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How to Buy a Business

Tuesday, April 19, 2011   By Mike Reddy

 



Buying a business is easier than building one yourself but it has its own challenges. Despite the fact that buying is a more expensive proposition than building (or should be if it's any good!), banks will see it as a safer option because they can look at the business's track record as a guarantee for future earnings to pay them back their interest and capital.


The first step is to ensure that you have some knowledge of the industry or market in which the business operates. Then you need to screen for size and geographic location; how many employees will you want to manage?

Once you have identified a general profile, you will need to seriously consider involving us as well as a lawyer and, perhaps, banker to carry out a thorough appraisal of a potential candidate.

One of the best assets of a business is its history. With enough detail it should provide most of the information you need; its weaknesses and strengths, threats and, most important for a future buyer, its potential. Again, we are perfectly positioned to assist.

Balance sheets, income tax statements, cash flow statements, footnotes and tax returns for the past three years will give a good picture of the health of the business. Projected earnings should give an indication of the business' direction, although these need to be treated with a little more caution.

After the due diligence comes some basic questions to help you understand the circumstances of the sale. Why is the owner selling? Has the industry changed? Are there issues with supply, or does the company require a major refresh of equipment and inventory?

Don't rely on the business owner to supply all the answers. Get out and talk to customers, suppliers and vendors to hear their side of the story. If you do buy the business, these are the people you will be dealing with on a regular basis so it is an opportunity to make introductions and demonstrate professionalism.

It also is an opportunity to unearth any complaints about how the business operates; a less than stellar reputation might affect the buy price.

The greatest danger is that a business's profitability will suffer after the owner leaves. This could be due to several reasons; the owner could take crucial relationships with key customers, staff might follow the owner elsewhere or turn uncooperative, or business processes could turn out to be not so established that they function without the owner's input.

The best advice when buying a business is to do your homework. Rushing in for an impulse buy could see you end up saddling yourself up with someone else’s problems. If it all goes well you should take over a strong source of future cash flow and profits.

 


Mike Reddy is a Chartered Accountant, business coach and advisor helping businesses in Sydney, Melbourne, Brisbane and Gold Coast to easily increase their profits and cash flow. He is currently President of the North Sydney Chamber of Commerce, a Regional Councillor for Sydney North East and a member of the Institute of Chartered Accountants Sydney leadership team. As well as advising businesses, Mike presents business development seminars and webinars and is regularly contacted by the media to comment on small business matters. You can connect with him on Facebook, Twitter and Google+.