What to look for when buying a business – Part 1

written by Sarah Colgate

Business Tips for 2024

December 20, 2023

My key considerations for you to ensure you save time and money are delivered in two blogs. This is part 1.

Buying a business can be an adrenaline fueled experience and we often get excited by the possibility of owning a business. That often leads to key aspects of buying a business being overlooked. 

How much do you need to know before buying a business?

I have put together a few considerations you need to work through when you are buying a business. For this blog we will be focused on service based businesses. 

The most essential considerations are:

The seller is only going to show you the good stuff.

  • The current owner has probably worked exceptionally hard in the business and they believe it is worth a lot of money because they have put their blood, sweat and tears into it. Ensure you look at the facts – figures and assets. 
  • The businesses that are not so great will focus you on what can be done to make the business great. They are selling you on the potential and what the future could look like. You don’t pay for that, it’s just an added bonus if you decide to buy the business. 
  • Business owners sell their business for loads for different reasons. You need to identify what those reasons are as soon as possible and ensure they will not affect the business in the long term. 
  • Take a deep dive into the figures including the profits. Ensure everything that is needed to run the business is included. Often business owners will have a list of add backs that aren’t realistic to make profits look good. Ensure you really understand what is happening in the business figures wise. So there are no nasty surprises down the track.

You as a buyer are looking to get the very best deal possible.

  • Look at what is actually being sold. What is the breakdown of assets versus good will? 
  • If there is a lot of good will in the sale you need to consider a worst case scenario. What competitors are in the market, is demand slowing down for the product or services the business provides. Is the good will based on the owner? If so, how is that transferable?
  • In regards to the assets in the business, look at what is the cheapest possible price you can buy for externally, check the lifespan of the assets, the servicing records and look to get them valued. 
  • To help in negotiating, outline your own value for all the components of the business.

Let’s work through an example for the key considerations of buying a business. Let’s say you’re eyeing a small service-based business. You’re stepping into an exciting world of being an entrepreneur. Whether it’s a cozy café, a digital marketing agency, or a dog grooming salon, these considerations will help you identify if this business is a good option.

1. Are You Business Ready? Do you know what’s involved in running a business?

Running a business isn’t all rainbows, sparkles and unicorns. It requires a lot of you and your time. A lot of dedication, discipline, and probably a lot of wine and or caffeine. Before you sign on the dotted line I suggest you consider the following:

Know Your Skill Set

Do you have the right skills to manage this business? Whether it’s financial education, marketing prowess, or people management, self-awareness matters when it comes to business. You need to look at yourself, your skills and what other skills are needed to complement yours or balance your weaknesses. 

I suggest you do a SWOT analysis on yourself as a business owner so you can easily identify what skills you have and what you need in the business to help you.

Time Commitment

How much time can you invest in the business? Some businesses thrive on late nights, holiday times, weekends and early mornings. Are you up for it, can it fit in around you, probably not, how do you fit in around it?

A key consideration – lifestyle businesses are usually not lifestyle businesses. Most of them operate in key holiday times or on weekends. Ensure you look closely at what operation times the business has and when the business has its busiest times. 

These times will impact you considerably. 

Emotional Stamina

Businesses are emotionally draining; this doesn’t change based on how big or small it is. I suggest you consider how much of yourself you can dedicate and how much emotional stamina you have in you to provide to the business. 

Consider the unusual work hours, customer complaints, staff demands and unexpected challenges—brace yourself for a roller coaster ride.

Personal Goals

Why are you looking at this business? Does this business align with your life goals or what is it helping you achieve in your life? How will this business help you achieve what matters most to you? Be clear on this point. I have had a lot of businesses for the wrong reasons and it’s harder to get out than get in.

Capital

Know your numbers. Can you afford the investment? How much money after the purchase price do you have to run the business?  How much do you need to make to pay the bills?  Ensure you have a cashflow forecast and keep it up to date for at least the first year so you know what you have coming in and when.

2. Finding the Right Business for you and your goals

Now that you have an understanding of what’s mentally involved, let’s consider what is the “right” business. A disclaimer on what is the “right” business – there is no such thing. It just comes down to what is the best fit.

Interest and Experience

Consider your background, what industries ignite your passion? Look at your expertise and your work experience to date. Make a list of all the types of businesses that may match your interest and your experience.

Business Potential

Any business you purchase needs to have some potential or an opportunity for growth. Look beyond the present business. What can you bring to the business? How can you create growth? Is there any untapped potential waiting for your magic touch? Ask the current owners what they have tried and what they see as being the potential. A lot of the time the current owners know exactly what needs to happen to grow the business but they haven’t had the time or the energy to carry out those changes.

Your Value

What unique skills or ideas can you bring to this business? Maybe it’s revamping the menu, optimizing the operational processes, buying supplies cheaper or changing the origin of the supplies or enhancing customer experience. Start outlining what small, medium or large scale changes can be made to improve the business. 

What have you done in previous roles to improve businesses and how can that be translated into your potentially new business?

Location

Location does matter. Is the business location accessible? Does it attract foot traffic or is there a reason people walk by it? A prime spot can make or break a service-based business.

I set up a business in my twenties that was based on the redevelopment of an area. The area 20 years later still hasn’t been redeveloped except for a few cafes and takeaway stores. That decision cost me $80,000 back then. So before you buy in based on plans triple check the plans and the company delivering on those plans. 

Also look at road/transport developments, council development plans and how far away parking is for customers and potential costs for people accessing the business. 

Existing Customer Base

An established clientele is gold and it saves you from the uphill battle of building trust from scratch. Ensure you understand how big the client base is, how they may be affected by new ownership. Know how to contact the customers, how well the database has been looked after and updated. 

If there was to be a significant decrease in the customer base how would you rebuild that? What do you need to deliver to current and new customers to keep them loyal and supportive of the business?

Above we have covered off half of the considerations you need to address before investing your money in a new business. Please ensure you take a deep dive into the business and ask a lot of questions of yourself and the current owners. I suggest you now click through to Part 2 to continue the key considerations before buying a business including research and professional guidance. 

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