Imagine a scenario where you bought a business without proper research and investigation, and got more liabilities than assets to pay off. This will surely prove to be a regrettable decision. Sometimes, people rush into the decision of buying a business once they know that it is up for sale and has become an unprofitable venture. But one needs to verify the viability of the business before going ahead and buying the same.
Am I paying a fair purchase price for the business?The purchase price is usually calculated on the enterprise value of the business, company stock, and the working capital. However, it is advisable to get a valuation for the price of the business so that you do not end up paying more than required.
This can be done by asking the right questions at the right time. The answers to these questions will not only help you understand more about the business, but it will also tell you about its growth in the future. Apart from this, asking the right questions will make you aware about the history of the business, and prevent you from taking a decision which you may regret later.
What is the purpose of buying the business?
What are the risks involved in the business?
What are the challenges of growing the business?
Is this an owner-dependent business?
Why is the owner selling the business?
What do the accounts of the last 3 years reflect?
Who are your current business competitors?
What assets are transferred with the business?
What is essential for survival of the business?
Who are the key customers, vendors and staff?
Will the owner help you to know about business?
Are there any legal, financial or criminal charges against the company?
Are there any skeletons in the closet?
Who all are aware that the business is for sale?
What do the online reviews of the business say?
What facts support the "story" of the business?
What will be my exit strategy for the business?
What are the problems in setting up and running the business?
Unless the business is something that you are sure will rake in profits, buying it can turn out to be a risky proposition. Hence, you should be absolutely sure about your decision. Ensure that your family also supports your stand, and you have done a SWAT analysis for this decision before buying the business.
Before jumping the gun and going ahead with the buying decision, do your homework to understand what kind of risks this business poses. For example, buying a business during a recession may not generate as much profit as it will during other times. So, ascertain the risks involved in this business.
Merely buying the business will not generate profits, you will have to think strategically to expand it in order to optimize the returns. You need to set a business goal, and prepare a fail proof plan to achieve it. You must understand aspects like industry trends, competition, market conditions, product demand, etc., to be able to grow the business.
If the business is solely running because of the understanding between the current owner and his vendors and customers, imagine what will happen once he leaves it. The existing customers and vendors may also move away. Hence, you must assess how the business will stand without its current owner before deciding to buy it.
Generally, when this question is asked to the owner, he may provide answers like retirement, shifting to another country, looking for some other challenging business, etc. However, investigate the real reason behind his decision, is it losses, business not working in current location, lack of orders, poor service, etc. Otherwise, you may buy a sick business, and end up in debt.
Acquire the projected financial statements as well as the balance sheets, cash flow statements, income statements and tax returns of past 3 years. Ask your CPA to evaluate them. This will give you a better idea about the financial standing of the business.
Knowledge about your competitors is always helpful to operate successfully in the market. It gives you a fair idea about the level of the market. Most importantly, it will allow you to explore the possibility of using the competitive advantage to take the business ahead.
It is important that you know how many assets have been transferred with the business. You will also have to check whether the number of fixed assets is not unnecessarily high.
You must know which aspects of the business are important for its survival, it can be anything from vendor policies, supply chain management, customer credit, to on-time product delivery or niche product segment. Knowing what makes the business tick is essential for survival.
Before buying the business you must know about the key customers of the business. This will help you to understand them better, and develop a rapport, which will ensure you get business in the future. Similarly, getting to know the vendors can help you to get raw materials on credit and at a faster pace. Also, knowing which staff is indispensable and highly responsible will help you to get your work done faster.
If the seller does not agree to spend sometime in the business and help you out, don't strike a deal with him. Assuming you are new to that business, you will require guidance about the functioning of the business. This help or guidance can prove vital if you do not have experience in this particular field of business. The duration of help or assistance required can range from a couple of weeks to a month or so. As long as the owner helps you out, and does not come in your way, you can avail his assistance.
You need to check if there are any past, present, or potential lawsuits against the business. If they haven't been settled, it may so happen that after the ownership is transferred, you will be held responsible for the same. Ensure that the business has a clean history, and does not have any kind of legal, financial, or criminal charges against it.
You will also need to find out if there is more to this business than what meets the eye. Investigate beyond the facade of numbers. Find out if the business has been part of a crime, whether the seller has IRS-related problems, what is the business zoned for, and if the area is hazardous, how are the employees treated, etc.
When the word spreads that a business is up for sale, it causes a lot of uncertainty. This makes the customers, vendors, and employees jump ship and go to competitors. Hence, it is important that this news should be strategically informed in the market, to avoid damaging the reputation of the business.
There are many online websites which provide reviews of various businesses. Check what is the public perception about the business. If there are too many negative comments, you may want to re-think your decision. You can also re-brand the business to build goodwill. These reviews will mirror the impact of the product on the public in general.
Don't just believe what the owner tells you. It is important that you carry out an assessment of your own to corroborate the facts about the company. Sometimes, asking such questions will give you surprising answers, and save you from a venturing into a financial debacle.
As you know business is dynamic in nature. There is a lot of uncertainty involved in running a business. Hence, it may so happen that you may have to sell the business, sooner than you thought. For this, you must have a exit strategy in place. If you have partners, you should have a buy-sell agreement in place.
You will have to evaluate if there will be hindrances in the smooth functioning of the business. Business can be affected by both internal and external factors. Internal factors like quality, time management, workload, employee dissatisfaction, etc., can affect the business adversely. While external factors like recession, competition, transport issues, market change, etc., can also impact the business. Hence, you should be completely aware of the problems that you may face during setting up and running the business, and have a plan in place to mitigate them.
Apart from this, you can also inquire if the owner owns stocks, and whether it is included in the sale price. Also, it is important that you are aware about the customer and vendor relations of the business as it will matter once you own it. Posing the right questions will help you know about the viability and profitability of the business.