Why do you want to buy a business?
There are as many reasons to buy a business as there are people. Perhaps you are working for a company but have dreams of being your own boss. Maybe you came into some significant money and somehow you determined that owning an enterprise is more appealing to you than the stock market or real estate, or something else. You might own a business already, and it is time to branch out. Or quite simply, you always wanted to be an entrepreneur and the time has come to go for it. Regardless of the reason, it would not make sense to go forward on a project of this magnitude without doing relevant research, strategizing, planning and looking at as many variables as possible. You have to do your homework. However, a word of caution: seldom, if ever, you will have everything arranged in such a way that it represents the perfect time to go ahead with these plans. By definition, entrepreneurship goes hand in hand with risk. If you are totally averse to risk, owning a business is not for you. You can prepare yourself in the best way possible, but if you go overboard with planning and research, it will likely not happen. Who knows how many dreams have been dashed by vacillation…
So, let’s address some basics:
First, You.
Skills, Interests, Background: Surely you agree that whatever you choose to do must align as much as possible with your skills, your interests and ideally, your passions. This is a foundational step.
Financial Assessment: Do you have the proper funds? Do you have enough not just to buy the company but also to run it for a reasonable amount of time? Is there enough cash for emergencies?
The Risk Issue: As mentioned above, you must be willing to deal with risk, including the thought that everything might go wrong and you lose your investment altogether; not only does this needs to be contemplated, but obviously how to manage the unpredictable to ensure it does not happen is crucial.
Next, Market Research
Industry Status: Find out as much as you can about the industry you are considering. Pros and cons, challenges, opportunities, what people in the industry say about it.
Market Demand: Can you confirm without a doubt that in fact there is a need or a demand for the service or product you are thinking about?
Competition: It is not often, if ever, that you find a business where there is no competition. You might not need to go crazy with this, but certainly understand who is out there, determine if there is room for your business and make sure you are at ease with the decision.
What Business to Choose?
The hard way: Do your own research, get involved in networking, ask around, identify where business listings are found.
The professional (presumably easier) way: Quite the self serving statement here, but just find a business broker who can help you with the business search, the due diligence including the financial component, negotiations, closing, the whole thing.
Due Diligence
The financials: A complete financial analysis is needed. There is no getting around this. You must understand P & L’s, Cash Flow, Balance Sheets, tax returns… and not everyone is good at this. So again, a business broker is highly recommended.
Legal Compliance: Is the business compliant with relevant legal requirements?
Customers: Confirm the customer base, customer demographics, consistency.
Operations: A clear understanding of vendors, supply chain, inventory, staff and management is definitely required.
Assets: Determine if fixtures and equipment are in good condition; is their remaining life span acceptable to you?
A comment on real estate and leases: Many businesses are offered with real estate, others require that a new lease be signed or transferred. This is a whole other issue where the support and guidance of a professional is very helpful – typically you would know ahead of time if you want to purchase the real estate offered. Due diligence on the potential new landlord is very much advised. This is a different conversation.
Valuation:
Is the business worth the asking price? Most business brokers are quite capable of performing a basic valuation for small and medium sized businesses. And in most cases, it is relatively easy and practical to determine if the asking price makes sense. If you are considering a larger enterprise, hiring a professional valuation company might be worth it.
Negotiation:
Making an offer: Realistically, the only way to make a proper or significant offer is after the due diligence and valuation assessments have been completed. The more information you have, the better.
Most business purchase transactions involve third party financing or seller financing. It is essential that you are familiar with pricing strategy, payment terms, benchmarks and contingencies. Buying a business is sometimes a long term or a life commitment, so limiting emotional buying might be helpful (unlike buying that awesome car you just have to have…).
To close, there is more, much more, but it might need to be included in a different blog. We need to attend to purchase agreements, self financing, business loans, investors, nuances of seller financing, the closing process, transition plans, staff retention, training – and what happens after. You get the idea.
Buying a business is a complex process that requires careful planning, thorough research, and professional advice. By following these steps and conducting proper due diligence, you can increase your chances of making a successful and profitable acquisition.