Why would you buy another business, let alone now? While the pandemic has brought about significant changes and shifts to every industry, it’s also created a time for new and emerging opportunities.
In the midst of the COVID-19 crisis in June, reports showed that buyer activity continued to increase. This tells us that businesses are still looking at ways to grow and taking the time to expand. While it may seem like a big upfront investment, especially in today’s environment, there are a lot of good reasons to consider purchasing a business.
With many businesses seizing the moment, there are plenty of benefits to buying a business in the current climate. It can:
- Improve the profitability of your current business
- Reduce risk and volatility
- Introduce economies of scale that may not have been available before
Knowing how to identify the right opportunity, and being prepared, is critical. Lenders and investors will want to see that you’ve done your due diligence. If you don’t do your homework in advance, it can be a disaster.
10 tips to consider when deciding to buy another business
Bigger is not always better
Think about the specific reason for investing in another business. Don’t buy because it’s a bargain price and it’s available. Investigate the business’ financial history and understand the growth paths. It’s also a chance for you to assess how your business is operating. Define your goals and success factors.
Make sure the seller is serious and know their motivations
You could waste a lot of time and money if the seller isn’t sincere. A serious seller will request that you sign a confidentiality agreement (this is a legal document). Throughout the process, try to put yourself in their shoes. They have lived and breathed this business and the successful sale of it will be important. Treat all interactions with professional respect, it will set the scene for future negotiations. Take time to know why they’re selling – this could work to your advantage in the negotiation process.
The seller should be transparent with all financials
The seller should be forthcoming with detailed financial records and tax returns for the past three years (at least). They should be able to answer all your questions in relation to the history of financial accounts, descriptions of business operations, profit and expenses, lease agreements, franchise details, customer lists, employee contracts and liabilities and details of key suppliers. If it appears that information is incomplete, inaccurate, missing or any details withheld, this could be a warning sign that there’s a problem that’s being hidden.
Does it complement your existing business?
Consider how the potential new business compares to your current business and what areas can be integrated or run independently. Look at all factors such as employees, products and locations. Ask yourself, will this purchase allow your existing business to improve or can you lift the other up to your level.
Look for opportunities to save in the sale
Evaluate where you can reduce costs and drive more operational efficiencies. Think about cutting back on office space or combining areas. Are there products in their business that your sales team could add to their portfolio, so you can redirect or reduce resourcing and overheads.
How do you plan to combine businesses and practices?
Carefully think about how you will merge the two businesses. Merging two companies with their different policies, procedures and cultures requires cautious planning. Don’t underestimate the challenges of merging systems, especially accounting and payroll. Consider the way the merger will affect different parts of the business and how you can minimise the effects.
Correctly valuing a business is key before you make an offer
When determining how much to pay for the business, look at what you expect to achieve as a profit versus the existing profits. If you pay too much initially you may not have the money you need to invest in your business later, for growth. When calculating the right price, base it on how it’s operating today, not the improvements you plan to make. Obviously, the more profit you will be able to extract the more you will be able to pay.
Pay attention to red flags and risks
If the seller has told you that cash is being collected but not recorded in the books, be careful. If you feel they’re not being upfront and honest, this could be a sign that they’re operating illegally. You can’t verify cash unless it’s being banked, so if it’s not in the books and in the bank, it’s not worth anything. Be aware of other liabilities such as outstanding tax or unpaid entitlements to staff. Sellers are trying to make a favourable impression, so they may gloss over the weak areas of the business.
Evaluate the best company structure
Often, you’ll have the choice of buying shares in a company or buying the business from the company. If you buy shares, you may inherit any skeletons they have in their closet. Often the better option is to set up a new company or use your own existing company to buy the business. Both tax, accounting and legal advice are essential to help make this decision.
Seek advice and guidance from experts
Rely on industry specialists to help you assess the future business viability and manage the due diligence processes. A lawyer can draft or review the purchase and sale agreement and ensure the seller provides the correct representations and warranties to protect you if anything goes wrong. An accountant can provide a financial examination and health check to determine if it’s the right investment for you. It never hurts to get a second set of eyes or an objective view on if the purchase makes sense and how it can add value.
While 2020 has been a challenging year and shaken a lot of industries and businesses, it presents opportunities to those who look beyond the bad news. Be bold and think big!