What to think about when buying a business
Buying a business can certainly be an exciting and rewarding venture. Not only does an established business already have a customer base, reputation, and brand recognition in the market, but you have the potential to generate income from day one, helping you to recoup your investment faster. Of course, it’s not all rosy – there are also risks involved in buying an existing business. For example, you need to carefully evaluate the business’s financial health, management team and future prospects, before committing. In this blog we take a look at some of the most important things to consider when buying a business, to help you mitigate your risks and make the right decision for you.
Scope out the market.
First off, you need to thoroughly research the industry and target market of your potential new business. Which industry trends or market shifts might have an impact on your target market and ultimately, your business? Where is your growth potential and which competitive dynamics do you need to be aware of? Assess the business’s position within its industry, along with its ability to adapt to market changes and to attract and retain customers.
Before you hit the go button, the next area to look at is the business’s financial statements, including income statements, balance sheets, and cash flow statements. Take time to review these with a fine-toothed comb – this is your opportunity to understand the business’s profitability, financial stability, and ability to generate cash flow. This will also help inform the business valuation and ensure you are only paying fair market value. What are the business’s debt obligations, outstanding liabilities, and potential legal or tax liabilities? Get the right figures together and then weigh up whether you have the financial resources to support the business’s future operations and growth plans.
Next stop is to understand the current business systems and processes, including its sales, marketing, operations, and management systems. Your job is to assess the scalability and adaptability of these systems – are they robust enough to support future growth? Alongside this, take time to review the skills, experiences, and morale of your new workforce – including the management team. What is staff turnover like? What values does the business have and do they align with yours?
Assess Your Assets.
As part of your due diligence, you must ensure your new business has clear and undisputed ownership of its assets, including real estate, intellectual property, and equipment. To avoid future heartache and cost, it is essential to address any title or property issues before finalising the purchase. What many business owners I speak to don’t realise is that inheriting a lease is much like buying a second-hand car. You can look ‘under the bonnet’ of your commercial lease, but without expert knowledge of the ‘mechanics’, you may not necessarily understand what you are looking at.
Boxes ticked. Where next?
As well as these areas, you’ll need to ensure you’ve ticked all the boxes in terms of legal and regulatory concerns and carried out a thorough risk assessment. Remember, whilst buying an existing business represents a fantastic opportunity, it is a significant decision that you need to feel confident going into. Take the time to conduct thorough research and carefully assess the risks and challenges involved. I would also urge you to engage qualified professionals where needed. The more visibility you have upfront the better – getting a clear picture of your potential business, warts and all, will hugely increase your chances of making a successful investment and building a thriving business in the future. For support on commercial premises leases specifically, please drop me an email or book a free chat.