Buying a business:
If you’re ready to ditch being an employee and looking to take the plunge into being a business owner, here are seven things to consider before you put your hand into your pocket to purchase a business.
1. Check that you are ready.
Running a business can mean long, hard hours using skills you’ve never before had to use. Running a business call for a disciplined approach. Along the way, there will be challenges to overcome and make considered financial decisions.
To gauge if you’re ready have a good think about:
- Whether you have the right skills to start a business.
- The time and effort you will need to invest to ensure the business grows successfully.
- The physical and emotional demands of working long hours and managing a lot of pressure.
- Whether having a business will enhance your personal goals or interrupt them.
- The capital you will need to invest initially to ensure ultimate business success.
2. What is the best business for you?
It’s good to use your professional experience and interests but that’s not the only criteria you need to consider. Once you’ve decided the type of business you’re interested in, the next step is to find an established business that interests you.
This can take a lot of time and effort and when you find one you like, think about:
- Whether the business has the potential to be successful.
- The kind of value you can add to the business.
- Whether the location is right for the business, which is paramount in many industries.
3. Be prepared to do loads of research.
When you’re looking at purchasing an existing business, you need to know whether or not the business is viable.
That means taking into consideration:
- Whether what you will sell is valued.
- The kind of person who is interested in what you’re selling.
- Knowing who your competitors are and how you can stand out to attract customers.
- What customers expect from that kind of business.
- Talking to potential / existing customers to get their feedback.
- Asking neighboring businesses about how the business is going.
- Undertaking extensive market research.
4. Know how to get a business valuation.
It’s important that you know whether the business has the opportunity to flourish and grow.
That means getting the facts and figures on:
- The current value of the business
- It’s potential for growth.
- The value of any assets and liabilities for the business.
It’s worth investing in getting professional advice on how to value the business.
A professional business consultant can help you too:
- Get a clear understanding of your financial circumstances.
- Determine the market trends for the relevant industry.
- Calculate the value of any goodwill included in the business.
- Assess what future profits you can anticipate.
- Bring all the financial factors together to provide you with a valuation.
5. Doing Due Diligence.
Before you sign the bottom line on any contract, it’s necessary to obtain as much information about the business as you can. This is called “Due Diligence”. You need to know any risks associated with buying the business and identify how you will manage those risks.
Make sure you obtain:
- All financial records for the business.
- Detailed information on the business operations.
- All relevant legal documentation for the business.
You will also need to review any:
- Licenses and permits relevant to run the business to ensure they are up to date.
- Contracts and leases relevant to the business premises and whether you will have to negotiate a new lease.
- Outstanding agreements made with suppliers by the seller.
- Plant equipment and fixtures are owned by the business to check they are in good working order and licensed.
- Assets and intellectual property.
- Inventory currently owned by the business and whether this is included in the purchase.
- Liabilities, such as outstanding debts, refunds and warranties to customers, and any outstanding amounts owing on assets that are registered as personal property.
6. The business financial situation.
It is essential to collect and check all financial information from the past three to five years.
These include:
- tax returns
- business activity statements (BAS)
- records of accounts receivable and payable
- balance sheets
- profit and loss records
- cash flow statements
- sales records
7. An offer on the business.
When you have completed your Due Diligence and have a valuation of the business, you are in a better position to make an offer for the business. This may take some negotiation of the purchase price with the seller. Once you both agree on a price, you must create a written contract outlining the final cost and what method of payment is accepted, to legalize the agreement and transfer ownership to you.
If you would like more information or you are considering purchasing a business, contact Rick & Mon Business Consultants on (03) 5902 7090. We’ll guide you through the whole process.