What to look out for when buying a business

Buying an established business is a great way to enter into the business world, or to expand your existing business empire. But purchasing a company isn’t something to enter into lightly.

Becoming the prospective owner of a new business means doing your homework, researching the business you plan to acquire and working closely with a team of advisers.

Here are five key questions to ask yourself, before entering into a deal.

1. Why are they selling the business?

It’s vital that you know WHY the current owner is selling. It may be that they simply want to move on to a new business venture, or retire. But they may also be trying to extricate themselves from a business that’s not performing well, or has intrinsic issues.

Important questions to ask will include:

Is the owner retiring?
Are they facing financial difficulties?
Are they looking to pursue other opportunities?
Are there any legal or regulatory issues?
Are there any personal reasons for the sale?

2. Are the finances in order?

A common problem with both startups and established businesses is a lack of cashflow. It’s possible to have a business with a reasonable customer base and ongoing sales, but for poor margins and rising operational expenses to have a negative impact on the company’s finances.

Before you buy, drill down into the company’s finances:

Get a copy of the business' accounts, both statutory filings and internal management accounts, and have them reviewed by an accountant
Look for any red flags, such as debt, losses or cashflow problems
Make sure the business is profitable and has a solid financial foundation.

3. Are the staff capable and engaged with the business?

As the saying goes, your people are your most important business asset. So, prior to buying the business, it’s important to get acquainted with the top team, management and employees.

To learn more about your prospective workforce:

Meet with the key employees and get their input on the business
Make sure the core team is willing to stay with the business after the sale
Think about the cost of replacing any key employees who leave.

4. What governance do you need to do?

Getting your due diligence and governance done is such an important step in your pre-purchase planning. You need to know this business is a viable enterprise, that there are no links to undesirable activities and that you’re not taking on a whole load of legal issues.

To make sure you’re ticking all the correct governance boxes:

Review the business' contracts and agreements
Run due diligence checks on the company and its owners
Make sure you understand the legal obligations of the business
Get legal advice on any issues that you are not sure about.

5. Can you get the best price?

Purchasing a well-respected brand is a great move as an entrepreneur, but you don’t want to pay over the odds when agreeing on a deal. It’s important to have a clear ceiling on your budget, and to stick to your guns when it comes to negotiations on price and conditions.

To help secure the best price:

Do your research and find out the fair market value of the business
Be prepared to negotiate with the seller to bring the price down
Don't be afraid to walk away from a deal if you are not getting a fair price.

Talk to us about planning the purchase of a business

This isn’t an exhaustive list. There are plenty of additional factors to think about when buying a business. Any business sale is a complex process, where working with professional advisers will help you navigate the twists and turns so you come out with a successful deal.

As your adviser, we can help you: