parties. In some cases, Sellers will also require the buyer to provide proof of funds to the Broker before inspections and any further information is released.
When you feel you have visited enough businesses, short list your options, and if needed, re-visit the short-listed businesses to narrow your options. Buyers sometimes like to revisit a bar or restaurant without notice and have a drink or meal to see how it performs. In these cases however, it is very important that you do not allow staff to know that you are a potential buyer – most probably, they don’t even know the business is for sale, and it is often best for the owner and buyer that it remains that way in the initial proceedings. Following your visit, or during the visit if the situation allows, ask more questions if you need more information.
Determine Offer, Terms and Conditions
When you have decided upon a business, decide what you would like to offer the current owner for it, and decide the conditions and terms under which you would like to buy it. There can be many conditions and terms that you might want and it would be impossible to cover them all here, but here a few common ones:
- Let’s say the owner of the business has told you that the business generates 100,000 baht a month in net profit. Obviously you will need to verify this in some way. So one of your conditions is that the owner is able to prove net profit of 100,000 baht a month over (say) the last 12 months.
- It might be important for you to obtain a 3 year lease with an option to extend and that there will be no rental increases during the first 3 years. In this case, your condition is that the Landlord will offer a 3 year lease with an option to extend and that there will be no rental increases during the first 3 years.
- You might be concerned that the Seller, being a very successful ‘bar owner’ (for example), may set-up shop next to you and take all of your customers. To prevent this, you may state as a condition of your purchase, the Seller is not to operate a bar within (say) 3km of the bar being sold, for a period of at least 3 years.
Your terms relate to when and how you want to progress the purchase. When are you going to make a deposit, when will you finalize payment, how are you proposing to make payments (cash, cashiers cheque, bank deposit, etc), and other related issues.
You now know the price you would like to pay, under what conditions you will progress, and your proposed purchase terms. You have the information you need to put together what some agencies call a ‘letter of intent’. You are now ready to make an offer with your conditions and terms. The offer must be in writing and must be submitted to your Broker for on-forwarding. At Asian Business Brokers, our policy is that all written offers, regardless of the amount will be submitted to the owner for consideration and advice.
Using the case example above, your written offer would look something like this:
I offer 2 Million Baht for XYZ Bar as inspected on Friday 22 January 2016, under the following conditions:
- the stated net profit of 100,000 baht a month is to be proven to me by submission of the monthly records for the period 1 December 2014 to 31 December 2015,
- the landlord is to confirm that I will receive a new lease from taking over for 3 years and that there will be no rental increases during that time,
- the current owner is to agree in writing that he will not own or operate a bar within 3 km of XYZ Bar for a period of at least 3 years after handover.
Upon confirmation of my offer and conditions, my proposed terms are:
- I will pay a 10% deposit and will pay the remaining balance and take over the business on 1 March 2016
- The deposit will be paid by Cash, and the balance by Cashier’s Cheque.
If you have prepared correctly and have your finances in order and are ready to buy, then your offer will be genuinely considered by the Owner.
Secure the Business
Once your offer, conditions and terms have been accepted, you should immediately move to take the business off the market and prevent anyone else from buying it. To do this, you must pay a deposit and sign a ‘Sales and Purchase Agreement’ (SPA) with the owner. This agreement will be prepared for you by your broker. The agreement will detail the dates and payment amounts and the conditions and terms under which the sale shall progress. Typically, the agreement will bind the buyer to settle if all the conditions and terms are met, and if the conditions and terms are met and the buyer does not settle, the owner may keep any deposit made and may re-advertise and/or sell the business to another buyer. Conversely, if the conditions and terms are not met, then the buyer may pull out of the sale and be refunded any deposit made.
Transition and After Sales Help
When the deposit is made, and prior to settlement, your broker and/or the Owner will provide you with any material necessary under your agreed conditions (including any due diligence checks agreed to in the conditions of the sale). Assuming the conditions are met, then the sale may proceed. If the conditions are not met, the buyer has an option to accept the situation of the unmet or changed conditions, pull out of the deal and receive a refund of deposit, or re-negotiate the purchase price taking account of the unmet or changed conditions.
It is very common for Sellers to offer their services to transition the business to a buyer for a short period following settlement. If this is important to you, please ensure you state this as one of your conditions of purchase.
There are a few common areas where Buyers make mistakes and (generally) fail to buy.
- People who enter into small business for the first time, often ask for guarantees of future income (revenue and/or profit). By the very nature of small business versus paid employment, there are no guarantees. The seller cannot guarantee your success, your broker can’t and even you can’t, but let’s face it, you are probably the person who will have the best idea about whether you will be successful. There are no guarantees of future income or profit in business. If you want certainty of income, then you probably need to look at being a paid employee and not a small business owner.
- Conducting due diligence is expected and encouraged, however there is a right and wrong time for it. Conducting due diligence prior to making an offer with your conditions and terms potentially wastes everyone’s time. Put yourself in the Seller’s shoes for a while. Let’s say after your initial inspection, you want to conduct rather involved due diligence – it will probably take a few days (maybe longer). And let’s say the owner agrees and you both spend (say) 3 days on this task. And, at the end, you say to the owner, I know your asking price is 6 Million baht, but I offer you 3 Million baht. In all likelihood, the owner is going to say no, and has then just wasted not only their time and resources, but yours too. Due diligence is carried out once you have agreement on your offer, conditions and terms.
- Buyers are sometimes very demanding about the financials presented to them by Sellers. You should be aware, that although you may understand small business accounting and profit centre accounting very well, most (and I mean MOST) small business and SME owners keep sub-standard records, and because there is no requirement for sole traders and partnerships to have their books audited, they are not audited. If you are buying a small café, or bar, or restaurant for example, you should understand that the Seller’s strong point is probably not their bookkeeping and accounting skills. And you should also understand the value of the investment versus the risk. If you are uncomfortable with the state of the books as presented, either do not proceed, or make allowance for it in the offer price and/or conditions.
Written by Parinee Insoongnoen (Palm)
Managing Director Asian Business Brokers (Thailand) Co., Ltd
for Asian Business Brokers © 2016
7 February 2016