What You Need to Know About Buying a Business

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As the baby boomer generation starts looking to sell its businesses, popular opinion suggests there will be a huge surfeit of profitable companies coming on the market in the next couple of decades. If you have a lifelong dream of running your own business, now is an ideal time to start taking steps to achieve that goal.

However, there are a lot of important stages to be considered – and potential hurdles to overcome – in the acquisition of your new business. Manage each stage effectively, and you could do very well for yourself. Here’s some of what you need to know about buying a business to set you on the path to success.

 

Before you do anything else

Buying a business is a potentially lifelong commitment, so before you throw yourself in head first, it’s important to make sure you’re ready to become a business owner. For the most part, buying an existing business is a far safer option that setting up an entirely new company, since you will already have a customer base, a company reputation, and hopefully some cash flow to fall back on. That is, if you’ve carried out your due diligence (see further on). When you take on a pre-existing company, you inherit everything – good and bad.

You likely already have some idea about the industry you want to go into, based on your skills and expertise. There are all kinds of weird and wacky businesses out there, so it’s simply a case of finding one you can get excited about. Whenever you come across a business you might be interested in, ask yourself the following:

1.       Why is this business for sale?
2.       What reputation does this business currently have?
3.       How is the industry faring as a whole?
4.       Where could this business go in future?
5.       Is it likely to be profitable?

 

Finding the right business

Once you’ve made the decision to move forward, you may want to consider starting your business search close to your local area, unless you are planning to relocate. You may already work for the small business that you’re interested in buying, in which case, you can discuss your options with the owner. As a first step, put feelers out among your friends and contacts to see if they can give you any leads. Even in today’s digitized world, word of mouth is powerful. The best opportunities may never be listed online in the first place.

The next step is to start actively looking via mediums such as newspapers, trade associations, online listings, and business brokers. Brokers can be very helpful, but you shouldn’t put all your eggs in the broker basket, since their priorities are usually financial.

Of course, you don’t have to buy a ‘traditional’ business. There are plenty of people who make good money from investing in online businesses, developing them, then either selling them to make a profit or keeping the website as a form of passive income. The former is known as ‘website flipping’ – you can find a variety of online businesses for sale via marketplaces like Exchange.

 

The importance of due diligence

Finding a business that gets you excited can leave you eager to crack on with proceedings. But it pays to be prudent, however ‘too good to be true’ it may seem. Now is the time to start really doing your homework. Just like getting a house surveyed before you buy, you need to make sure there are no potentially costly issues that will cause you trouble further down the line.

If you’re working alone without the assistance of a business broker, you may wish to get an attorney and possibly a business valuations service involved at this point to help you make an informed decision about what you’re investing in. It’s not worth leaving any of the details up to chance, as once the business is in your hands, you’re liable for it. Factors like whether a change in ownership might cause some of the company’s existing clients to leave all need to be considered – this can be hard to judge for yourself.

Likewise, consider hiring a professional accountant to evaluate the financial state of the business and ask the right questions at this early stage. Remember that once you own the business, you will need to keep your personal and business finances totally separate.

 

 Credit: Pixabay

How to judge the value of a business

There are many ways to judge a business’s value – and as mentioned above, your accountant will be able to help you with this. You could also track down a business transfer agent if you want some further advice. In summary, these are the areas to evaluate:

  • The history of the business
  • Why the business is for sale
  • How it’s currently performing in terms of sales, turnover, and profits
  • Its present financial situation, including cash flow, debts, and assets
  • Any future projections

But that’s not all – you also have intangible assets to consider: things like the company’s reputation, any patents or intellectual property it may own, and what kind of relationship it has with its suppliers. No business exists in a vacuum.

 

Reaching completion  

Completion means it’s really happening! This is it – the formal transaction. The handing over of the business. My advice: prepare an agenda in advance so that the process goes as smoothly as possible. Ensure all actions before and after are covered and assigned, so everyone knows what needs to be taken care of and whose responsibility it is.

There are certain issues that commonly come up during completion – things like all of the signatories being available, coming to a funding agreement, and release of charges. A good agenda should help to mitigate most of these problems. As the buyer, the majority of the formalities post-completion will lie with you, so make sure you know what’s expected of you in the weeks following completion such as getting all of your paperwork in order. Start as you mean to go on!

 

Making the transition

What you need to know about buying a business doesn’t stop once the business is in your hands. Now it’s time to make sure that you do it justice and give it the best chance of doing well. In some instances, it’s a good idea to ask the seller to hang around for a couple of weeks during the handover, before they disappear off into the sunset. They can help you get a handle on the day-to-day and also introduce you to the business’s employees and customers.

If the business already has employees, make an effort to get to know them and schedule meetings with key staff members who play an important role at the company. This is a chance to start things afresh, so be sure to ask for their feedback – what they think has been working for the business thus far, and what hasn’t.

Some may feel uncertainty at the business changing hands, so you will also want to reassure them and give them a sense of the direction you plan to take. Some advisors may suggest that you add a provision in the contract that allows you to get out of the deal, should the most valuable employees walk out.

 

Once a business owner, it is now that the hard work really begins. Running a business can be a wonderful challenge and learning experience, but the decision to buy shouldn’t be taken lightly. Are you planning on buying a business? Or have you done so already? We’d love to hear what you think in the comments below.

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Comments 1

James OSullivan on Thursday, 23 November 2017 16:27

Interesting stuff, and definitely due diligence is needed here!

Interesting stuff, and definitely due diligence is needed here!
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