What to know before you buy a business

Buying an existing business allows you to skip the startup phase, which is the riskiest stage for most companies. However, how do you know you’ve on to a winner with the business you want to buy? In this article, we explore the steps to buying a business, and what to avoid, so you don’t end up with a lemon, i.e. a failure.

Before buying a business, get your thinking right, because the quality of your choices will play a large part in your success.

Are you business ready?

You’ll know you have what it takes to buy a specific business when you know what role you will have in it. How you use your knowledge, skills, and strengths to add value to the company is vital. Not all business owners run the show, they have a management team to do the hands-on operational roles. Your part may be at the executive and or board level, so you are part of the team that works on the business rather than in it.

How to buy a business

The starting point to buying a business is identifying what’s on the market. This is the easiest path to purchase as the current owners want a buyer. Another way is to approach a business you’re interested in or if you’re interested in specific industry research and identify target companies that interest you.

Your power team

A group of professionals that work with you to achieve the best outcome is your ‘power team’. In this group is your lawyer, accountant, financial advisor, maybe your lender, and a business broker and insurance provider.

Due diligence

Some may say doing your research and gathering intelligence on prospective businesses for a takeover or purchase is the most crucial task. They’re not wrong, as information is power and with it, you can work out what the company is worth, and how it’s performing. Is it a business in decline, or is it growing? How will you know if you do a shoddy job on the due diligence?

You might be better off hiring an investigator, or an auditor to do some of the legwork for you. Plus your power team are there to make sure you’re not wasting your time a dud. Seek to understand where the business is positioned in these areas:

• Is there a market now and tomorrow for the product or services?
• Competitors and their market share
• Customer base
• Current customer contracts
• Supplier agreements
• Why is the business for sale? How profitable has the company been over the last three years, what are the trends? Your accountant will help here.
• The leases, contracts, employment matters and or intellectual property – ensure it’s all legally sound – use your lawyer to assist here.
• the market appraisal of the business
• Define the legal structure you will use to operate the business, how you will fund and service the borrowing of the company plus how you will contribute to its success.

Negotiation

Use a seasoned negotiator to get the best price. Using a third party takes the emotion out of the negotiation. Once again, you’ll need to support your position with data to prove your deal is the right one.

Remember, price is not the only bargaining point. There are many reasons for selling a business, and you need to find out what will seal the deal. For example, if the current owner built the company from the ground up and some of the staff are still with the business, knowing that they will keep their jobs or have a role in the company after it’s sale may be what tips the deal in your favour.