It’s fairly easy to buy a business but much harder to sell one, so before you take the plunge and lock yourself into potentially bankrupting financial commitments there are a number of things you need to do to ensure you’re on the right track:
Ask yourself some deep searching questions. This is key. Are you really the right person to own and run a business? Are you dedicated, a hard worker, committed, a leader, passionate, self-sufficient and multi-skilled? And what about your experience? Have you worked in that line of business before? Know how to market yourself and your business? Can you sell, juggle your finances and manage staff? You have to be a jack-of-all-trades to survive in business and it’s a hard training ground.
Prepare a Business Plan. The whole point about a business plan is that writing it forces you to think about the issues that you will have to face in running the business. How will you market the business? Where will you operate from? What staff will you need? What will the break-even point be? How much profit will it make? How much working capital will you need? Will it support your lifestyle? Just because the current owner has done things a certain way in the past doesn’t mean it’s going to work for you and you need to know sooner rather than later.
Make sure you have enough money. Even a well-run business sucks up cash like a vacuum cleaner and a growing business even more so, which means its essential to make sure you have enough working capital to keep the business going when things get tough, customers are slow in paying or you have to buy more inventory. You need a healthy cash reserve or failing that, an unused borrowing facility. Plan ahead too, it’s no good finding out the week before you have a huge GST bill that you have no money to pay.
Get some good advisors. Being in business is a lonely place and there will always be business skills you have to buy in, so get yourself a good lawyer, a great accountant and maybe a business mentor or coach. Now some say they cannot afford advisors but it will cost you far more in the long run not to get expert advice and assistance to enable you to avoid making expensive business mistakes. There are so many examples of naive individuals buying failing businesses or not protecting themselves from dishonest business vendors. Take, for example, the purchaser who failed to build in a restriction on the vendor setting up in competition so that the vendor set up in business a mile down the road and took all the customers. Or the purchaser who found later that the vendor’s accountant had fiddled the books so ended up paying well over the odds.
Do some Due Diligence. It’s absolutely essential to carry out some due diligence on the subject business before you go unconditional. There are some excellent checklists around to help you with due diligence but no matter how experienced you are in business due diligence takes specialised skills so you need a good commercial lawyer and an experienced accountant who does more than just tax returns and who is honest enough to put reputation before short-term profit. Is the business dependent on a few key customers? Does the goodwill centre on the owner not the business? Will key staff stay on? Who owns intellectual property? Are previous accounts reliable? Are there traps in leases or financial commitments? There a huge number of areas to investigate and it can be a minefield.
Find out why it’s for sale. This is a question of vital importance and if you can find out the true answer it could save you from rack and ruin. There are plenty of good, fairly convincing cover stories out there and it’s not always easy to find out the true reason for the business coming onto the market so be careful, very careful indeed. How long has the vendor owned the business? Make some enquiries, ask around, don’t be fobbed-off and investigate all aspects of the business. If it sounds too good to be true it probably is!
So take your time and don’t rush into buying a business. Get good advice and think about it very carefully. Consider the alternatives too - would it be better to start a business instead or wait until the next one comes onto the market? Far better to take your time and make sure it’s right for you than get yourself into unnecessary difficulty.
If you need help buying a business call Nick today on 021 225 6425 or email.