Business Advice

Ground rules outlined below can be useful in providing assistance to Purchaser of a Business in finding the right business. 1.  Take Your Time  When buying a business, it is important that purchaser allows for a considerable time (2-4 months) to find an appropriate business. Since buying a business requires a major commitment on purchaser’s part, it is vital that the purchaser takes his/her time and makes an informed decision. 2.  Conduct Industry Research Once the purchaser has decided on the industry in which he/she wants to buy, it is important that the purchaser undertakes relevant industry research considering points such as industry’s performance, no of businesses operating in the industry, main suppliers and customers etc. This would provide purchasers with an increased ability of analysing a business in that particular industry. Information about the industry can be obtained from library, trade magazines, accountants, consultants etc. 3.  Undertake Educational Courses   Undertaking a technical course specific to the industry chosen is a good way of obtaining additional information about a industry and the management issues involved in that industry. 4.  Don’t Buy the First Business Examined Examining a number of businesses that are for sale in their particular chosen industry would give the purchasers a better understanding of certain working aspects of the industry like profitability, staff levels and working hours etc. 5.  Obtain a Second Opinion Purchaser should get a second opinion on the business they find suitable from an individual who is independent of the transaction and also has the relevant industry knowledge like accountants or business valuer in order to make sure that no important details have been overlooked. 6.  Where to Find a Business  Purchaser should make use of the numerous avenues available to them in order to find the right business. Purchaser can look at the following areas for possible businesses to buy. Classified Advertisements Direct Approach Business Brokers Trade Publications Specialised Magazines Internet by Paul J St. Clair, Chartered Accountant and Taxation specialist - ph 02 9221 4088

In this article we’ll get down to the nitty-gritty of how to get going in a difficult economy. When we’re done, you’ll be armed with a creative, industrious, positive attitude in the face of hard times – the same hard times that cripple your competitors. If you’re reading this article in the middle of a difficult economy – and the chances are that you are – it’s vitally important to take careful stock of the psychological and transactional changes going on in both the minds and lives of your market place and in the minds and lives of your competitors. Look at the attitude and actions of your suppliers, vendors and support services. You’ll probably witness the following predictable reactions. Your competitors are feeling battered. Their sales and marketing approaches are generating meager results. They don’t have tried and tested plans in action. And they don’t have a proactive strategy for capitalizing on all things going awry. So typically you’ll see them pulling back and trying to cut costs to maintain a holding pattern. Or they’re redoubling the same ineffectual efforts that didn’t really work during the good times but got masked by the upward force of the economy. So what do you do? Set up an offence and defense – Offensively, you look for gaps, weaknesses and hidden opportunity in all this adversity. And believe me it exists in droves. Defensively, you stop doing anything that isn’t working. Test, monitor and measure your results and you’ll know immediately when something isn’t working and you can stop wasting time and money on it right away. This will help you guard against loss, but you can do better than that. Your next step is to go beyond merely surviving and to begin enacting changes that will ensure your business continues to evolve. What are some of those direct and impactful ways? Well, we’ve talked about the importance of joint ventures so let’s start there. Your first plan of action should be to structure joint ventures with groups who already have access, trust and credible relationships with market segment you want to reach. The key is to move your costs from fixed and speculative to variable, contingent and result certain. But it gets even better. These steps comprise only stage one of your crisis growth strategy. Your entire outlook and modified approach are based on gaining more direct, favorable, predisposed and highly credible access to your market in unconventional (but highly ethical) ways – and these are ways your competitors would never think of. It’s your opportunity to make your product or service stand head and shoulders above the rest. Think about it. When your competitors are too blinded by their own panic to reach out to the market place in a meaningful way, that’s when you can establish yourself as the pre-eminent, most trusted, reliable source whilst everyone you compete against is bleeding red ink. Life Time Value of a Client You can engineer countless performance based deals with other businesses when you are able to make them irresistible propositions. The key to success at structuring no-cost performance deals is to know your allowable cost for acquiring a customer. Most companies don’t analyse what a lead, prospect and converted first time sale really costs them. And until you know that piece of information along with the life time value of the buyer, it’s impossible to make performance based deals with the media and other companies. In a crisis economy when sales are down along with consumer confidence or motivation you need to make offers, propositions and proposals that are irresistible, unbeatable and non-refutable. And in this context especially remember the life time value of your buyers. In any economy the goal is to start the buyer relationship as quickly as possible, because the sooner they buy that first time, the sooner they’ll come back to buy again. So your goal in good times or bad is to lower their resistance, lower the barrier of entry and reduce the hurdle. Make it easy for your prospect to say “Yes.” Penetrate New Markets  In a crisis economy odds are great that your competitors are focusing their attention on the same basic market that you’ve all targeted all along. If everyone else is depending on either their newspaper ads or Yellow Pages to generate business, you can tap into overlooked, undervalued alternative sources. For one thing, there is an economic connection between doing one type of improvement and the incentive to do more. For example, people who remodel a kitchen suddenly see that the rest of the house looks a bit shabby. So they re-carpet and re-paint and re-do the driveway, roof, and bathroom and so on. It’s the same for people who add a pool or spa. They re-do their landscaping, re-envision their garden, and add an extension to their veranda. My point? Well let’s say you’re the contractor remodeling a bathroom. You can go to all the people who do non bathroom remodeling such as kitchen re-modelers, carpet companies, and roofing people and make deals to get their client’s names after their work has been completed. Their business is potentially a huge source of future business for you. What’s next? Look at your basic business – not what you sell, but what you don’t sell that your type of buyer or client needs, wants and will buy in a crisis economy. Most business owners see themselves as being highly specific sellers of a single category of product or service, yet the same people who buy from you also purchase complementary or related products or services before, during and after they buy from you. By adding additional back-end products or services that you can source from quality providers who, like you, are struggling in this crisis economy and will be open and willing to structure very advantageous deals where you offer their products and double, triple or even quadruple your revenue. Once you’ve mastered the art of growing your business regardless of what is going on in the surrounding world, your business will always thrive if you action these ideas. In a downturn, fewer people are taking the steps they would in rosier times. Your competitors are struggling because they possess the mentality that says “No one is buying”. You on the other hand are growing your business because you know that whilst the pie might be smaller, your piece of the pie is getting bigger and bigger. For further information on how your business can benefit from these and other exciting business and marketing tactics call Bob Lyon direct on 043 883 0937 or get your FREE report entitled “How To Sell Your Business At Your Price … And Cause A Stampede Of Prospective Buyers Literally Begging For Your Time” by simply going to  www.betterbusinessreport.com/ab4s1.htm

1. PRIDE You think your business is worth a lot of money because you have had it for 15 years. Unfortunately it doesn't matter how long you've run your business. Its the value proposition that you're offering to the buyer that matters. You could have a business that you ran for 20 years and it could be worth nothing or you could have just started up a business and it could be worth millions. Business owners think that because they put 20 years into their business they deserve to be rewarded. No one cares how long you've been in the business 2. GREED You think your business is worth the amount of money you need to retire. The problem is that it does not matter at all to the buyer what you need to retire. The buyer only wants to investigate what future maintainable earnings are there for him or her, or what value there is in the assets. Otherwise your business is worth far less than your expectation. 3. FALLACY Accountants and business owners alike apply the wrong multiple to the wrong profit figure. There are generally accepted ranges of multiples that are applied to particular profit classes. One such multiple, called an EBIT multiple will be smaller than another class called EBITDA for the same business. (Refer to our website glossary of terms for what these acronyms mean) Hence you would need to apply a smaller multiple to an EBIT than to an EBITDA. You would be surprised to learn how many so-called experts apply the wrong multiple to the profit figure. 4. HISTORIA This is the sin of looking to history when looking for the profit figure. History and past events are relevant but are only as a guide. Many people look to the most recent tax return or a three years average as though it was the only profit marker. A buyer is only interested in next year’s profit. Work on that one and leave last year’s as a guide only. 5. EGO Business owners think their business is worth the same to a buyer as it is to them. They think of themselves and not the buyer. The mistake they making here is not taking into account the risk of the transaction. The risk of the transaction can be the risk of losing 10% of the clients or 90% of the clients, depending on the relationship that the business owner has with the clients. There are many other risks of the transaction including loss of key staff, degrading of relationships with key suppliers and other risks inherent in a new boss moving into the Managing Directors office. The key is to take steps to remove the risk from the transaction. 6. HOPE As opposed to Historia, which is obsession with the past, Hope is the opposite. It is empty belief. “I hope my business is going to improve.” “I hope my business will be worth a lot of money.” “I hope someone will buy it” Sorry, it will only improve in profit and value and sell for good money if you make it happen. Optimism is a great way to live. Hope is just desperation. 7. BLAME Business owners like to blame others for the state of their business. “My business is worth a million dollars and if its not it’s the fault of the government, the economy, my opposition, the internet, Google, interest rates, the high dollar, the low dollar, consumer confidence, business confidence...” anything that lets them off the hook. Blame excuses action. No action means that the business will never grow in value. If You Want To Maximise Your Business Visit: www.bc.com.au/maximise.html For further information contact Tony Arena (Managing Director) Phone: +61 2 9439 3399 Email: [email protected] www.valueabusiness.com.au      

The words “buy” and “sell” are often used in relation to the acquisition and transfer of franchise businesses, but what do franchisees actually buy? The overwhelming majority of people who are attracted to franchising are first timers in business who are drawn by the branding, support and infrastructure provided by a franchise chain that takes the pain out of reinventing the business wheel. Without prior experience in business, potential franchisees have no comparable frames of reference in their decision making process, and consequently often revert to the same types of processes used in other major acquisitions, such as the purchase of a car or a house. In buying either a car or a house, the purchaser is required to still undertake their due diligence to protect their interests, and for houses (and most cars) will also need to sign a contract. Of course the nature of the due diligence between the purchase of cars and homes compared to that required for the acquisition of a business is very different, although many of the same principles apply. One of the commonalities is the emotional investment in the decision being made. People buy the cars they drive and houses in which they live based on a number of factors, all of which can be summarized as simply a liking for the car or the house. This emotionally-led decision (along with the elimination of options the buyer didn’t like) then becomes the frame of reference by which they also seek franchises (ie. they seek to acquire one they like], without appreciating that liking something may not be enough to actually make any money out of it. A key difference between the transaction to acquire a car or house and a franchise is the outcome itself, which many potential franchisees don’t fully understand up front. The outcome referred to here is ownership. When a buyer puts their money down to buy a car or a house (or a fridge, TV or anything else], the item becomes theirs. This ownership of the item (even if it is mortgaged to a financier) allows the buyer great freedom to do pretty much what they please with the item. If they don’t like the colour of the house, they can repaint it. If it’s too small, they can extend it. If it’s too old, they can renovate it, and so on. Likewise with buying a car. The new owner can drive the car fast or slow, on bitumen or on dirt, with roof racks or without, and can accessorise the vehicle to their heart’s content with window tinting, tow bars, entertainment systems, mag wheels and so on. Cars and houses are usually bought under finance, and where conditions are applied to the ownership of the item, it is usually dependent on the loan being repaid and kept up to date. Buying accessories for the car or furniture for the house involves the same process of making a desired selection, paying for it, then choosing what happens with these items thereafter. The point is that by paying their money, the buyer can do more or less what they please with the item they’ve bought. Ownership provides the freedom to determine the future look, feel, fashion, usage, functionality and worth of the item bought, and generally this freedom to choose is determined almost entirely on the person’s ability to pay for the item and whatever they wish to do with it afterwards. Which brings us to the acquisition of a franchise, which, on the face of it involves a similar process of “buying” something, however the outcome is totally different. A “buyer” will go through a similar process of finding something that appeals to them in (or slightly above) a price range they can afford, as if they are buying a car or a house. But while having the money alone may be enough to qualify a person to buy a car or a house, it is just one consideration in the process of acquiring a franchise, which is why franchises aren’t bought. A franchise is defined as a conditional grant, which is very different from outright ownership. The conditions attached to a franchise grant are set by the franchisor in the best interests of the system and the brand, and which may change over time. Failing to observe the conditions of the grant at all times may result in the grant being withdrawn. So unlike the case of buying a house or a car where the vendor is paid their money and then has no further interest in the item sold, a franchisor is not only paid the money upfront (plus usually an ongoing fee], but also takes a very close interest in the ongoing welfare and performance of the franchise. Ultimately, the franchisor also has the power to withdraw the franchise if the franchisee fails to follow the system guidelines which they are required to uphold. Therefore buying a franchise is very different from buying anything else, yet precious few franchisees fully appreciate this in advance. By subconsciously equating the purchase of a franchise with the purchase of a car or a house, potential franchise buyers also assume that the ability to pay and a desire to acquire are enough for the purchase to proceed. Nothing could be further from the truth. Most franchise systems have rigorous selection criteria and seek specific attributes among potential franchisees that money and desire alone cannot overcome. Failing to understand this in advance can be both confusing and annoying for a potential franchisee who learns they do not have the necessary attributes to join the system on which they had set their sights. For this reason, potential franchisees need to be informed up front that there can be no guarantee that they will be successful in their quest for a franchise. Many systems can do better in this regard by changing some of the words used in the franchise application process. A simple first step is to refer to potential franchisees as candidates instead of buyers, leads, etc. The use of the word candidate conveys that there can be no guaranteed outcome in the selection process, irrespective of how much money the person may have or how keen they are to join the franchise. To be a successful candidate in other walks of life requires that a person have the qualities required to survive some kind of screening or elimination process. Unfortunately when the perception of buying a franchise is subconsciously compared with buying cars or houses, candidates at first acknowledge the ability to pay as the only qualification required to be granted a franchise. By referring to potential franchisees as candidates, and explaining the selection process up front, franchisors can more effectively identify both suitable and unsuitable candidates, as well as improve the quality of new entrants to the system, while at the same time demonstrating real value in the franchise grant on offer. In doing so, franchisors also reinforce the conditional nature of the franchise grant, making it clear to incoming franchisees that accessorizing their businesses like they would with a new car or a house will require the consent of the franchisor, and cannot be done on a whim alone. After all, every other franchisee in the network has made a similar investment, and protecting the value of those investments requires that all franchisees must adhere to standards in the operation of their businesses. For these reasons, “buying” a franchise is very different from buying a house, and should be approached by both franchisors and franchise candidates very differently. Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues.

In my experience, most business owners don’t start thinking about what their business is worth until they start thinking about getting out. A recent global survey by Grant Thornton identified that 45 percent of Australian owners of privately held businesses are thinking of selling in the next ten years. This figure is only topped by New Zealand, where 69 percent of business owners anticipate selling in the next decade. My question is: who is going to buy them? These figures are consistent with the Baby Boomer population bubble that is affecting many markets in Australia (and NZ) as the baby boomer generation approaches and enters the retirement years. This population bubble means that the number of businesses coming onto the market will certainly rise in the next few years, meaning we could have a glut on our hands. In any market, a glut means that prices will plummet. There will be many more sellers in the market than buyers. We only have to look at the housing market to know what happens when the number of sellers exceeds buyers. Crash go the prices! The reality is that if you are planning to sell your business in the next few years, it may not be worth what you are hoping for. There are two factors that will work against you  getting a good price when it comes to selling up. The disruptive changes that need to be made to extract the owner at the time they choose to leave creates a major distraction to the conduct of normal business, which means that profits (which affect the valuation) may be lower than normal. A business that is reliant on the owner is very hard to sell, or has to be sold at a much lower price than the same business is worth if it is self-reliant. What does this mean for you? You don’t have to wait until you want to sell to start working on getting the best price. Because of the coming turbulence in the market, you should prepare by creating flexibility with the options you have. You should start to build your business by doing the things that maximise value, but also establish a “Plan B” in case you can’tsell for the price you want. You will be best placed to extract maximum value from your business and achieve maximum price by building a business that works without you. Whether you have been in business for a while, or just starting out,it’s time to start planning to put your business on autopilot. When your business runs on autopilot without you, you have all options open. You can run your business profitably and have the freedom to live your life as you want. You can still retire, but don’t have to sell your business to achieve that goal, because it will supply you with ongoing residual income without having to work in it. On the other hand, your business is a much more saleable prospect if it runs successfully by itself. It has much more value to an investor if they can walk straight in knowing that there does not have to be a transitional time of weaning the business away from the exiting owner. You need to make the transfer easy and setup your business to be attractive to a potential buyer. There will be many that will end up being un-sellable and worthless by being dependent on the current owner. Only the best businesses will sell in the coming economy. Why not make yours oneof them? It’s time to start now. Greg Roworth is the founder and CEO of Business Flight path International Consultants  

As you and your business enter into your second five years, beware of the symptoms of burnout. We know them all too well. We've been there. This is the time most business owners start thinking about selling. And, just because you feel you are done with the business is not a reason to put it on the market. Bottom line: if you do, you won't get what it's worth. So, here are five major symptoms to be aware of as you approach your second five years. Loss of passionYou feel as though you are trapped on a never-ending grind of work, work, and work. After going through the same old routine for five years, the passion has gone. While spending so much time at the coalface, you forgot that your original objective was to dig through it. Without your objective sin mind, you become like a ship without a rudder, going around in circles and getting nowhere fast. Without the spark which created the business, how can you light the fire? Lack of focusAt the start you had a dream and a goal and you knew why you wanted to get it. Not only did the goal pull you on, it inspired you, your team and your clients. However, as an entrepreneur, you see opportunity after opportunity and can get distracted from your core goal. And if you lose focus, so does your business. Lack of new ideasYou instinctively know the gap between you and your competitors has narrowed. They copy your product or service or, as a result of improved communications and technology, they are bringing in innovative ways of improving what you are doing. Your product is not new any more and you are in danger of losing your competitive advantage in the market place. Without fresh ideas, you are going to be left behind. Lack of skillsWith things succeeding, there are more people and a bigger business to manage. Your management skills are no longer good enough to take your business to the next level. A lack of planning can affect productivity and profitability. You know you don't have the capacity to master all the skills you require, and the solution is to bring in somebody who can help. But your ego doesn't allow you to admit you're out of your depth. The temptation is to put the foot on the brakes and hold the business to within your competencies. And to hold the reins more tightly than ever. Lack of adequate capital Like most small businesses, you're usually running close to the wire with limited funds. This puts pressure on introducing new technology, marketing initiatives and better human resources to improve products or services. You are feeling the pressure of insufficient capital but don't know what to do. These are all key symptoms of becoming tired of a business. The core issue here is that you are exhausted and lack energy. You are at least five years older than when you started and not had enough R & R, if any. Burning the candle at both ends, working on pure adrenaline and lack of mental rest has caught up and you are close to burnout. Most businesses go down not from being badly run but from the owner running out of energy. Your body may get used to all these years of work, work, work. You could even be numb to the subtle aches and pains, desensitised to your internal alarm bells. It's like the frog in hot water. As the water heats to boiling, he'll stay there because he won't feel the difference until it's too late. Next, the frog is cooked. The same principle applies to business owners who just keep on keeping on - day after day. You might think you are strong but... You may well be able to relate to some of these symptoms. But rest assured that all these problems can be addressed with time. Time to think, time to plan and time to reignite your passion. If you really want to sell, then plan to sell. Don't sell because you're 'done' with the business. By selling when you're sick of the whole box and dice, you're setting yourself up to get the lowest price possible.  And you deserve far more than that! Louise Woodbury, co- author of “The Invisible Entrepreneur - How to Grow Your Business by Taking 3 Months Off” and “The Invisible Partnership - How to Work with Your Spouse Without Ending in Divorce”

We know the person who knows your business best ... is you. Why?  Because, we’ve worked with many small business entrepreneurs who are, in fact, experts in their industries. However, when it comes to selling your business … are you mentally ready for this journey? The Invisible Entrepreneur, invites you to consider a new way of doing business.  And, it’s not about adding more information to your well of knowledge.  It's simply all about you ….. because after all you are the only one who can bring about change in your business. Consider that selling your business could be your personal Everest - your very own mountain to conquer. Right now, while you’ rereading this, you might not know exactly how you’re going to get there. But just as Sir Edmund Hillary got to the summit, you will too. When Hillary set out to conquer Everest, he knew three things. First, he had an understanding of the scope of the challenge he was about to undertake. It was one fraught with danger and could even cost him his life. You may feel like you're navigating a dangerous course by transforming your business so it is attractive to a potential buyer. Second, Hillary knew there was a lot he didn't know. But he knew he had to find the answers. No matter how experienced you are, no one has all the answers. Understanding your limitations doesn't make you less competent or less capable. The opposite is true. Smart entrepreneurs recognise their limitations and work out how to supplement any gaps in skill or knowledge. Third, beyond seeking out answers from his own resources, Hillary also knew it was possible that many alternative solutions could exist. Solutions that hadn’t even been considered yet. Solutions and strategies beyond his current reality. We all have blind spots. The trouble is we don't always know what they are. But we encourage you to remember that these blinds spots exist -and that the way to reveal and eliminate them is to open your mind to new solutions and new ideas. Or find a guide who can help you. Sir Edmund Hillary recruited help from Tenzing Norgay, an experienced Sherpa. Norgay knew the landscape intimately. Where inexperienced eyes would see a mountain of difficulty, he saw a clear path. He could identify the dangers and manage the risks. Finally, he could guide a mountaineer to the summit and then negotiate a safe return. You are not indispensable One of the biggest hurdles for a small business entrepreneur to overcome is the idea that their business can function without them. Many entrepreneurs don't believe this is possible. They believe their business is different. They sincerely believe they are the lynchpin and that it simply couldn't operate without them. For example: Does everything need your approval to go ahead? Do you believe that even small advertisements couldn’t appear in the local paper without you checking them first? Or that a quote on supplying goods or services to a client couldn’t leave the office without your signature? And are you insisting that copies of all booking slips for deliveries would be sent toy our in-tray so you could see that the order had been processed. Are you one of those people who simply must know what’s going on - who wants to have a finger in every pie because that helps you pickup on things that might fall through cracks? You may not be guilty of all these - but if you recognise some of these attributes, a good adviser, your Sherpa, will guide you. But...only if you are willing to listen. In preparing your business for sale, you're about to enter uncharted territory - but you are not alone. Your guide is right here in your hands. And, while it will take you out of your comfort zone and into unexplored areas of your life, it will steer you in the right direction. Louise Woodbury is the   co-author of The Invisible Entrepreneur.  You can order your copy from all major bookstores. ISBN 978-0-646-49043-4.www.take3months.com or Tel 02 9955 8888.

At the point of receiving disclosure documentation, many potential franchisees are recommended by their franchisors to use the Franchising Code’s 14-daywaiting period to undertake their due diligence on the franchise investment. The problem for many potential franchisees at this point is that they don’t know what due diligence is and may have never heard the term before. They may figure due diligence must be something that is expensive and complicated and therefore done by the lawyers or other professional advisors that they might engage to handle \"the paperwork\" of the sale. In other words, it's something difficult done by somebody else. Nothing could be further from the truth. Due diligence is no more complicated than looking at the facts of a deal from all angles to make sure they stack up. In short, due diligence assesses the risks and opportunities of a proposed transaction, be it buying a business or entering some other arrangement. Conducting a building inspection and title search as a condition of buying a house is an example of due diligence in areal estate transaction. Getting engaged and taking the time to know someone before getting married is a form of due diligence (occasionally supplemented today by Googling a potential partner's details, or searching their Twitter and Facebook pages, etc). Most people who buy a second hand car insist on first taking it for a test-drive, conduct a title check, get a mechanic to look over the vehicle, and ask questions of other people who have owned the same type of car. This is considered natural behaviour when buying a car and forms part of our pre-purchase due diligence. By comparison, why wouldn't a potential franchisee or business buyer want to do the same thing when going into business for the first time? Unfortunately, many franchisors can recount examples of franchisees who have been too eager to join the system and then conducted little or no due diligence - with the result that their businesses failed to meet their expectations and both franchisor and franchisee become estranged. Here are some other definitions of due diligence to help potential franchisees understand the concept: The process of investigating a potential investment; The care a reasonable person should take before committing to a transaction; An assessment of the desirability, value and potential of an investment opportunity; Background research to determine the worthiness of an acquisition.  Who is responsible for undertaking due diligence? The potential buyer is responsible for undertaking due diligence. Although there is a statutory requirement for disclosure under the Franchising Code of Conduct, franchisors are not required to ensure that franchisees actually undertake due diligence. Even where a statutory disclosure obligation exists under the Code, buyers should - as much as possible - seek to independently verify information presented to them in order to reduce the risk of making a purchase decision based on false, out of date or incomplete information. Buyers will usually involve professional advisors to assist in the due diligence process. These will generally include accountants (to assess financial data and issues], lawyers (to assess legal, contractual and mandatory compliance issues) and specialists relevant to the industry or market sector in which the business operates. Irrespective of the use of advisors, the buyer takes ultimate responsibility for the decision to invest in the business offered. The buyer takes full responsibility both for the investment decision, and for the completeness of the due diligence process which gave rise to that investment decision. Buyer to act in own interest In any commercial transaction, the buyer has a choice to proceed or not proceed with the deal. It is expected that a seller will act in their own interest to maximise their benefit from the transaction, and by the same token, so should buyers. However, many people who buy small businesses or franchises have little or no prior experience in undertaking such deals. As a result, they may have little or no understanding of due diligence, and instead rely solely on their accountants and lawyers, and the veracity of the information provided by the franchisor. Unfortunately, without an adequate knowledge as to what a proper due diligence process should involve, the buyer is limited in their ability to protect their own interests. They may fail to seek professional advice in the first place, or fail to understand the advice provided. More importantly, they may simply fail to verify the information provided by the franchisor, and rely on untested detail. If the buyer does not act in their own interests, they cannot expect that their advisors alone will be able to do so, or that sellers will either. The cost of due diligence There are at least two types of cost involved in conducting due diligence: hard and soft costs. Hard costs are cash outlays, which can be substantial. It requires an investment of time and cash to research information and pay advisors. The Franchise Advisory Centre recommends that potential franchisees be prepared to pay at least between 2-5% of the cost of a franchise on due diligence alone. In other words, if the franchise costs$100,000, then the potential franchisee should be prepared to spend between $2,000 and $5,000 on their due diligence. If, after conducting a due diligence process a buyer decides not to proceed, then the cost of due diligence will be significantly less than the potential losses the buyer would have incurred if they had proceeded with the business and it subsequently failed. By far the greatest cost of any due diligence process is the cost of professional advisors (ie. accountants, lawyers and other professionals engaged for their expertise). These advisors will usually work on a per hour or project rate, and so it stands that the greater the investment, the more diligence required, the greater the advisor costs will be. It goes without saying that professional advisors acting for the buyer will require payment whether or not the buyer completes the sale. While this could mean that the buyer will ”lose\" the cost of the due diligence by not completing the sale, this might be a very small loss compared to the cost of buying an unsuitable or unsustainable business. Soft costs are the costs of the buyer’s time. Time spent researching a business is not something a buyer can expect to be paid for or have deducted from the purchase price of the business. The buyer invests their time and energy in considering the transaction, and should the transaction not be completed, the buyer at least is usually better-prepared and more experienced to undertake the next due diligence process. As a general rule, potential franchisees should make a due diligence soft cost investment of one hour of time per $1,000 to  be invested in the business. This can be spent on researching the specific business opportunity, as well as the industry and business in general and will ensure that a reasonable amount of time is allocated to assessing the risks and opportunities of the proposed transaction. Verify disclosure information Potential franchisees will rely primarily on information provided in the franchisor’s disclosure document, and should make every attempt to independently verify each item in the document to ensure that the information presented is current and correct. It is important to remember that disclosure documents under the Code are required to be updated within four months of the end of the financial year (which for most systems will be October 31 for the preceding12 month period July to June). Consequently, a franchisee who receives a disclosure document in July, August or September in any given year could be looking at information which is 12months or more old. If this is the case, the potential franchisee may choose to request a more recent disclosure document, or defer a purchase decision until after the disclosure document is updated. Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News &Events, Australia’s only fortnightly electronic news bulletin on franchising issues