Frequently asked questions - Tips on buying a business
Q1. What questions should people ask themselves when considering buying a business?
Buying a business can be one of the riskiest undertakings imaginable. The wrong decision can cost you your money, plus more spent trying to rescue it, not to mention your home, even your marriage. Ask yourself the following questions:
- Do I really need to buy a business?
- What do I expect from the business?
- What can I contribute to the business?
- Can I run it as well as, if not better than, the current owner.
Q2. Where should people look to buy a business?
You can find businesses in the papers, in for sale magazines, or if you are already in business, you can talk to competitors, suppliers, customers. But the chance that the business you are looking for, in your price range, experience range and area will be for sale at the time you happen to be looking, is slim.
Some reputable business Brokers offer a "Buyer Service", where you can retain the Broker to search for business that fit your parameters. This means that you pay commission instead of the seller, but the Broker is now legally obliged to work FOR you rather than AGAINST you, and most importantly, you have someone with appropriate insurance you can sue if it all goes wrong.
Q3. What should people consider in choosing a business that is right for them?
Business is not easy - there are always competitors doing their best to beat you. So if you don't actually enjoy what you are doing, you are already behind the eight ball.
You also need to know why the vendor is selling. A bad business can often lead to a bad back.
Q4. What are the key areas of financial due diligence for a buyer?
The first test should be the common sense test - are the seller's claims reasonable? Be wary of claims that cash has been taken out of the business. Count only add-backs that can be traced through the books.
You can follow up by talking to customers, suppliers etc.
Q5. What should be considered in determining a purchase price for a business?
The true price you should take into consideration is the "Enterprise Value", which includes the stock, and the working capital need to maintain the business. This would depend on such things as payment terms between customers and suppliers, and any seasonal factors which can influence the cash flow
There are no hard and fast rules, but you cash flow should enable you to pay off the interest and principal in a reasonable time, say 5-6 years.
Unless you really know what you are doing, it is probably safer to pay more for a solid business with a good track record and prospects, than to pay a bargain price for a shaky business.
Q6. What are some general contractual conditions/criteria buyers can consider when negotiating the purchase of a business?
If you are dealing with a crook or a con man, there is not much comfort in having a contract which says he promises not to cheat you. So you need to know who your seller is. And make sure all possible concerns you may have are addressed as conditions in the contract and alleviated before handing over your money.
Use a good solicitor who specializes in business conveyancing to prepare the contract, and a reputable Accountants to conduct "Due Diligence" prior to completion.
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