When it comes to buying a business, don't be tempted to take shortcuts. It's important that you follow a sound business purchase process in order to get the results you're after. The first step in the business purchase process is determining your goals.
When you're not sure what you want, it is tempting to take a look at everything. After all, the perfect business might be one you never would have thought of, right?
Actually, you are much more likely to find a business that suits you if you know what you want. If you are working with your own business broker or mergers and acquisitions professional, you will probably complete a profile to give you and your advisor a narrower goal. If you are searching for a business on your own, you can create your own profile by thinking about your likes and dislikes, strengths and weaknesses, and answering questions such as:
- What do you want your life to look like after you buy the business?
- What activities would you enjoy doing in the business?
- What industry or industries do you want to look at?
- How much money does the business need to bring in?
- Is it important for the business to have a strong management team?
- Are you willing to move for this business?
These questions do not cover everything you need to consider but they will get you started. Remember, the more you follow a sound business purchase process, and the more you know about your ideal business, the easier it will be to find it.
Develop a Plan to Buy a Business
Buying a business is very exciting but also stressful. You are making a significant investment and want to ensure you are making a wise purchase. Taking time to prepare before making an offer will help you manage the entire process more easily.
The best way to buy a business is to have a plan. Many buyers are unclear about the type of business they want and aren't sure of the kind of business they would be able to run successfully. They don't know what size business they can afford. As a result, they look at every opportunity and end up wasting everyone's time, including their own.
There are many ways to make costly mistakes buying a business. With a proper plan and expert legal advice, you can avoid these mistakes and start running your new business.
Questions To Ask About the Business
Once you've found an opportunity you're interested in, you'll likely be asked to sign an NDA (Non-Disclosure Agreement). After signing, you'll be given a business profile or Confidential Information Memorandum. This document may be very brief—covering only the basics—or comprehensive. The more information you have, the more of an informed decision you can make.
One of the most critical steps in buying an existing business is to make sure you have a thorough understanding of the following:
- History of the business
- Why it is being sold?
- Company philosophy and values
- Strengths, weaknesses, opportunities, and threats
Management & Employees
- Strength of management team
- Employee compensation and turnover rates
Processes (product production or services)
- Market size
- Market outlook
- Number of competitors and their position in the market
- Competitive advantages
- Barriers to entry of new competitors
- Number and diversity of clients
- Reliance on one or several major clients
- Length of relationships
- Number of recent clients lost
Marketing Strategies & Tactics
Suppliers & Subcontractors
Equipment & Facilities
- Balance sheet
- Income statement
- Discretionary earnings or Earnings Before Interest, Taxes, and Depreciation
- Cash flow analysis: working capital, receivables, and payables
Choose Expert Advisors to Help in the Business Buying Process
Knowing what information to gather and analyzing that information is virtually impossible without a team of seasoned professionals who have experience in the business buying process. Your chances of success will improve dramatically if you work with experienced accountants and/or financial advisors and lawyers.