Most people prefer to buy an existing business rather than start from scratch. They see it as a much safer option as they’re acquiring a business that already has a loyal customer base, regular cash flow and hopefully a solid amount of goodwill, especially with certain franchises. It is necessary to undertake the minimum amount of due diligence to ensure you’re not buying a dud.
Once you’ve decided to take the plunge you need to start looking for the right business. There are always plenty of businesses for sale, it’s just matter of finding the right one. Be wary of business brokers trying to make a quick sale. We can assist to weed out the “Dodgy Brothers” type brokers, so call us first.
We recommend performing due diligence on all prospective business purchases. It doesn’t have to be as complex as a full blown review, but the following are key areas that need to be scrutinised:
A full list of current inventory (for trading businesses) is an essential requirement. There is absolutely no point in buying a business with thousands of dollars of obsolete stock sitting on the shelves. An unscrupulous business owner may also run down current stock levels and leave you unable to service your customers with existing stock levels when you take over.
A full list of assets is a must. You need to know what is included in the sale to make sure the business can function with existing equipment. A depreciation schedule obtained from the business owner’s accountant should also tell you just how old the current equipment is. Buying a rundown business should be done with great caution as you will soon need extra cash to modernise the assets.
Obtain copies of current leases, insurance policies, employment contracts, franchise agreements and any other legally binding contracts with customers and suppliers. Any restrictive policies must be carefully reviewed by a lawyer for restrictions that could hinder your ability to do business.
No business should ever be purchased without a thorough examination of the business’ financial statements. A qualified accountant won’t just look at the bottom line for you, they’ll look for trends, anomalies etc. The financial statements will tell a story about the business.
Don’t just rely on the profit and loss statements. Obtain copies of sales records to determine the best selling product lines. Seeing the cash flow cycles of seasonal fluctuations will also assist in planning for the future.
DEBTORS AND CREDITORS
Longstanding debtors may be a sign of unhappy customers or a fragile selling market. On the creditor side, any outstanding creditors may have account restrictions in place or be spreading a bad name about the business due to non-payment of purchases
Is there one in place for growing the business? If not, this would then become one of your highest priorities upon taking control of the business.
Determine if the current owner has priced his products/services correctly to take account of the fixed and variable costs of the business, as well as knowing what the market can afford to pay.
LOCATION AND CUSTOMER DEMOGRAPHICS
Does the current location lend itself to passing traffic and walk in sales. If not, a specific marketing campaign to raise awareness of the business’ location may be required. Has the suburb undergone any recent demographics change that may weaken the customer base?
Inheriting current staff can be both a blessing and a curse. Current staff are best placed to keep the business running as seamlessly as possible and can also provide great ideas on how to improve the business. On the flipside, hanging on to disgruntled staff can lead to poor customer relations. Be wary of high staff turnover. Watch out for any accumulated leave entitlements that can add to your liabilities from the outset.
Do you have the ability to raise enough money to, not only purchase the business, but also fund the working capital for the first few months. Have you reviewed the value of your home or other assets to determine the equity available? What about serviceability?
The early days of running a business will always be the most difficult and stressful. Optima Partners can assist you with the proper checks and balances to give yourself the best chance possible for success.
Please contact us if you are considering purchasing or selling a business.