Buying a business is usually less risky than starting from scratch. You’ll be taking over an existing operation with proven profits and cash flow, an existing customer base, and employees who know the business well. All the requisite procedures, policies and systems will already be in place.
On the downside, purchasing a successful existing business will be more expensive than starting from nothing. That said, it’s easier to secure finance as investors are more comfortable dealing with an established company than a brand new start-up.
Making the right choice
When choosing a business to buy, it’s vital that you choose something that suits you if you’re to succeed. Stick with an industry you know and understand. Think about your experience relative to the size of the business you’re considering buying, in terms of numbers of employees, volume of sales and number of locations.
Next, consider the geographical location for the business. There may be implications around staffing levels, suppliers and premises costs to consider depending upon where the company is located.
There are number of things to consider in order to verify a business’ true value:
Take note of the existing inventory of goods for sale to customers and also consider its age, condition and quality.
2. Fixtures, premises, furniture, etc.
Ask for a list of everything owned by the business in terms of assets. Determine its current condition and market value, and whether items are owned outright or leased. Think about what modifications you might need to make to suit your own needs.
3. Legal contracts and other documents
It’s important to look over all contracts and other legally binding documents held by the business. This includes sales contracts, employment contracts, and agreements with third-party suppliers and distributors.
4. Tax returns
It’s important that you and your accountant look over the business’ tax returns in order to determine the actual financial net worth of the company.
Ask your accountant to look over the company’s books and financial records for the last five years. This will enable you to determine the company’s earning power.
6. Liabilities and debt disclosure
You will need to see a complete list of any liabilities and debts held by the business in order to determine potential costs and legal implications.
7. Accounts payable and accounts receivable
A clear understanding of accounts payable and receivable is important if you are to understand how cash flows in and out of the business.
8. Marketing metrics
Data on consumer patterns and marketing strategies is key to understanding how effectively the business has marketed itself to date. You may want to consider a total rebranding or different type of marketing campaign depending upon your findings. Also consider the cost of the business’ advertising and marketing campaigns.
9. Product pricing
Evaluate current product pricelists and consider what discounts are being offered on products. Compare this against industry standards to determine when you could reasonably expect to raise prices again.
The business location and the market area immediately surrounding it are important, especially to retailers. Check out the demographics and competition. See if there are any problems with delivering products or receiving raw materials from suppliers.
A business’ image can be an asset or a liability, depending on what customers think. Carry out in-depth market research of customers, suppliers and other local businesses to see what sort of reputation the company has.
12. Current staff and organisational chart
Current employees can be invaluable, especially if they are key personnel. Study the organisational chart to work out line responsibilities and look over personnel files to see who’s who.
Determining a fair price
The owner’s idea of the value of his business is typically at variance with that of the buyer. It’s important to be aware of the current market economy when negotiating for the purchase of a business. In general, businesses sell for a more inflated price when the economy is expanding and for a lower price during an economic downturn.
Other factors to consider include profits, monthly gross sales, assets and liabilities, and return on investment (ROI).
Taking on an existing business can be a challenge, but it does give you a head start over a totally new venture if you get it right.