So you’ve decided that you’d rather buy a business than start one from scratch.
Whether you’ve run an enterprise before or not, there are a few things to consider before you buy a business.
There are generally two ways of buying a business: either you buy the legal structure of the company; or you buy the underlying assets. Each has its pros and cons.
One of the cons of buying the legal structure is that any unknown liabilities such as lawsuits, employee claims and warranties will be the responsibility of the new owner (that’s you) after the sale is complete.
There are various methods of addressing this problem depending on what the risk is. You can have a lawyer check the court lists for pending legal action.
Additionally, you can have funds held in escrow until a set period after transfer.
One of the main reasons why someone buys a business is that they don’t have to spend years building up a customer base.
Make sure to ask the seller about their marketing. They should be able to describe customer lists and databases and their current marketing plan.
Just because the business has people in it when you visit, doesn’t mean they’ll still be there when you move in.
The financial statements are the first place you should look when starting to value a possible business. If the target business has failed to keep good financial records, consider it a red flag.
Firstly, any price that they’re asking for isn’t going to be based on any reliable data.
Secondly, any established company without good financial records is likely to have weaknesses elsewhere in the structure. Keep in mind, you’re buying the structure not the assets.
It’s highly recommended to have an accountant look at the information provided.
Make sure to ask for income tax returns and activity statements as well as bank statements to audit the financials they provide. If they can’t provide these documents, consider walking away.
NEVER rely on what they say the cash takings are. Especially if you’re buying a restaurant.
Any established business will have employees who run the day to day operations. If these employees are family members of the seller then be wary of losing your most valuable staff as soon as you buy in.
The presence of a procedures manual or a training manual that new staff can use is a sign of a well run business.
Additionally, where the owner and their family work in the business, make sure that they’re not including their salaries in the profit figures.
You don’t want to buy a business only to find that the kids were working for peanuts and their replacements are another $70K pa.
Buying a business can be an incredibly smart move but make sure that you go into a potential purchase knowing what to look for. Having the right advice at the right time can be priceless so make sure you consult the right experts before diving in.