Buying an existing business can often be a lot easier than starting a business from scratch.
We’ve formulated a list of important tips to consider before buying a business.
1. Get accounting and legal advice before signing any contract.
This may seem obvious, but you’d be surprised by how often this is overlooked.
An accountant can advise you on trading figures, tax returns and other financial aspects of the business. Most accountants will have a good idea of the returns that can be achieved by a similar type of business.
They can give you an indication of the value of the business to make sure that you are not paying too much.
Your solicitor can advise you on important aspects of the contract. They can provide you with advice regarding the lease, the terms of the contract and any risks associated with purchasing the business.
Having upfront advice is critical.
2. What are you actually buying?
It is important that the contract sets out exactly what you are buying as part of the business.
Details of any inventory, plant and equipment, stock and any intellectual property or trademarks should be detailed in the contract.
You can get an expert to inspect any plant and equipment. An expert will ensure that the plant and equipment is in good working order and ensure all items are accounted for. It is critical that the handover of the business goes smoothly and that you don’t experience any interruptions due to mechanical failure.
This simple step can save you a lot of heartache when buying a business.
A detailed inventory is critical:
We recently had a client seek advice from us after buying a business without seeing a solicitor first.
Geoff purchased a bakery from the previous owner who had two other bakeries.
The contract included a list of inventory, plant and equipment, and stock. However, the details were vague and included descriptions such as: 1x microwave, 1x pie warmer etc.
When Geoff took over the business, he found that the equipment left in the store was not what he’d agreed to purchase. The relatively new equipment he had seen when he first inspected the business had been replaced with older models from the seller’s other bakeries.
Unfortunately for Geoff, he couldn’t prove this. He’d signed a contract with vague descriptions.
A detailed inventory with accurate descriptions of plant and equipment including make, model and serial numbers is critical.
Another thing to consider are ongoing contracts to supply goods or services to third parties.
You need ensure the third parties are willing to continue with the current arrangements if you acquire the business. If a key client decides to take their business elsewhere when you acquire the business, it may have a significant impact to the value of the business that you are purchasing.
If the seller cannot answer your questions about what you are purchasing, you need to think twice about purchasing the business.
3. Don’t fall for inflated estimates of the businesses potential.
Quite often a seller will say that the business has “unlimited potential” or “great potential to grow”. Our response to this is, if the business has great potential then why hasn’t the current owner realised it?
You need to remember that you will be the one who will realise any future potential for the business. You should only pay for the business in its current state.
4. Avoid making wholesale changes to the business.
Each business owner will have different ideas on how the business should be run. However, we recommend that you avoid making any major changes too soon.
Changes should be made gradually, after you’ve had time to settle into the business. Experience for yourself what procedures work well and don’t require changing, and what procedures will benefit from some changes.
Gradual change involves less risk.
Massive changes to the business could be detrimental. Most people don’t like change and that could include the customers of the business. If you make drastic changes to the business you could jeopardise the current goodwill of the business and lose customers.
If you require further advice regarding buying a business, contact us.