What to look for when buying a business – Part 2.

written by Sarah Colgate

Business Tips for 2024

December 21, 2023

My key considerations for you to ensure you save time and money are delivered in two blogs. This is part 2.

3. Do Your Research

This sounds pretty obvious I know,  however you would be surprised by the number of people who get caught up in the excitement of buying a business and never actually do any research. Research is essential so you can go into this business with your eyes wide open. 

Investigate everything you can about this business, its brand and reputation.

  • What do people say about this business? 
  • Check online reviews, talk to existing customers, and look at the social media chatter. 
  • Go to industry associations and ask about the businesses’ involvement. 
  • Google the business owner,  see what comes up and ensure you dig deep enough into page 2 or 3 of Google so there are no surprises down the track. 
  • Who owns the brand? 
  • What registrations, patents, trademarks are in place? Do you need to ensure they are part of the contract to be transferred to you on settlement of the sale?

If you are not experienced in this industry, get to know it. Get to know everything about it. Ensure you know the industry landscape. Know who all the major players are, who have what influence, what are the biggest brands you are up against. I suggest you do a competitor analysis, know everyone’s products, prices, offering the value they are including and the type of customers they attract.   

Then look at the market;

  • The history of the market and what factors affect it. 
  • Understand the size of the market
  • Who are your target audience and how do you reach them?
  • What trends are shaping the market?
  • What technologies are being developed that will impact the industry?

Take a deep dive into the financials;

  • Ensure you know the profit margins on each and every product or service and what impacts these profit margins.
  • Know the cash flow and if there are seasonal impacts that you need to account for. 
  • Debts and debtors, are you taking on the existing debt of the business? How are you doing to service those debts? What is the payment schedule on debtors?  
  • What are the assets and what are the values attached to them? How easy is it to transfer ownership?
  • Look closely at the costs attached to the business. Can the business actually run on those costs? Have expenses been removed or added back to show a bigger profit?
  • Look at key staff, how can you ensure they are retained and what employment agreements are in place?
  • Ensure you request detailed reports and forecasts for the business and if you don’t get what you need, submit a list of every item you do need. This is non negotiable unless of course you are getting the business for nothing!

Quite often businesses have a web of messy agreements, leases, contracts and so on in place. You need to unearth all of them. A lot of the time they will be expensive and really not suitable for your needs. 

What commitments does the business have?

I bought a business once that had 5 equipment leases agreements in place on everything from phones systems to photocopiers and more. Ensure you know what you are getting into and if possible how to get out of them. 

Know what property rental leases are in place for the business. Find out if they are  transferable, have you seen them and do you need to meet with the landlords to have them agree to transfer them to you? Ensure you are aware of any security deposits that are required for these leases or directors guarantees. Do you have this money set aside in your budget and cashflow?

What supplier contracts are in place? Are you required to buy from certain suppliers and for how long or at what cost? More information you need to be aware of.

Does the business have customer contracts? Is the business a preferred supplier or contracted supplier to someone else? Ensure you understand what that contract entails, what’s required for you and what exactly you need to provide. Also it would be a good idea to meet with any contracted customers to ensure they know there is a change of ownership on the cards so you can retain their business. Quite often customers don’t know there is a change and when they don’t have a relationship with the new owner they will move their business onto someone else. Make sure this doesn’t happen to you. 

What are you buying in the business? Ensure you have a list of what equipment, machinery, technology and furniture is included. You don’t want to turn up on your first day and have nothing you need in order to run the business. This might sound simple enough but so many people skip over this step or just focus on the big things not the little ones. 

A business I purchased had three sheds worth of tools and equipment. There had never ever been a stock take of the equipment. It was an absolute shambles so we ended up asking the seller to take photos of everything in the sheds so we knew what was included and what wasn’t. 

My final note on equipment is  to ensure you assess the condition and have an understanding of how long that piece of machinery, technology or equipment will serve its purpose. You may just buy all the equipment you need only to find out later it is out of date, out of life or just useless. Then it costs you tens of thousands or more to replace it.

4. Seek Professional Guidance

Don’t go solo when buying a business. Have someone else look at all the figures, all the inclusions, assets and equipment. 

I personally suggest you consult an expert, a business advisor, consultant or even your accountant. Get them to act as the detective digging up all the dirt and identifying the risks and areas of concern. You still need to do your work. You CAN NOT rely on someone else to do it for you no matter how much you are paying them. I have close friends who bought a business and spent a fortune on a business consultant to do Due Diligence on the business and within a few months of owning it they realized he hadn’t done anything he said he did. They relied on him and he took their money, told them to buy the business, and they ended up losing the business and their house. 

Be careful, be cautious and be diligent in your fact finding. Do not get caught up in the excitement and adrenaline of what could be. You need cold hard facts and information before you make any offers or buy any business. 

Also if you have a family member or friend whom you know has significant business experience, get them to take a look and give you their opinion. Don’t be afraid to ask questions, ask for advice and get people’s opinions on the facts of the business.  

As I mentioned at the beginning the seller will show you what they want you to see, you will look for what you want to see, if you have an independent person taking a look you will be assured that the little things that become very big things are not missed.

Conclusion

I know what I have outlined over these two blogs seems like a lot to do and a lot to consider, it is. Ensure you protect yourself and your money but take these steps seriously and triple check everything. Remember to go through the steps outlined in the blogs here

Revist the four sections and each point within;

  • Are you ready, willing and able to own a business?
  • Finding the right business for you and your goals
  • Do Your Research
  • Seek professional guidance

Buying a business is a big decision and will impact your life considerably. Take your time and ensure before you act you are confident you can make the business a success. 

I wish you all the luck and if you need someone to take a look at the business for you, please give me a call. 

All the best.

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