Buying a business is a big decision, but can be a great way to grow your company. We’ve compiled a list of our top tips to be aware of when looking to buy.
- Is this the best decision for you?
What is your true motivation for buying a business? If you see real opportunity, buying a business may be right for you. Ask yourself if right now is the best time to make the commitment to buy.
- Will your family and staff support you?
Owning a business will affect your relationship with your family, in one way or another, since you will need to make emotional and time investments. You need the physical capacity to work long days, especially in the early days.
- Who runs the business when the owners go on holiday?
When was the last time the sellers went on holiday and how long were they gone, and what kinds of problems happened when they were gone? That helps determine how tied the seller is to the day-to-day operation of the business. The problems that occur while on holiday are sometimes an indicator of how much babysitting you may need to do.
- Do the numbers add up?
Will the business provide a reasonable return on your investment and compensate you adequately for your time? When calculating turnover and gross profit, work on the basis that 100% will never be retained, aim towards 75%. If you would still buy at 50% being retained then you may have good reason to purchase. Be sure to spot any increasing or decreasing turnover and profit trends and find out the reasons why.
Ask to get a debtors and creditors list, excluding company names, giving assurance to the seller. This will let you see if they have one or two accounts that support the business.
- Are there any other skeletons to worry about?
Are there any exclusive rights that impact the business? Has the business ever been a crime scene or been vandalised? Are there dilapidations on the property? What software do they currently run, will it migrate to your system and successfully bring data across?
- What do customers have to say?
Talk to current customers of the business, and not necessarily the ones that the seller handpicks for you. Find out who buys from you and why. Are there any contracts in place to consider and what do the customers say about the company name? Social media is a good way of judging a company’s reputation.
- How does the business make its phone ring?
It might be worth asking the seller about what marketing they have done to grow their business and to generate new prospects. Ask them which marketing efforts create the most leads. What you want to try and find out is what marketing they are doing, if any, and how effective it is.
- Why is the seller really getting out?
The seller knows their business better than you. Ask them about why they are selling. The challenge is to find the real reason. A redundancy sale is best but beware if the seller is younger than fifty. Use credit checking services to see if the information provided matches, or if the seller has any conflicting business interests.
- The nuts and bolts
Day to day operations will not be available without emails, website domains, telephone numbers etc. and all will need to be transferred, so before purchase find the easiest and smoothest way to get these sorted.
- Negotiate a “letter of intent.”
A LOI is a short agreement between the buyer and seller of a business that spells out all the important terms and conditions. Include the purchase price, how and when it will be paid, the assets that will be sold, the seller’s noncompete agreement etc. Be aware if the business is being sold by an agent, if so, make sure you are aware of any fees that the seller will want to recuperate.
- Do your homework on the staff
Staff will have the right to transfer their employment to you. Look at all existing contracts of employment, can you match or improve them? Also consider redundancy; any future redundancy will be yours to facilitate, so there will be a potential cost.
- What is your exit strategy?
What if you have to sell the business or get out sooner than you thought? Along the same lines, you should also have a buy-sell agreement in place if you happen to have any partners involved in the business.
- Make sure the seller sticks around for a while.
The customers may have built a good relationship with the owner. Be sure the seller continues to make an appearance at the business after the closing to introduce you to customers.