If you want to become a business owner, buying a business can be a great alternative to starting a business. Buying an established business includes buying a customer base and a proven product or service. The employees in the company can also be a real added value when you buy continuous service. Approaching this process the right way, taking the right steps, and thinking about the right questions to ask when buying a business is essential.
Buying a business is not a commitment to be taken lightly. It will pay off to compile a list of what you need to know to be comfortable with any potential deal.
Why is the business for sale?
Business owners have all kinds of legitimate reasons for selling their business, however, knowing the real motive for selling their business is essential. You have the right to ask as many questions as you want when you are a potential buyer, so feel free to start with this question so that the negotiation is confident.
Is the business financially viable?
This may seem like the obvious question to ask. Before studying the accounting and financial documents used to judge a company's profitability, talking about it with the seller is a great way to assess its authenticity. If there are any issues, he is likely to be nervous and imprecise about the information he is giving you.
Who are the company's customers and are they loyal to the current owner?
Customers are a big part of defining the value of a business. You will need to know if the customer expectations of the business you plan to acquire match your experience, skills and knowledge. Customer is about value, but it's also about whether the business is right for you, which is very important to the success of your entrepreneurial journey.
You also need to make sure that when you buy out the business, you also buy all of its customers. Is customer loyalty related to the current owner or to the business itself? The answer to this question is a deciding factor. You will need to determine the exact situation before you can establish a valuation or proceed with the transaction.
How did the seller set his price?
This is another extremely important question to ask. Salespeople are often emotionally attached to their business. It is therefore essential to know whether the valuation of the price of the company was made by a professional, such as a chartered accountant specializing in the sale and buy-out of a company or if the owner's affect could have influenced the price.
Can you access accounts and other important business related records?
Any business that you intend to buy should have the proper documents and make them available to you. Tax records, vendor documents and invoices will allow you to accurately assess things. Without these documents, stop any dialogue. Without records, you cannot come to an assessment of the value or viability of an operating business, even if the price offered to you has been set by a professional.
Are the company's employees aware of its potential sale?
During a business takeover, its employees can be a mine of information, help and comfort or on the contrary a thorn in your side. If the company has employees, there are legal obligations to follow, but you should also assess whether they are happy with the sale and ready to work with you.
Ideally, it is best if employees are kept informed about the sale and treated appropriately. Taking control of the business will then be much easier. A disgruntled workforce can indeed be a gigantic problem in itself to overcome.
Communicate with existing staff to keep them by your side and work for you. Ask the question, then act quickly and accordingly, otherwise you could significantly affect the value of the business.
How much time is left on the commercial lease?
If there is a current lease, you need to know how long it lasts and factor in the costs that will result. These are likely to be substantial, so this is an essential element when negotiating a deal for an existing business. You should request a copy of this lease as part of the due diligence process.
What is due diligence when buying a business?
Typically, by the time of due diligence, you will have advanced in negotiations to buy a business, but that doesn't mean you can no longer opt out or adjust the terms of the agreement.
Due diligence usually occurs after purchase intent has been confirmed and you have agreed to a preliminary price. The seller must then give you full access to business and management accounts and records.
Due diligence is therefore the stage where you can really measure the value of a business by comparing its assets and liabilities.
In addition to looking at the accounts carefully, you'll want to get a measure of the inventory, condition, and value of any business premises, warehouse, etc. and also pay attention to the condition of the tool equipment. You need to come out of due diligence with a reasonably solid idea of how the business is performing and how it will continue to operate after the takeover. Don't rush this part of the process.
What to look for when buying a business?
Beware of accounts receivable. Again, this is not necessarily a deciding factor, but you need to understand why there are unpaid bills.
Declining revenue or the number of customers just before the business goes up for sale is not a good sign for buyers. Ideally, you should favor a diverse, loyal and permanent clientele.
Poorly maintained premises, tools or equipment are a warning sign. Maintaining and maintaining equipment can be an excellent indicator of the overall health of the business. Not only is this not a good sign, but you are also more likely to need future investments to keep the business going.
In the internet age, customer reviews can provide a telling illustration of how well a business is performing.
Disgruntled staff can have a huge impact on the value and viability of a business, as can a high employee turnover rate.
Finally, check the company's credit rating. This is an important indicator to take into account.
There are times when getting the right advice is a great investment. Even for the most seasoned businessmen, it is advisable to have the business takeover project studied by an expert in the field.