There are many important factors to consider when buying a business. An initial assessment of the business will assist you at determining if it is an acquisition worth pursuing. The starting point is for the buyer to ask themselves the following questions:
- What skills or expertise do I have?
- What kind of business am I best suited to?
- How much liquid cash do I have available?
- What do I need to raise in finance?
- What income do I require from the business?
- How many hours do I have to spend in the business to earn the required income?
- How far am I prepared to travel?
- How will this business affect my family and leisure time?
If you don’t have a gut feel for the business, then you shouldn’t buy it. A buyer should always buy a business that they feel they can improve on, which has potential. They should complete a detailed due diligence on the business to verify figures and profitability. Below are a few of the advantages and disadvantages to be considered when buying a business:
- Immediate profits – don’t have to wait to establish profits. Average estimated time is 18 months.
- Less risk – success of the business model is already proven
- Base to build on – new owners drive can increase profits and growth.
- Hiccups ironed out – free of start-up problems + you have existing clients, employees and suppliers etc.
- Smaller capital outlay – you may be able to buy an existing business with established profits for less than starting a new concern.
- Assistance from seller – 99% of sellers stay on in business for a period of time to assist buyer with takeover and to ensure continuity.
- Problems – you could be taking over problems someone else has created.
- Location – maybe not situated in good position.
- Future area developments – maybe not conducive to business sustaining the market, products etc.
- Time factor – minimum of 3 quotes required by bank for equipment required + one still has to find suitable premises
Other important points to consider when buying a business:
- Always remember that CASH is KING, look carefully at the figures and concentrate on the cash flow rather than on the NET PROFIT.
- Buy a business you can improve on. If there is no potential to grow the business, don’t buy it.
- Make the decision to buy yourself, don’t rely on an advisor.
- Ascertain what the appropriate method of financing the business is.
- Identify any major problems that may exist in the business and see if it can be minimized or eradicated.
- Seller finance in most cases is a form of protection, so it is important to concentrate on the terms of the agreement rather than solely on the price.
- Establish what the exact reason is for the seller wanting to sell the business
- Think creatively about the future and buy something you are going to be proud of.
- Don’t procrastinate, GOOD BUYS are GOOD BYES if you wait too long!