Buying an existing business can be a great opportunity to hit the ground running without the disadvantages of starting from the ground up. Here, John Corias explains what you need to know before buying an existing business.
In the vast majority of situations, buying an existing business is a much safer option. You acquire a business that already has a loyal customer base, regular cash flow and hopefully a solid amount of goodwill associated with the business name. Of course, the reverse can also be true. Buying a business without conducting strict due diligence checks can mean buying a business with too many skeletons in the closet. It really is a case of buyer beware.
Once you’ve decided which particular industry you and your skill set are most suited to, you need to set about finding a business for sale. There are always plenty of businesses for sale, it’s just matter of finding the right one for you. So before you go ahead and jump in, try asking these questions about the potential business you’ve got your eye on.
1. Why is this particular business for sale at this time?
2. What is the general reputation of the business in that location?
3. Are both the nationwide and local market conditions right for success?
4. What is the outlook for the future?
5. Is the business profitable?
The answers you receive to these five basic questions will do one of two things: make you run away screaming down the street, or peak your curiosity enough to start conducting a more thorough investigation into the business that is for sale. Should you decide to investigate further, these are the key areas to be scrutinised before taking over the keys.
Inventory: A full list of current inventory (for applicable businesses) is an essential requirement. There is absolutely no point in buying a business with thousands of dollars of obsolete stock sitting on the shelves. An unscrupulous business owner may also run down current stock levels and see you unable to service your customers with existing stock levels when you take over the reins.
Assets: A full list of assets is a must. You need to know what is included in the sale to make sure the business can function with existing equipment. A depreciation schedule obtained from the business owner’s accountant should also tell you just how old the current equipment is. Buying a rundown business should be done with great caution as you will soon need extra cash to modernise the money making assets of the business.
Legal documents: Obtain copies of current leases, insurance policies, employment contracts, and any other legally binding contracts with customers and suppliers. Any restrictive policies must be carefully analysed by legal counsel for restrictions that could hamper your ability to do business.
Financial statements: No business should ever be purchased without a thorough examination of the businesses financial statements. A qualified accountant won’t just look at the bottom line for you. The financial statements will tell a story about the business that will make your decision much easier if you understand the businesses finances. Add-backs are also a useful way of determining what you could make of the business and if the business can also afford to cover the repayments on any finance you will need to buy the business.
Sales records: Don't just rely on the profit and loss statements. Obtain copies of sales records to determine the best selling product lines and opportunities to streamline the types of products being sold. Seeing the cash flow cycles of what months have the strongest sales will also help you in planning for the future.
Debtors and Creditors: Longstanding debtors may be a sign of unhappy customers or a fragile selling market. On the creditor side, any outstanding creditors may have account restrictions in place or be spreading a bad name about the business due to non-payment of purchases
Marketing strategy: Is there one in place for growing the business? If not, this would then become one of your highest priorities upon taking control of the business.
Price levels: Determine if the current owner has priced his products/services correctly to take account of the fixed and variable costs of the business, as well as knowing what the market can afford to pay.
Location and customer demographics: Does the current location lend itself to passing traffic and walk in sales. If not, a specific marketing campaign to raise awareness of the businesses location may be required. Has the suburb undergone any recent demographics change that may weaken the customer base? Or provide the potential to modify existing product lines and services to match the new potential customer base?
Current staff: Inheriting current staff can be both a blessing and a curse. Current staff are best placed to keep the business running as seamlessly as possible as you get your head around the joys of owning a small business. They can also provide great ideas on how to improve the business. On the flipside, hanging on to disgruntled staff can lead to poor customer relations; a high staff turnover is a sign of a poorly run business operation. Watch out for any longstanding leave entitlements that can add to your liabilities from the outset.
The early days of running a business will always be the most difficult and stressful. With the right team around you and the proper checks and balances in place, you give yourself the best chance possible for success.
John Corias is Senior Partner at m.a.s accountants.
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