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Tips on buying a business print Print

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Thinking of buying a business? It’s an exciting thing to consider and can be one of the biggest decisions of your life.

Chances are you will be investing a huge amount of your time, money (or maybe someone else’s money), reputation and energy into the new business. 

To improve your chances of success, it pays to do your homework. It’s important to undergo thorough due diligence to investigate all aspects of the business for sale, to identify and assess:

  1. the opportunities 
  2. any potential risks or problems 
  3. the value of the business for sale. 

This article covers:

  • a check that you’re right for business ownership 
  • tips on what you should do before you buy a business 
  • what can go wrong when you don’t do the research before making the purchase. 

Are you right for business ownership?

If this will be the first time you’ve owned and run a business, it’s worth interrogating your answer to this basic question.

Here are some more questions to help you get a feel of whether you’re ready to be self-employed.

  • Do you thrive on challenges? 
  • Would you be able to juggle every aspect of the business – from sales, accounting, admin, tax to customer service? Or employ staff to do this? 
  • Are you prepared to undergo training to develop the skills you need or to get input from specialist advisers?
  • Can you lead by example? A business owner is usually the first to arrive, the last to leave. They show a strong commitment, setting the standard where they work. 
  • Do you enjoy making, and being responsible for, your own decisions? 
  • Are you prepared to work long hours, possibly without the security of a steady income? 
  • Do you naturally look to streamline processes and methods when approaching a task? 
  • Does your family understand the impact that buying a business could have on them and support you unconditionally in your aim? 
  • Are you prepared to take the risk of losing the money you invest in your business? 
  • Do you have several years’ experience in the industry you’re considering entering? 

Nine key things to consider before buying a business

To help ensure you know exactly what you’re buying, let’s take a look at nine of the key things to consider when buying a business.

1. Know what you are paying for

You should get a detailed list of exactly what is included in the sale price. This includes all physical assets such as plant and equipment, stock, premises and vehicles.

Don’t assume that anything is included unless it is written down in the sale and purchase agreement. It will also include intangibles, known as goodwill.

2. Evaluate the goodwill

Goodwill represents the ‘potential future earnings’ that the business is likely to produce, and so it can be difficult to put a precise valuation on this. Goodwill compensates the previous owner for the work they have done to generate a profitable revenue stream, such as selecting the right location, recruiting and training staff, establishing supplier contracts, developing a credible and trusted brand and developing a customer base.

Be careful when negotiating a price for goodwill if future earnings are dependent on the existing owner’s abilities and rapport with customers. Some key questions to ask yourself are:

  • Can the business really stand independently of the previous owner and their personality? 
  • How much of the business’ potential would walk out the door with the departing owner? 

3. Investigate the restraint of trade

If a significant part of a business’ value is tied up in goodwill, consider whether you’d want to see a restraint of trade clause in the sale and purchase agreement. A restraint of trade clause can prevent the previous owner selling their business to you, then setting up in competition next door.

4. Check the lease

If you are buying a business that operates from a specific location, check the lease for those premises. You should consult your lawyer and possibly a real estate professional to ensure the lease can be reassigned and the terms are acceptable.

5. Understand the market

Is the business you’re considering in a market that’s entering a growth phase, or has it stalled? Know as much as you can about industry characteristics such as customer demand, local and international trends and technological developments.

6. Understand the competition

You need to know who your competitors are, what their prices are, what they are good at, and what they are bad at so you can position your business to be different, and to be appealing to your target market.

7. Predict the growth potential

You may be satisfied with a business that will continue to deliver the same returns to you as it did the previous owner.

However, most people look for a business that they can improve and grow. If you are looking for a growth business, you need to identify how you will grow (such as extending premises, opening longer hours, exploring new sales channels or targeting a different market) as well as any barriers to growth.

Common growth barriers include market saturation, location issues, policy or legislation, and changing consumer attitudes.

8. Seek advice

You might be surprised at how much information you can gather by talking to business owners within your industry. Non-competitors in another location can be a great source of free advice.

Consider assembling a support network consisting of an accountant, experienced mentor, Business Banker and lawyer.

9. Conduct your own research

Search online the business you are buying and check online feedback and blogs to see what customers think and see if there has been any bad press/PR. Ask suppliers, customers, contractors; in fact anyone that has dealt with the business in the past.

What can go wrong when you don’t do your homework?

Buying a business has many advantages – it can be a great way to gain immediate cash flow, market credibility and an established customer base. However, if you don’t take the time to do due diligence, you may be buying:

  • unhappy customers or suppliers due to poor systems or services from the previous owner 
  • poor operating systems 
  • old, obsolete, or poorly maintained equipment 
  • unsuitable staff due to poor training, attitude and values or personality clashes 
  • out of date or old stock that may be hard to sell 
  • overvalued goodwill. 

So worth doing your research and covering off at least the nine tips above before buying a new business.

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