What should I be asking myself when considering buying a business?
Buying a business can be extremely risky. The wrong decision could cost you a lot of money, not to mention personal stress and even effect things like your marriage. Ask yourself the following questions:
- Do I really want to buy a business?
- What do I expect from the business?
- What can I contribute to the business?
- Can I run it as well as (if not better than) the current owner?
Where should I be looking to buy a business?
Businesses can be advertised in a lot of places, newspapers, magazines, even on Facebook, but the but the chance that the business you are looking for, in the right price range, experience range and area will be for sale at the time you happen to be looking, is slim, not to mention the added risk and complexity of dealing with a private business sale. Buying through a professional such as a business broker really is the smart choice.
What should I be looking for to find the business that is right for me?
Business is not easy – there are always competitors doing their best to beat you. So look within an industry that interests you and whose work you actually enjoy doing.
You also need to know why the vendor is selling. You don’t want to be buying someone else’s problem.
What are the key areas of financial due diligence for me as a buyer?
The first test should be a common sense test — are the seller’s claims reasonable? Be wary of claims that cash has been taken out of the business and follow up where youcan by talking to customers, suppliers etc.
What do I need to consider in determining a purchase price for a business?
The true price you should take into consideration is the “Enterprise Value”, which includes the stock, and the working capital needed to maintain the business. This would depend on such things as payment terms between customers and suppliers, and any seasonal factors which can influence the cash flow.
There are no hard and fast rules, but your cash flow should enable you to pay off the interest and principal in a reasonable time, say 5–6 years.
Unless you really know what you are doing, it is probably safer to pay more for a solid business with a good track record and prospects, than to pay a bargain price for a shaky business.
What are some general criteria I should consider when negotiating the purchase of a business?
You need to know who the seller you’re dealing with really is. Make sure all possible concerns you may have been addressed as conditions in the contract and alleviated before handing over your money.
Use a good solicitor who specialises in business conveyancing to prepare the contract, and a reputable accountant to conduct “due diligence” prior to completion.