Buying an established business is more complicated than buying a car or buying a stock. It is not just about crunching numbers; it is about the people too.
Everyone needs to know what they want from a business and how much they can afford to pay for it.
It takes time and patience to find the right opportunity, so be prepared to spend time looking at businesses that do not seem perfect or have problems you can't solve on your own.
In this post, we will look at the questions you need to ask and the process of buying an established business to help you make an informed decision.
5 Crucial Questions Every Entrepreneur Should Ask Before Buying An Established Business
Every entrepreneur should ask themselves five crucial questions before buying an established business. These questions will help the entrepreneur know if they want to take on that challenge and will help them understand what to look for in a business.
1. Why do I want to buy this business?
The answer to this question may be simple. The company may be one of your favourite ventures, you may have a genuine interest in the industry, or you may regard it as a terrific investment opportunity. Increase the rigour of this self-examination by ensuring that the business aligns with your own characteristics and skills. An assessment of the company's location, existing customer base, and reputation is also recommended. If any of these factors hinder your company's success, you may want to reconsider your decision.
2. How will you ensure you are successful?
This may have something to do with your motivations for purchasing the company. Your business expertise may be particularly well suited to marketing, bookkeeping, and budgeting, all of which will have a far more significant influence on your bottom line than simple cosmetic modifications. Make sure that you have the capabilities and expertise necessary to make the firm a success, especially if it is being sold due to financial difficulties.
3. How much money do I have?
Besides the money you will need to purchase the business, you will also require operating capital to fund payroll, inventory, utilities, rent, and other overhead expenses. Investing in a business is a long-term commitment. Calculate how much money you will need to spend to the firm's functioning by analyzing your current cash flow and forecasting future cash flow. Examine the present owner's accounting records and speak with them about its current monthly and annual operating expenses.
4. How much is the business worth?
This will be critical information for you to understand to estimate a reasonable asking or selling price. There are several various ways you can use to undertake this value analysis, including the ones listed below:
- The Capitalized Earnings Approach: This examines the projected return on an investment
- The Excess Earnings Method: This method examines the return on investment while distinguishing between asset returns and other earnings.
- The Tangible Assets Method: This is a method of determining the value of a business by examining its tangible assets.
5. What has the current owner got to say?
Speaking with the present owner is an integral part of purchasing a business since it allows you to obtain a better idea of the company's strengths and limitations. You may need to sign a confidentiality agreement to assure the current owner that nothing they say will be used for any purpose other than to decide on purchasing.
What is the Process Like When Buying A Company?
Many factors need to be taken into consideration when buying a company. One of the first such considerations is whether the company is up for sale at all. There are some great marketplaces to find a business for sale.
Some companies may not want to be bought because they have their own goals and objectives to reach. Other buyers in the past may have also passed over it.
The first thing you will need to do is to reach out to the company. You will sometimes speak with the banker of a company you have located through the business marketplace first if you choose to reach out to them - you can find out more about BFS and whether this is something they do. In a sense, this expert will serve as a gatekeeper to the corporation, establishing your interest in the organization before giving you the organization's confidential information.
After obtaining your signature on an NDA, you will be provided with a complete summary of the company's operations and financial performance from the previous year.
However, for those wishing to reach out to local businesses about a prospective offer, it is unlikely that they will be available for purchase on the internet. In such situations, there is no such thing as a good or incorrect strategy.
You can either ask your lawyer to check with the owner of the business to see if they are open to discussing a prospective takeover, or you can approach the owner yourself, being as transparent about your intentions as possible without jeopardizing the intricacies of your company's plan. Once you have conducted discussions and found out more, this is where you make your formal offer.
The due diligence step will begin once you have received confirmation that the owner has accepted your non-binding offer. This can take anywhere from three weeks to three months, depending on the company's size, but for SMEs, it is more common to take four to six weeks to complete. Do not speed through the investigation procedure because this is your last chance to uncover any skeletons in the company closet (if any are present). Profit from this as an opportunity to become more intimately familiar with the company's operations so that you are prepared to jump right into action when the deal is finally closed.
Assuming this comes back with no hiccups, it is time to instruct your lawyer to close the deal!
Buying an established business, while seemingly complex at the time, can mean you are ready for success and growth immediately, without the hassle of getting it up and running. Good luck!