7 essential things you need to know when buying a business

How to buy a business

If you’ve reached the stage where you’ve found the business that’s exactly right for you and are ready to make an offer, just pause for a moment to pull together a list of the important things you need to know before you move forward with your plans.

Some of the information you need to gather is obvious – no-one would want to proceed without making a forensic examination of a company’s financial records, for instance – but you should also take the time to look into how the company operates, who its customers are and whether there’s potential for growth.

Hopefully, you’ll be consulting with a team of professionals in order to perform your due diligence, but a few carefully placed enquiries will help you determine if your prospective business is a winner or a dud.

1. Is it financially viable?

Research your target market and try to get a feel for its economic outlook. No business is recession-proof but you want to feel there’s a steady or growing market for your goods and services. Assemble an ‘acquisition team’ to help perform due diligence on your purchase – your solicitor, accountant and financer (if you have one). Begin by taking a close look at the business’s finances, reputation and trading history. You need access to tax returns and other documents to back up the owner’s assertions about the company’s revenue, income sources, and profits or losses. Pay close attention to the security of recurring revenue streams and forward-going customer contracts.

2. Is it worth the asking price?

Obviously, the price you pay for the business is likely to be a reflection of its profitability in one form or another so it’s worth understanding more about the calculations used to arrive at the asking price. Find out if the seller has used an asset-based or multiplier valuation method and make sure the calculations check out. If your offer includes equipment and/or stock inventory, ensure that their valuation reflects condition, age and market conditions.

3. Why is it for sale?

No-one knows the business better than the seller, so do quiz them about their reasons for selling. You might not get the unvarnished truth but it’s worth asking the question. Common reasons include retirement or ill health but don’t take it at face value; when you start digging into the company’s financial history, see if the figures add up. Is there a year-on-year growth pattern or do the figures suggest a gradual decline in trade? Ask around – if the seller is cashing in on the business because a competitor is about to open up down the road, you’ll want to explore further. If the business is sound, any owner should be able to provide you with details of their preparation for sale and explain any fluctuations in performance. Make sure you try to explore the reasons as thoroughly as you can.

4. Is there room for growth?

The more you can discover about the business, the market in which it operates, areas where there may be room for growth and factors which could drag it down, the more prepared you’ll be for the challenges that lie ahead. Analyse business operations carefully. Study industry and economic data to determine whether sales seem likely to grow, decline or level out, and consider whether current pricing levels are sustainable. Ask the seller for specific strategies for business growth and quiz them about the plans they’ve implemented already. By picking your seller’s brains on these points, you stand to gain important insights into the business’s potential.

5. Are the staff an asset?

The seller should be prepared to provide a list of employees together with their job descriptions, salaries, terms and employment history. It’s helpful to understand the hierarchy of the team, how it operates and what the real cost of employing staff will be – including holiday and sick pay, pensions and bonuses. Find out just how important the seller is to day-to-day business operations and be wary if it seems to be 100% dependent on the owner’s involvement at every level. If you want to make sure you retain key employees when you take over, start discussions early and don’t leave it to chance.

6. Is the website working?

If your prospective business gets a significant amount of income from web-based trading, you’ll need to look closely at the analytics data. Find out how many unique visitors your prospective site gets each month and quiz the seller about jumps or dips in audience numbers. Enquire into the site’s revenue sources and ask how the current owner is marketing the site. Find out how much the owner has had to spend to generate revenues and if they offer a projected revenue figure, make sure they can back up their claims. The site’s intellectual property includes the brand, logo, page style and code, so make sure the owner can legally sell the rights on to you.

7. Should you be worried?

A lot of important issues will be addressed via the due diligence process but you do need to take a belt-and-braces approach to some key points. Once you’ve reassured yourself that your chosen business is worth what you’ve offered to pay for it, start looking at all those things that could damage its value or even put you off purchasing altogether. Check that any leases or licences are up to date and transferable, make sure you know exactly what assets (tangible and non-tangible) are included in the sale, find out if there are any pending or past legal proceedings that could cost you time and money, and investigate any bad debts. A vital discovery at this stage could save you tons of hassle further down the line.

Buying a business always carries an element of risk – it’s up to you how much you’re prepared to gamble. Find out everything you can and you’ll be in a position to take a decision that reflects the true state of the business.

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