Advivo Partner, Chris Morris, shares what key factors you should consider before buying a business
There can be many reasons for people to buy a business and no matter what that reason, there are several key factors that should always be considered.
Below are my Top 5 Tips for buying a business:
1. Understand your ‘Why’:
Reasons for wanting to buy a business can vary considerably depending on the buyer and can include:
- A desire to be your own boss and do things your own way;
- Buying a business to complement one you already own;
- Expanding an existing business into different geographical locations;
- The desire to solve problems for others;
- You may have a passion for a particular industry or product;
- To create family wealth;
- The list goes on…
Whatever your reason, it’s important to understand your motivation and how it will impact your decision-making.
2. Make sure the business you’re looking at align with your ‘Why’:
This is about understanding what will be required from you as the new business owner and the impact of those requirements on your life. Ask yourself questions such as:
- Will this business tick my boxes?
- Am I buying myself a business or a job?
- What will be my involvement in the business and what role will I perform?
- What resources does the business need to operate/grow and am I able to provide or source them?
3. Do your research:
Once you’re satisfied that the business aligns with your ‘why’, it’s time to do your research. A non-disclosure agreement will often be required by the seller before they will divulge too much information. In many cases, buyers will do the research part themselves, but don’t be afraid to ask for help if you’re unsure. Better to ask for help and get it right, than not ask and risk getting it wrong. Your accountant or business advisor will know what to ask and when.
Research is all about understanding the business and the environment in which it operates.
- Areas of the business to understand include staff, suppliers, competition, customers, online reputation and in the market etc.
- Understand why the business is being sold and ask questions on anything which doesn’t make sense.
- Understand the strengths and weaknesses of the existing business as well as potential opportunities and threats.
- Understanding the industry and markets/trends is also key. Are these growing, declining or remaining steady?
- What are your plans for the business? Does anything need to change?
4. Carry out your due diligence:
If not earlier, now is certainly the time to involve your accountant or business advisor. We will ensure the numbers add up to the story and identify/mitigate risk for you.
We can also advise on how best to structure the purchase for protection and tax purposes, including consideration of financing options such as vendor finance, retentions or staged earnouts.
In addition to the accounting and financial aspects, your due diligence should also take into account legal matters including:
- Intellectual Property (Trademarks, Patents, websites, phone numbers etc.)
- Contracts (Buy/Sell, Leases, Supplier, Customer, Warranties, Staff etc.)
It’s vitally important that a level of due diligence is carried out commensurate to the risk involved with purchasing the business.
5. Understand the cash flow
You’re already aware of the Seller’s asking price and now that you’ve done your research and due diligence you will have a better idea of what you’re willing to pay for the business and why. It’s also important to understand the other costs associated with purchasing a business (such as duty, accounting, legal and finance fees) and the cash flow implications associated with them. Furthermore, when buying or starting a business there will be upfront costs incurred before revenue starts to flow. It’s vitally important to understand the timing of cash inflows and outflows so that you can budget for these accordingly and ensure you have enough operating capital required to support your business.
Buying a business can be an exciting time and if the proper steps are taken, you can ensure that you and your business have the best chance of success. If you would like to discuss these or other important factors to consider when buying a business, we’d love to hear from you! Please contact us today.
Written by Chris Morris
