Buying an existing business can be easier than setting up and launching a new business from scratch. But you'll want to do your research and due diligence before going ahead – especially if you've never been in business before.
The main reason most people buy a small business rather than starting one is for the established infrastructure and ongoing cash flow. People buy franchises for similar reasons – they usually come with supplier agreements and a proven system of what works and what doesn't. That said, buying an existing business has its own challenges. You'll need to do your research and conduct detailed due diligence. Plus, there's every chance you'll need to secure a business loan in order to pay the required lump sum for the business.
Once you've found a suitable business, you'll need to verify the state of the business before making an offer. This includes ensuring that sales are as good as the owner says and that employees will be happy with a new owner. You should also check that customers will remain loyal once you take over. Make sure you investigate all aspects thoroughly. Are the business systems sound and documented, and is the cash flow sustainable? A business owner will want to sell their business for as much money as possible and you'll want to pay as little as possible. Your aim is to make the seller want to sell the business to you – on your terms and at your price.
Formally register your interest in buying the business. The owner will usually have instructed a business adviser, such as a business broker, lawyer or accountant, to sell the business. Approach the advisers, rather than the owner, to register your interest. Your integrity and your future plans for the business are usually extremely important to the seller.
If you can uncover the seller's motivations, you'll gain an advantage in the negotiation process. If the owner has to sell within a certain time period then you may be able to negotiate a lower price.
Before you make any offer, complete a preliminary due diligence to ensure the business has no major problems. Always ask yourself this question – "If the business is as wonderful as they make out, why they are selling?"
Sellers often gloss over the weak areas of the business or create short-term gains to give a favourable impression of the business. For example, lowering stock levels to artificially inflate profit (before stock needs to be re-ordered) can make a business seem more profitable. Ensure you investigate thoroughly before you show your interest in buying the business.
Immerse yourself in the business:
Tap into the knowledge of those in the know to assess the future business viability of your acquisition:
If the business is not making a profit, try to uncover why. For instance, it's not a good investment to buy a café in a location where three other food and beverage businesses have gone bust.
Once you've indicated that you're interested in buying the business, you can usually get access to more detailed information. You'll likely need to sign a Heads of Agreement or confidentiality statement.
Establish existing customer needs and perceptions:
Get a feel for the business's credit history:
Analyse historical information and trends:
Take care to look for changes or inconsistencies:
You may need to revise any projections that are out of step with these indicators.
Does the business have an efficient accounting system in place and does the owner monitor key performance indicators regularly? Check the major balance sheet items:
If you're allowed access to the business, consider an employee audit:
Complete a legal due diligence.
Working out how to value a business is key before you make an initial offer. Always get professional advice, especially if there are any tax implications.
Make your own sales and profit projections rather than relying on supplied figures. If you have ideas on how to increase profits, this is your good fortune. Don't inflate your offer price because of opportunities you've identified. If you can't identify where savings can be made and where there is scope to increase profits, then you shouldn't be buying the business.
Consider your level of risk. The risk is higher if the target business:
Though it sounds obvious, making a lower offer and increasing it if required is always a better strategy than going in high at the start. Ultimately, the business is only worth what someone will pay for it. The seller might have to lower their expectations.
Goodwill is an amount the seller might expect from you for the value of the business's intangible assets such as an established brand, loyal customers, high profit, quality staff, good location, long lease or supportive suppliers.
Get advice from your accountant on the most favourable way to deal with goodwill. Try to negotiate it down if you can. For example, it may be more favourable to pay more for assets than to pay goodwill because assets can be depreciated over time.
Sellers usually prefer a lump sum for the business, and if that's the case you may need to look into securing business loans and finance. However, often the seller often has to leave some money in the business to help finance the deal. Try asking the seller if you can pay off the business over a period of time rather than in a lump sum. This allows you to pay using cash generated from the business itself. It also hints that the seller is confident the business will be able to fund repayments from cash flow.