10 Tips to consider before buying a business.
- October 2021
- 5 minutes
If you’ve decided to buy an existing business rather than start one from scratch, here are ten things to think about before you do:
Set your goals
It’s critical to know why you’re looking to buy a business in the first place and to set clear and achievable goals for yourself. You might want your company to make you money every year. Alternatively, you might prefer something you can scale up and add value to in order to resell later.
Having a clear goal in mind will help you evaluate potential purchases more objectively, and it will also serve as a helpful guide for any sales agents or other professional advisers you hire to help you find a suitable business.
Make sure you have picked the right industry
Make sure you’ve chosen an industry that will help you achieve your goal, rather than one that is simply appealing to you because it fulfils an unrealistic childhood dream.
Maybe you’ve always wanted to own a widget factory, and you’ve noticed there are five of them on the market right now? Is this a once-in-a-lifetime opportunity, or is it because the widget market died a year ago?
Working in a particular industry for a period of time is the best way to learn more about it. You might even be able to fit this in around your current job part-time.
If you really want to own a restaurant, spending a year working as a waiter in the evenings will be the best way to test your dream. You will gain invaluable inside knowledge which you’ll be able to put into practice in your own restaurant when you get it going.
Do your research
A simple Google search will turn up dozens of websites and companies that sell businesses. Spend a few evenings here doing research to see what’s going on in your chosen industry and location.
Attempt to compile a shortlist of companies, which you can then target with additional research. Examine every page of their website; Google their name to see what other people have to say; and track down customers to get their feedback. You could even pretend to be a customer to get a sense of how the company operates.
Have an initial viewing
Now is the time to approach the business through their agent and learn more. Remember to stay subjective – just as when you’re buying property, you need to think with your brain not your heart. Listen to your gut feeling and don’t ignore it… buying a bad business is an expensive mistake to make. Some business owners don’t tell their employees they’re selling because they don’t want them to lose focus at a time when the company’s performance is being scrutinised. Respect the seller’s wishes and remember to keep a friendly, if professional, relationship with him.
They might be selling you a company they started from the ground up and want to make sure it’s in good hands.
Do a reality check
Now you have the full information on the business – official and unofficial – you should take a step back and think it through. What warning signs have you seen in the business? No company is perfect, but do you have the skills to fix the problems you have seen? Can your strengths enhance this business?
Be particularly careful if the business appears to be over-reliant on the current business owner or a number of key staff. The business owner cannot be replaced like for like, even by you. And key staff may be the first to leave during a major upheaval – will this business survive without them?
It’s best to seek professional and informal assistance. Request that your accountant and lawyer go over the numbers and contracts. It doesn’t matter how much this costs; it’s far better to spend a few thousand dollars now and uncover some potential horrors than to discover them 12 months later when it’s too late.
Find out what your partner and friends think. You may be too close to the business at this point to be objective, so people you trust may be able to provide a fresh perspective.
Get the money sorted out
When looking for a business to buy, you should have a budget in mind, just like when buying a home.
If you’re financing the purchase, make sure you have a general credit agreement in place before engaging in detailed negotiations with vendors.
Get the credit formalised now that you’ve decided on a specific purchase. Lenders will typically demand complete information about the business you want to buy, including three years’ worth of financial statements and projections. They may even request that you put up some personal assets as collateral for the loan.
Make an offer
If you don’t have a solicitor, get one now. Make your initial offer by phone and always follow it up immediately in writing. Use the term ‘subject to contract’ in all communication.
This is the time to request conditions of sale, such that the existing owner stays within the business for a set period during a handover.
Negotiate a great deal
Don’t be afraid to demand what you want. There aren’t many businesses with multiple bidders, so as someone with cash to burn, you’re in a good position.
You and your lawyer will go through a due diligence process in which you and your lawyer verify the information provided by the seller.
Find out why the current owner is selling and use that information to your advantage. Are they really willing to risk the sale of the business for the sake of a few thousand pounds if they want to retire?
Buy the business
Once the lending has been settled, and everything has been transferred to you – congratulations, you just bought a business! Now the hard work starts!
You have to fit into the business and understand it fully, before you can start to make the changes needed to hit your original goals.