When buying a business you cannot ask too many questions, you should feel comfortable asking the seller or broker as much as you like. If the answers are not forthcoming there is usually a good reason, that reason may be why you should not buy the business.
Why is the business for sale? Always try to find out why the business is for sale. The seller will probably be telling you how wonderful the business is, if that is true why are they selling it? Ask the question and gauge the response, make sure you feel comfortable with the reason.
Do some detective work – Don’t just accept the answers given to you, check them out and make sure that they are right. Do some research into the local area and find out if there are any future developments and changes which may affect the business. Speak to other local businesses and also speak to the local planning department. Whilst you are doing this research in the local area it is a great opportunity to keep an eye on how much trade the business is doing, is this in line with what you have been told?
Check the financials carefully – look through all of the financial information that you have been given very carefully. Check the sales trends of the business during a typical year and also check that overall sales are stable or increasing. Try to make sure that financial accounts are backed up with tax returns and BAS statements. From the information supplied try to establish the following:
- Is the business moving in the right direction?
- Is the business reliant on any key customers?
- Will these customers continue buying when the business changes hands?
- What is the value of the stock?
- Is any of the stock obsolete?
- What is the value of the assets?
- Is the business reliant on key suppliers?
- Will these suppliers give you the same deal/discounts?
Check the costs – try to identify all of the fixed costs, you will also need to factor in the cost of any borrowing to purchase the business. Make sure that the cost which you are likely to incur will be similar or less than the seller.
Check the profits – it sounds obvious but make sure that the profits generated, less the running costs, including your own salary and finance costs make the purchase viable. Remember that owning a business can be a tough job, make sure there is enough financial reward to make it worthwhile.
Check the assets – having already established the overall value of the assets you should check the asset register and also the schedule of depreciation. Check that you are satisfied with the assets and level of current depreciation, and make sure that you accountant is happy too.
Check the contract – once the contract of sale is issued you are almost there. Although this will probably come via your solicitor you should still take the time to read it very carefully, yes even the small print. You will need to make sure that the terms of the agreement match those that you agreed with the seller. The contract should also list all the assets included in the sale and the value of the goodwill. The contract should also protect you by stating that the offer is subject to the granting of any necessary licenses, obtaining finance, and ensuring that the business performs to a minimum standard agreed during a trial period.
For detailed information, advice, and protection when buying a business you should always seek the advice of a solicitor, accountant, and business advisor.
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