Buying an existing business is a big step. Much of the hard work of establishing the company has already been done for you, but along with the benefits come risks. Doing your due diligence is essential before you dive in head first or get swept up in the excitement.
Here are seven of the vital questions you should ask before you commit to buying a business.
1. Why are the current owners selling the business?
Knowing why someone is exiting a business can tell you a lot about your potential investment. Of course, don't take their answer for granted. Ask a variety of questions around their reasons, as this will help you determine if they're telling the truth.
Even if you get the feeling they aren't being completely honest about their reasons for selling, this still gives you useful information. They might not want to respond for personal reasons, but there's also the chance that the answer reflects negatively on the business.
Talking to the owners about why they're leaving the company can give you insight into the work-life balance they've experienced. Are they exiting because they want more free time, or has the company set them up for retirement? Maybe they know that the business needs a little more effort put in to get it through the next growth phase but they're not willing to invest that energy personally.
2. How did they reach the asking price?
Evaluating the worth of a company isn't simple. The factors you need to consider often change depending on industry, but generally they include goodwill, assets and yearly profits.
Check how the current owners reached their asking price. Is there rhyme and reason behind the figure, or is it based on arbitrary factors? It's generally a good idea to invest in an independent professional valuation for a comparison as well.
3. Will they agree to a non-competition clause?
The last thing you want is to buy a business only to have the previous owners or employees set up shop right next door. Raise the topic of a non-competition clause. You need assurance that they're willing to sign one so you can rest easy knowing you won't have a rival starting up in the locale for at least a given period of time.
4. What risks and challenges have they faced with the business?
The best insight you're going to get on the company you want to buy is from the owners themselves. Discuss with them what risks the business faces, and what they've found challenging. Knowing they've had difficulties with suppliers, for example, allows you to come in prepared to either find a new source or monitor the relationship closely.
Most owners understand that all businesses face challenges. If they're not willing to discuss theirs with you, this should raise a red flag.
5. What happens with any existing employees?
It's important that you obtain a full list of employees and contractors, along with their salaries and any additional entitlements that they might get. For example, you need to know if there are any promised bonuses or longstanding leave entitlements the company is liable for.
Maintaining the previous employees can help smooth over the transition between owners and reassure customers.
Who are their key staff members, and are they staying on with the business? If not, you need a complete list of their duties as well as a thorough training manual, as you'll have to figure out how to replace them.
Maintaining the previous employees can help smooth over the transition between owners and reassure customers. However, it also means taking on a lot of responsibility. Make sure you get the full story before proceeding.
6. Are there any opportunities they've identified?
Even if they've considered leaving the business for a while, it's likely that the current owners are still aware of openings in the industry that the company might make use of. Ask them where they'd go next with the organisation if they were staying on. If they don't have any suggestions for you, make sure you consider why. Is it because there are no opportunities around or is it just a lack of foresight on their part?
Being aware of any opportunities helps you evaluate the potential future worth of the business, and if the rewards outweigh the risks that comes with acquiring the company.
7. Have you talked to the right people?
Buying a business is no small step. Not only is it a large financial decision, it also impacts your personal life. A company generally requires a lot of time and effort to ensure it runs smoothly, especially during a transition phase.
Investing in the right advice is essential. An outside professional perspective gives you feedback weighted with experience. Additionally, an advisor should know which areas need the closest scrutiny to ensure you're making a wise choice. Having someone that's aware of the challenges you might face, and how to avoid them, is priceless.
For example, an accounting firm that also specialises in business development can help you by:
- Evaluating the industry and any potential competitors.
- Looking at the health of the business's cash flow, and forecasting it for the near future.
- Supporting you in navigating any potential issues, like franchise agreements.
- Advise you on loan structure and management for your purchase.
- Creating a business plan with you, so you have a road map moving forward with the acquisition.
Purchasing a business is both an exciting and daunting time. If you'd like support through the process to help you make the right decisions, reach out to the team at WMC Accounting today. We believe in partnering with our clients to ensure they achieve their goals.