Often when getting into business people will choose to purchase an established business rather than starting from scratch. However, there are still a lot of things to consider before you dive in. You need to make sure you are well informed and prepared in order to give your business the best chance of success.
Reason for Sale
Knowing the reason the vendor is selling is useful as it can help with your decision to purchase and also the negotiation. Do they need to sell and is there time pressure? Or is this perhaps their retirement strategy? You also want to find out if there are there any other factors in their decision to sell, i.e. competitors opening up nearby or environmental issues.
Look under the surface to make sure what is shown initially is what is actually the case. Research the industry and market thoroughly, particularly if it is not an industry you are currently immersed in. Talking to customers and or suppliers is a great way to get to know more about the business. If the business relies on foot traffic, spend time outside observing who and how many come and go, and do this at different times of the day. Make sure nothing untoward has gone on prior to the listing, such as dropping prices to make sales numbers look better.
Conduct a thorough SWAT and risk analysis. Look for any recent changes or irregularities that may be masking something. Thoroughly look into the financials and get your own finance professional to look through them also. Investigate what the staffing situation is and if they will be staying on after the purchase. Ensure there are no outstanding legal issues with the business.
Value of the Business
Knowing how the vendor has reached their valuation of the business is important. Compare this with other valuation methods. Also, look at comparisons of other similar businesses. Establish what the goodwill covers and is actually worth. Be aware if the departure of the current owner is likely to affect the business and customer base. You also want to make sure you are clear on exactly what is being sold.
Financing the Business.
How you are going to finance the purchase of the business is a major factor and there are often a few options. Will you approach your current bank or will you need the assistance of a finance broker? If obtaining traditional financing is an issue, some vendors will consider vendor financing. Also, it is important to know your expected cash flows and what sort of financial back up you will need going in. A conversation with your accountant and lending partner prior to any offers can help you go in with the right strategy.
Make sure you thoroughly review all of the legal documents – such as the full contract and any lease documents – and consult your legal representative. You will usually need to sign a confidentiality agreement prior to being shown any confidential information. Also, ensure you have the right authorisations and licences to operate the business.
When you are considering purchasing a business, a chat with a business broker and / or your accountant can steer you in the right direction. Contact us to find out how we can help you throughout the process of purchasing a business.