If you are looking to purchase an already established business, being prepared is very important. Although you might have come across a business that you are interested in buying, before jumping in head first, there are plenty of things you should find out about the company.
Buying a business can be a grueling process, especially if the seller hasn’t hired a reputable broker like Marc Phillips to help with the deal. A broker can help both the buyer and the seller throughout the entire sale, but some sellers want to avoid paying them commission so they decide to take on the task themselves. If there isn’t any broker involved in the sale, you can expect to spend a lot of time with accountants and lawyers to make sure that everything is above board.
If you find a business for sale on the market that seems too good to be true, then it probably is, especially if the price seems lower than the current market value. Although you will want to find the best possible deal, there might be reasons why the business is for sale for such a low price. You will want to purchase a business that helps you generate money, not one that turns out to be a money pit. Asking the right questions and inquiring about different parts of the business will help you understand exactly what the company is all about before you spend your hard-earned money on it.
The History of the Company
If you have found a business that is up for sale, you will want to know a little bit about how it got to where it is today. Everyone makes mistakes in business, even some of the best entrepreneurs on the planet are prone to making mistakes, and if you are dealing with an honest business owner, they will be more than happy to share with you the struggles they have faced while running the company. Here are a few questions about the history of the business you should consider asking:
Why are they selling the company?
If a business is generating a decent profit, and it has lots of clients, then why are the owners looking to sell? If the owner tells you that they are looking for a new challenge, or that they want to travel the world, you might have to do a little more digging to find out the truth. Very few business people sell well-established businesses that are making a lot of money unless they are getting top dollar for it. Even if you feel like the seller is trustworthy, it won’t hurt to look into the real reason why they are looking to offload their company.
Why did they start or buy the business?
Running a business can be extremely time-consuming, and being the boss means that you will often have to be self-motivated. Find out why the current owner started the business in the first place, and what motivated them to get involved.
How long has the company been running?
The majority of well-run businesses are consistent. Although the business might be doing well while it is up for sale, you will want to avoid a business that is just another flash in the pan. Looking into the history of the business will give you a good idea of what to expect in the future, and it can help you avoid making the same mistakes the current owner made while they were running it.
Discuss Finances in Depth
At the end of the day, you don’t want to spend a fortune on a business that is going to cost you money instead of making it. You must get hard financial data before you agree to take over the company.
How much profit has the company made each year since the first day it was open?
Organize a meeting with your accountant to help you examine the business’s figures. You will want to see their current overheads, which includes employees, rent on a property, electricity, etc. Find out the profit margin they are making on each sale. To verify each of these financials, you will want to employ an independent auditor. Unlike the average person, a reputable auditor will be able to spot any issues with the financial documents.
Understanding the annual gross revenue will help you understand exactly how much money you can potentially make by running the business. Although you might be able to do better than the current owners by helping the company generate more money, this will give you a good idea of where the company is right now, and where they were in the past.
The Selling Price
The selling price and how much the business is worth aren’t always the same. Some people get very excited about a business for sale, only to realize that they spent way too much money on it down the line. If you invest in a business without knowing the real worth of the company, you might find yourself in financial difficulty in the early days of running it.
What is the seller’s asking price?
Before you start the negotiating process, you will want to know what the asking price is. Although they might not give you their exact asking price, they should be able to provide you with an estimation. Most people sell their business for three times the company’s annual profit. Your accountant should be able to provide you with this information. Consider asking your financial professional for their valuation of the business before you ask the seller. They will examine the company’s tax returns, balance sheets, income statements, etc. Making sure that each statement that the business owner gives you is vetted by an accountant is vital. If the owner is reluctant to give you any of this information, he or she might be hiding something. If the owner gives you the asking price, don’t be afraid to ask them how they came up with the figure.
What is included with the sale of the business?
If you have looked around the business, don’t just assume that once you buy the company you will automatically inherit all of the assets. Ask for a comprehensive inventory of each asset that is included in the sale.
Before people put a company up for sale, many of them hire an independent appraisal to put a valuation on the business. If the company hasn’t gone down this road, it might be worth your while hiring an independent appraisal before you invest. This will help you understand the true value of the company.
How Does The Business Run on a Day to Day Basis
Understanding how the business runs will help you understand how the company generates revenue. Knowing how it runs each day will give you a good insight into how you can succeed if you take it over.
Does the business have an existing client base?
If the business already has plenty of customers dealing with them regularly, find out if you can look at their current client list. Although the owners might be reluctant to show a potential buyer their client’s information, it might help them get the sale over the line. Customers are the most important thing in businesses because they will generate revenue, and if there are some big clients doing business with the company at the time you are looking to buy, it might become more of an attractive purchase.
How did the company grow its client base?
Business owners often spend a fortune on marketing. However, not every marketing plan succeeds. Knowing what worked for the business and what didn’t work will help you from making the same mistakes if you were to take over. This important information can help you get off to a flying start if you were to invest in the company.
Who are the business’s competitors
Knowing a lot of information about the business you are thinking about buying is important, but understanding who your competitors are and how you are going to compete with them is just as important. People often look to sell a business because they are struggling to compete with other companies providing the same or similar services and products. To compete, you might need to put a lot more money into the company, which you will have to take into account before investing. Although you might find it hard to get the truth out of the seller, you can do a little digging yourself. Talk directly with existing customers, or customers that the company has been unable to retain. If the employees in the business that is for sale are aware that the company is on the market, they should be able to give you information about the day-to-day running of the business, and how they deal with their competitors. They might even provide you with key information about how to improve the business so you can bring it to the next level if you were to take it over.
Ask Yourself Important Questions
Even if the business is highly profitable, and it seems like you will enjoy the work, there are a few serious questions that you should ask yourself before investing.
Why am I buying this business?
This is probably the most important question you need to ask before spending a large sum of money on an existing company. What has motivated you to consider buying a company? It might look great from the outside, being your own boss and being able to choose your own working hours, but if it was that easy, everyone would own their own company. Running a business is not a walk in the park, especially during the early days. Most successful entrepreneurs work around the clock to ensure the company succeeds, so you better be ready to roll up your sleeves and get to work. If the company doesn’t succeed, are you going to put yourself and your family in serious debt? Will you need to remortgage your home or put your kids’ education on the line if things don’t work out the way you hope? To be business successful, you will need to take a lot of personal and financial risks, so you need to ask yourself if it is worth it.
Before investing in the first business you see, take your time and shop around. Let the seller know that you are looking at other options, which might help bring the current asking price down.