10 things you must consider before buying a business

Before you come close to signing on the dotted line, there are 10 important factors to consider closely, writes accountant and business advisor Nick Roberts.

Starting a business from scratch and going without income in the initial period can be a daunting prospect, so it’s tempting to buy a business instead.

But before the excitement clouds your objectivity think carefully — the corporate world is littered with disastrous business acquisitions. So how can you avoid ending up the same way?

This article will cover the 10 major elements that should be taken into account prior to signing any deals. Understanding these and keeping them in mind will give you the best chance of a successful acquisition.

1. Reason for sale

Sometimes it’s not easy but, if possible, determine the real reason for the sale of the business. Is it a good reason such as retirement, separation, or the owner’s overstretched? Or is the business heading to the wall?

The reason for sale will undoubtedly influence your justifications for purchasing, and it may also impact the strategy to develop for taking the business on.

2. What are you buying?

Don’t buy the company — buy the trade and assets.

Establish exactly what assets you’re buying and how much you need to pay — are they worth it? If you’re buying goodwill, this is not tax deductible. Is all the goodwill attached to the owner or to the business? Goodwill can dissipate quickly, especially if a business takeover is botched.

3. Restraint of trade

Basic stuff, but you’d be surprised how many purchasers try and save money on professional advice and make a hash of it.

A client of mine sold his business and opened up again just a few kilometres away because there was no restraint of trade imposed. Guess what happened?

READ: Key considerations when taking a business online

4. Due diligence

You cannot avoid a thorough review of the business before proceeding. Don’t be fobbed off with limited or restricted information, you hold the whip hand because you are waving your money in front of the vendor.

Yes, this may cost you, but don’t be penny wise yet pound foolish. In any case, it may not cost as much as you think, especially if you can do some of the work yourself. A good accountant will have a checklist on what to look out for.

A client of mine who is looking to buy a business is actually working in the business right now. You can’t do better due diligence than that, he’s found out all sorts of things!

5. Impacted staff

Staff these days are the number one business problem and especially in a small business where staff numbers are limited, because losing even one employee can be catastrophic.

A change of business owner is almost guaranteed to prompt staff departing and, these days, getting the right staff is a real challenge.

6. Real estate

If you’re buying a business with premises you need good advice whether you’re buying or leasing.

If leasing, how long is left on the lease? Are the premises suitable? Is the location the best? Are there any building maintenance works that will fall to you to make good?

7. The handover

Typically, buying a business where the existing owner is prepared to stay on a while and assist you with getting to grips with the business will command a higher price.

Even a small business can be complex and there are many things to take on board, so a reasonable handover period can be invaluable.

8. Key relationships

Building a successful business requires establishing and maintaining relationships with all sorts of people, not just staff and customers but suppliers too, because these days getting things done by tradespeople, professionals or suppliers of goods and services generally is not that easy.

As a business purchaser, you need to work out very quickly the important people you need to get to know and keep on side, it’s a huge component of goodwill that is often overlooked.

9. Working capital

Many business purchasers underestimate the working capital required to operate a business and typically, available cash or borrowing facilities have already been utilised in paying for the business.

Get an accountant to prepare a simple cashflow forecast highlighting your peak cash needs.

10. How much should you pay?

Unfortunately valuing a small business is notoriously difficult, primarily because of the overriding involvement of the owner of the business. Take away the business owner and you often take away the business.

Many pay huge sums of money for a small business just to buy themselves a job and end up being worse off financially.

With many business purchases it can depend upon just how much money the purchaser has to spend, which I’ve always thought strange, but it’s just the way things are. There’s no simple answer so seek the advice of a good accountant and be prepared to walk away, that being the necessary risk of negotiating hard.

In conclusion, while owning and operating a business can bring huge rewards and satisfaction as well as building wealth, it’s also very risky. So take your time, do plenty of research, and call us on 03 9038 9449. That way, you’re minimising the risks and setting yourself up for success.

Source: MYOB March 2021

Reproduced with the permission of MYOB. This article by Nick Roberts was originally published at https://www.myob.com/au/blog/buying-a-business-key-factors-to-consider/

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