Buying into a business - Where to start
It goes without saying, but before you commit yourself to buying a business, it’s wise to carry out detailed research. Find out about the business itself, the competition and the industry in general. Then you’ll be able to make a more informed decision on whether or not to buy it - this is a brief guide to help you get your research started.
It’s easy to overlook some details in the lead up to a sale, so, to help you to cover the basics, we’ve put together a ‘buying a business checklist’ that you could use as a starting point.
Note: This checklist isn’t exhaustive and is not of legal or financial advice. You may find it beneficial to a consult a professional.
Step 1: Find Out Why the Owner’s Selling
Does the owner simply want to retire or is there a wider issue that’s making it difficult for the business to turn a profit? This could be cash flow problems, increased competition or a shrinking market resulting in less demand for the product or service to name a few. Whatever the underlying issue could be, do your research upfront to avoid getting caught out later.
Step 2: Know Your Legal Obligations
Check if the type of business you want to buy requires particular permits and/or licenses. If so, find out if you’ll need to re-apply for them if you become the new owner. Will you need to take on existing staff? What entitlements and pension scheme commitments would this involve? Scrutinise any property lease agreements that will apply and see whether you’ll be able to renew/continue with them.
Step 3: Ensure the Business is Financially Healthy – and Likely to Remain so
Before you purchase a business, you may find it best to get specialist help with carrying out financial due diligence. This could include reviewing balance sheets, tax returns, profit and loss statements and projected sales and profits. Studying this key financial information could help you to get a good view of the risks and opportunities that the business offers1.
Step 5: Verify that all Business Assets are in Order
Assets can become outdated, so, check that any equipment included in the sale doesn’t need replacing. And, if any of the assets are rented, ask for copies of the paperwork.
Step 6: Check it’s Operating Smoothly
Try to see if there are any issues with the way the business is currently being run. You could get a feel for this by asking current customers and staff how they feel about it.
Step 7: Find Out Who the Customers Are
Study the target market. And, see if there’s a database of customers. Try and find out if they’re likely to remain loyal to the business if you buy it. Check if there are any contracts in place that would lock them in and/or if any key contracts are due to end.
Step 7: Assess the Competition
Research the competitors of the business. Look into their growth and plans for the future, strengths and weaknesses. See if there are any competitors already geographically close to it, or due to start up nearby. With the knowledge, is there anything that makes the business stand out against the competition? Such as a price advantage, quicker service or a reputation for reliability. Is there any intellectual property that can be protected through a trademark, license or patent?
Step 8: Get the Latest Industry Views
Do the experts think the sector is expanding or contracting? Are profit margins rising or under pressure? Keep abreast of any key changes to the market and how the industry is performing.
Step 9: Look into the Suppliers
Check out the suppliers. Will they be willing to trade with you and are prices due to fall or rise? Could you negotiate a better deal with them?
Step 10: Consider Speaking to a Professional
A finance specialist should be able to verify a vendor’s profit projection figures. The information they provide could be useful in negotiating your deal. He or she may also be able to see where savings could be made and where profits could be increased. Agree any fees for advice in advance. It would also be wise to seek legal advice before buying a business2.
Step 11: Decide on Your Maximum Offer
If you’re uncertain, you may want to seek out an independent valuation for the business to help you decide on your initial and final offers. Whether you seek professional advice or make the decision on your own, think about anything that could have a bearing on the value of the business. This could be current and potential competitors, the owner’s circumstances, how long it’s been on the market and how many offers they’ve had. Are the owners under time pressures and need a quick sale? If so, they may accept a lower offer.
Taking the above steps won’t guarantee success, but finding the answers could help you decide if a business is right for you.
This content was created on 19th June 2018