Starting a business from scratch can be a challenging and time-consuming process. For some, the easier and more feasible option is to buy an existing business. So we have compiled a checklist for buying a business which assesses the risks and challenges you may face.
Buying a business can be a great way to get a head start in entrepreneurship. Having to go through the tedious process of building a business from scratch isn’t for everyone. However, buying a business comes with its own set of challenges and risks. It’s always important to do your due diligence before making any decisions.
In this blog post, we’ll take a look at some of the key factors to consider when buying a business. Then provide you with a comprehensive checklist to guide you through the process.
The best ways to organise your purchase is to develop a structured plan with the following checklist.
1. Determine Your Goals
Before you start looking for a business to buy, it’s important to determine your goals.
- What type of business are you looking for?
- What industry do you want to be in?
- What size of business are you interested in?
- What is your budget?
- Do you want to be hands-on or hands-off?
Answering these questions will help you narrow down your search and focus on the businesses that best align with your goals.
2. Research the Industry
Once you have determined your goals, it’s time to research the industry you are interested in. You should research the industry trends, growth potential, and any regulations that may impact the industry. This will help you understand the market, identify potential competitors, and assess the overall viability of the industry.
But most importantly, it will help you realise if you can perform in the sector you have chosen.
3. Identify Potential Businesses
After you have researched the industry, it’s time to start looking for potential businesses to buy. You can start by searching online marketplaces, working with a business broker, or attending business expos and networking events. You should also consider asking your personal and professional network if they know of any businesses for sale.
Everyone can start looking in their local areas, but you might find searching elsewhere will be better.
Finally, don’t settle… Look for multiple potential businesses so you don’t end up overpaying because you’re excited by the prospect.
4. Assess the Business
Once you have identified a potential business to buy, it’s time to assess the business. This includes evaluating the financials, operations, assets, and liabilities of the business. Some of the key documents you should review include:
- Financial statements: This includes the income statement, balance sheet, and cash flow statement. You should review the financial statements for the past three to five years to get a clear understanding of the financial health of the business. Get our FREE Ebook on KPI’s & Management Accounts.
- Tax returns: Reviewing the tax returns can help you identify any potential red flags. Such as inconsistencies or errors in reporting.
- Legal documents: This includes contracts, leases, licences, and any other legal agreements the business has entered into. You should review these documents to identify any potential legal issues that could impact the business.
- Employee records: You should review the employee records to understand the current workforce. This should include the number of employees, their roles and responsibilities, and any benefits or compensation they receive.
- Customer records: You should review the customer records to understand the customer base, including their demographics, purchasing habits, and loyalty to the business.
- Assets: What does the company own and what will you be buying. Make sure that all assets that are owned by the business are included in the purchase.
- Liabilities: Every company has them, and you need to make sure that you can plan to pay them off… But most importantly, make sure there aren’t any overdue debt to HMRC or banks.
5. Conduct Due Diligence
After assessing the business, it’s important to conduct due diligence. This involves verifying the information provided by the seller and ensuring that there are no hidden issues or risks that could impact the business. Some of the key areas to focus on during due diligence include:
- Legal issues: Verify that the business is in good legal standing and that there are no pending lawsuits or legal disputes.
- Financial issues: Verify the accuracy of the financial information provided by the seller and ensure that there are no hidden debts or liabilities that could impact the business.
- Operational issues: Verify the accuracy of the operational information provided by the seller and ensure that there are no operational issues that could impact the business.
- Environmental issues: Verify that the business is in compliance with all environmental regulations and that there are no environmental issues that could impact the business.
6. Determine the Valuation
After conducting due diligence, it’s time to determine the valuation of the business.
There are multiple ways of valuing a business, some of them include:
- Asset Valuation: The value of all the tangible and intangible assets are collected (including cash and inventory) this is the value of the business.
- Discounted Cashflow Valuation: If profits are not guaranteed to grow, you discount the current years profit by a factor you must determine (normally 10%) and see what the total profits are for the next 5-10 years. The total profits are the value of the business.
- Relative Valuation: Find other businesses in the same sector or industry that have been sold, and base your valuation on the sale price of those businesses.
If you need some help with valuing a business, you can always seek advice from an accountant or business broker. We offer a business valuation service at our consulting firm RGE & Co.
15 Things to Consider when Buying a Business
Buying a business can be a complicated and risky process. To make sure you’re making the right decision, here are fifteen things you should check before buying a business:
1. Intellectual Property
Identify any intellectual property owned by the business, such as patents, trademarks, and copyrights. Make sure the business has proper ownership and protection of these assets.
Identify the competition in the industry and assess the business’s competitive advantage.
3. Industry Trends
Research the industry and assess its growth potential, trends, and potential threats.
4. Reason for Sale
Determine the reason for the sale and assess if it aligns with your goals and objectives for the business.
Research the business’s reputation and online presence to assess its brand reputation and customer satisfaction.
Evaluate the assets that come with the business, such as equipment, inventory, and real estate. Ensure that they are in good condition and that their value is accurately reflected in the purchase price.
Identify any outstanding liabilities, such as loans, taxes, and accounts payable. Make sure that these are accurately reflected in the purchase price.
Review all contracts that the business has entered into, including vendor contracts, customer contracts, and employment contracts. Ensure that there are no unfavourable terms or clauses that could impact the business.
Assess the current management team and their abilities to run the business. Determine if any changes need to be made in management after the purchase.
10. Due Diligence
Conduct thorough due diligence to verify the accuracy of the information provided by the seller and identify any potential risks or issues that could impact the business.
Determine how you will finance the purchase of the business. You might want to consider your options, such as taking out a loan, using your own funds, or seeking investment from partners.
Evaluate the location of the business and assess the potential for growth and expansion in the area.
13. Marketing and Advertising
Assess the business’s current marketing and advertising strategies and determine if any changes need to be made to increase sales and revenue.
14. Customer Base
Evaluate the current customer base and determine if there is potential to expand or diversify the customer base.
15. Industry Regulations
Research the regulations and laws that impact the industry and ensure that the business is in compliance.
By thoroughly checking these fifteen items, you can ensure that you are making an informed decision and mitigate any potential risks associated with buying a business.
Yes, there are several additional things that you should consider when buying a business. But these are from our own due diligence checklist that we complete for clients all over the UK.
By considering these factors, you can ensure that you have a comprehensive understanding of the business and any potential risks or opportunities. With all of this will help you make an informed decision and set the business up for success.
Being aware of these challenges and taking steps to mitigate potential risks, buyers can increase their chances of success when buying a business. Working with experienced professionals, conducting thorough due diligence, and developing a solid integration plan can all help mitigate potential risks and increase the chances of a successful purchase.