What is a Trial?
Here at Business for Sale blog, I’m sometimes asked, “What is a trial?” in respect to business listings. If you’ve spent time looking at business listings online and offline, you’ll eventually see wording along the lines of “Will trial at $8,000 per week” (or any amount – it depends on how well the business is doing).
So what does this mean?
Well, it’s all about making sure you’re comfortable with what the business makes each week.
If you had read my post on multipliers, you’d know that a business can be valued based on a multiple of its sales or profits. And if you’re buying a business priced that way, you want to get what you paid for, right?
You’d want to make sure those sales or profits are reproducible, right?
But how do you know the seller is telling you the truth?
A trial allows you to be part of the business for a set period of time (usually two to four weeks), where you can be in the shop to see money flow through the cash registers. You’d also be able to check end-of-day reports to see totals and ensure that the sales are in line with what the trial says.
At the end of the trial period, if the average of all weekly sales equal or exceed the trial amount, the contract goes through and the business is yours. But if it falls short, the contract can still go through…
Huh? What’s the point of the trial then?
That is, unless you let the seller know that you want to terminate the contract, based on the grounds that the trial wasn’t met. You have to notify them in writing within two business days of the trial’s expiry date (as per the standard conditions of the REIQ business sale contract).
Finally, a trial is only really used in food & beverage businesses, like cafes, take aways or restaurants. Other types of retail businesses can also offer a trial, but it is not very common.
OK, I understand. But what if…
Now if you’re the skeptical type, you might say that sellers could bring in their friends to artificially boost sales during the trial period. And you could be right – I’ve heard stories of sellers going to great lengths to do exactly that. So the truth of the matter is, trials are not a solution in itself – you’ll still need to do your due diligence before and during the sale of the business to ensure you’re getting what you paid for.
If you liked what you read, leave a comment below!
Chris Khoo
Business Broker
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