When buying a business, there are many different factors to consider. Forbes reports that only 1 in 15 prospective small business buyers end up completing their transactions. Here we share everything you need to know before deciding whether or not to purchase a business and how to make sure that the transaction is successful.
What type of business do you want to purchase?
Before embarking on the purchase of a business, you need to think long and hard about what it is you want to buy. For example, are you looking to invest in something you already have experience in, or perhaps you want to buy a business that revolves around your passion or personal interest. At this stage, you will need to consider what your personal goals are for starting a business – this will help guide your search for a business that is aligned with your interest or values.
Additionally, you will need to think about what budget and resources you have available. By knowing what you have available and what you ideally want to spend, you can start thinking about which businesses might be the right size, location or business model to align with your expectations. You can also think about what changes you would like to make to the existing business as this will help you with your long-term budgeting.
You should also think about what your involvement will be in the business. It is not enough to simply invest money into a company; you will need to consider the time and energy you are willing to commit and how this fits with the needs of the company. Thinking about resources will also extend to thinking about a team of staff that can help you make your business goals a reality.
Which businesses are for sale?
When looking for a business that suits your personal criteria, there are lots of different ways to go about it. One of the best ways to do this is to use online business marketplaces which give you access to thousands of listings, allowing you to filter searches and hone in on the most relevant results. Another approach may be to look at Craigslist ads or newspaper ads. Also, do not underestimate the power of networking; asking around can be a great way to find new contacts. Think about relevant contacts that you may already have in the small-business ecosystem or look for larger-scale networking events or industry conferences. You can also work with a business broker who may be able to help screen potential businesses that best suit your needs.
Why is the business owner selling the business?
There are many reasons why the owner of a company may choose to sell their business, be it wanting to start a new project, take retirement or relocate. However, there may be certain reasons for selling that might be cause for concern. For example, look out for holes in the business plan, any existing debts, how their company fares in the sector compared to competitors, and problems with inventory or supply chain.
When approaching business owners, make sure to ask them about challenges they have faced in the past and how they have overcome these; you need to be prepared to take over the company so it will stand you in good stead to know what type of challenges you might be up against. You can also do your research and speak to customers and employees to find out about the business from a different perspective.
Carry out due diligence
Due diligence is a crucial step when purchasing a business. It involves gathering as much information as possible and working with an accountant and lawyer to make sure you have all the necessary documentation. The accountant will help you review the business’s existing financials and help check that everything is legitimate.
A staggering 50% of agreed deals never close due to the deal not passing the due diligence stage which is why it is so important to take your time on this step and make sure that it is carried out properly.
Typically, the due diligence process involves reviewing the following documents:
- Business tax returns for the past 3 years
- Company revenue for the past 3 years
- Customer database
- Information on existing debts
- Organisational documents for the business
- Any existing contracts
- Property documents such as commercial leases or rental agreements
- Employee information
- Marketing and advertising information
The process of due diligence can be a lengthy one but it is crucial for making an informed decision about whether or not you want to purchase a business. Working with professional accountants or lawyers will ensure that you are considering everything you need to know. Only once due diligence is complete can you make a well-informed decision about buying the business.
One of the most important steps for purchasing a business is securing sufficient funds to pay for the transaction. The most typical way to fund these types of transactions is a combination of debt and equity; this means that you will likely need to put forward some of the cost and the rest will come via a loan. There are many different options available for taking out a loan so, during the due diligence process, you should be comparing and contrasting different options such as small business loans, installment loans or bank loans. When carrying out these comparisons, important factors to consider are the interest rates, repayment terms and conditions and any other fees you might incur. All of this will help you assess the best and most affordable option to suit your needs. Whatever you decide, you should ensure that your lender will be ready to fund your purchase as soon as you are able to close the transaction.