Top tips for buying a business
Starting a business from scratch can be an extremely daunting process for any prospective business owner. But who says that’s the only way? Buying a business is a popular way of getting the advantages of controlling your own destiny without having to deal with all the challenges of getting something new off the ground. We outline the top tips for buying a business and the things to be mindful of before you hit go!
In many cases, buying an existing business is an excellent way to become a small business owner without taking on all the risk of launching an unproven product or service to the market. However, the process of selecting the right business is just as important to get right as working on a new business launch plan. If you skip steps and rush the process you could inadvertently end up buying a lemon that you soon realise was the biggest mistake of your life. Good businesses don’t grow on trees, so identifying the right business to buy isn’t necessarily an easy process.
When buying an existing business it’s important you have a strategy, objective and vision for what you want that business to run like, what income you expect it to generate and what hours you expect to contribute to its on-going success. Some businesses require very hands on management, whilst others you can just sit back and relax as the money comes in. Some businesses may require a very specialist skill or domain expertise, whilst others only require general knowledge to operate. Write down what your expectations are for running a business and use this to define criteria for narrowing your search. In the same way as booking accommodation for a holiday, you need to decide on what matters to you and start from there.
Once you have identified your focus areas, confirm the target industry and/or profession, then draw up a list of potential candidates. There are plenty of businesses for sale, so start by looking at what is already on the market. Add to your list by identifying businesses that may not be on the market but look interesting nonetheless. For example, you may want to open a cafe. Look around at the coffee shops in your area, see which ones look busy, have good reviews, or have good foot traffic, list the ones you think may suit your criteria for purchase and come up with a plan to speak to the business owner. This could be as simple as walking in and asking for them directly. You never know! There have been plenty of businesses purchased this way over the years.
Once you establish a relationship with the existing business owner, it’s important you understand their motivations for potentially selling the business. Starting with identifying why they are selling the business?
Why now? Then move to understanding how is it performing currently? What is the reputation of the business? Are there any head winds the business is facing such as a new competitors, or high cost of goods? What is the outlook for the future? And most importantly, how is the business performing financially today? Be diligent about asking these questions and seeking honest answers. Back up the owners responses with your own insights and data. Connect with other local businesses, industry experts or past employees to validate the business owners responses. Remember, the person selling the business wants to make it as attractive to you as possible. You need to see through the exaggerations or misdirection to determine for yourself if they are speaking truthfully.
During this process, it’s also important to speak to multiple businesses so you have a point of comparison. It’s often hard to know what a good business looks like without comparing them against each other. You can also use this to play the business owners against each other in the negotiation stage. Like anything, having multiple options allows you to negotiate from a position of strength and ultimately get the best deal available.
By this point you should be ready to move to the final stage. You have confirmed your objectives, you have identified businesses you are interested in buying and commenced discussions with the owners. Now it’s time to approach the due diligence and contract stage. The due diligence stage is your opportunity to really get into the details of how the business is performing and how valuable it is today. There are seven areas to focus on:
- Finances - Bank statements, tax history, financial records. Anything you can get your hands on to determine how financially sound the business is.
- Assets - Obtain a full list of assets and their condition including a depreciation schedule provided by the business's accountant.
- Inventory - Get a full list of inventory, and ideally ensure you inspect the inventory to see what condition it’s in. It’s important to know where you stand on this.
- Suppliers - Review existing suppliers, their prices, service offering and any existing contracts in place. You will most likely be inheriting this so you will want to ensure they seem reasonable.
- Legal documents - Get access to insurance, company records, lease agreements and any other relevant legal documents.
- Marketing - Determine what marketing channels the company currently leverages, what spend is allocated and identify any new opportunities to acquire customers.
- Staff - Review the existing staff plan, any open positions, employment contracts and evaluate current staff member's performance levels. The last thing you want to inherit is an underperforming team.
Once you have collated this information from the business it’s time to compare notes with other third-party data insights you can get access to. If you want to open a second hand car yard, look at general market trends in this space. Are consumers buying second hand cars? What impact are the likes of Car sales having on sales? Whilst the business might be sound right now, does the owner want out because they know the market is changing very rapidly? You don’t want to be the person buying a Nokia franchise, the day Apple has announced the iPhone.
Use this data to determine what the maximum amount is you’re willing to pay for the business. Start low, make an offer and see what the response is. It’s likely there will be a heavy amount of negotiation. Often, there is no exact science behind how you come to an agreement on the final purchase amount. It’s just a case of being open, transparent and understanding what the other party is looking to achieve. A business broker may be engaged in the process, either upfront, or if the negotiations are not moving smoothly. Business brokers can help estimate the value of a business, and by being a third-party, this can help smooth over this often touchy subject. Once a price is agreed, it’s time to draw up the final contract, and this requires getting the lawyers involved. Online legal services like Sprintlaw are a great option as they provide fast, easy and affordable legal advice to help you ensure you get a good deal.
Whilst there is a lot to do, buying an established business does afford you the opportunity to start something knowing there is a safety net of existing customers, sales and revenue to support you. For many potential business owners, this alleviates the issue of starting something from scratch and potentially not earning income for many months whilst waiting for sales to grow. We hope these tips help you make the right choice when buying a business. It’s one of the most important decisions you will ever make, so make sure you do it right.