Thinking of buying a business? Here are the Five Crucial Things to Consider
Buying a company that’s already established can be a quick and easy way of getting in to business.
However, there are important things to take into account when considering buying a business.
This guide takes you through the essential issues to think about when buying an existing business.
1. Due diligence – what are you actually buying when buying a business?
- At the very least you need to see the financial accounts and forecasts, and make sure these stack up with nothing ‘hidden’ in the figures. Make sure the way the business was run fits with the way it will be run in the future. For example, will you have to hire extra staff to compensate for the current owners not being present?
- It’s not just about the numbers. What else are you buying? Think about sales contracts, purchase agreements, the quality of stock and equipment, intellectual property (including websites) and the cost/value of staff.
- Make sure that what you want from the deal v what the seller wants to sell are in alignment
2. Once you have established the above, a valuation needs to be put on the business.
Valuing a business is more of an art than a science – after all the value is only what the ultimate buyer is willing to pay. The seller will naturally want to maximise their return, you will want to create the best opportunity for your future plans – the final outcome will generally lie somewhere in between. Valuations will be affected by:
- Future earnings potential – this is usually estimated based on past performance, but business won and loss will impact too
- Assets and liabilities of the business – ie what it owns vs what it owes
- Whether you are purchasing the business trade alone or the shares of a company. Not only can this impact on both your and the seller’s respective tax positions, but buying the shares in a company can be riskier because you are buying all the assets and any unknown ‘skeletons in the closet’.
3. Structuring the deal
- Cash up front? This can be riskier as the current owner will be able to simply walk away from the deal when it’s done. If they insist on payment up front, ask yourself why? You could expect a discount on the asking price if you’re paying for everything on the day of completion.
- Earn-out? Making sure the current owner still has some skin in the game should ensure customers/staff/suppliers stay loyal during the transition as you get to know them and they get to know you. This can be structured in a number of ways but will usually tie the final sale price to turnover and profit targets.
4. Funding the deal
- Purchase. How will any upfront payments be funded? Don’t forget to price in the legal fees, sales commission and other professional costs. If you need to borrow, will the cash flows be sufficient to cover capital and interest payments?
- Cash-flow for the short/medium term. If the purchase is to be paid for through future earnings, make sure the numbers stack up with a healthy margin for contingencies and possible downturns.
5. It takes time and patience
Buying a business can be a lengthy and complex process. There will be times when you want to walk away out of frustration. Due diligence and legal considerations can drag on for weeks. Deadlines can slip. But you only have one chance to get it right so be prepared for the long haul.
If you need advice on any of these issues, get in touch and we can help.