Strategies for minimising risk when buying a business
When buying a business, its potential to make a profit versus its risk of making a loss should be the basic principal that guides your decision. More potential for loss equals more risk – something that you must minimise.
An IBISWorld risk rating report has shed light on the riskiest and safest industries to operate in. The most at risk included machinery and scaffolding rental, coal mining and structural steel erection services. The safest on the other hand, included veterinary services, trailer and caravan dealers and super fund management services.
Minimising your risk when buying a business could be as simple as doing your research.
Smaller operators should steer clear of highly risky industries, as failure is often tied closely to personal finances. There's always a certain level of risk no matter what industry you operate in, and failure to manage this can be detrimental. How can you minimise risk when buying a business to make sure you're making profit, not costly mistakes?
Know the warning signs
Before you settle, it's essential that you have a good knowledge of all aspects of the business. This way, you can identify warning signs of risk early on.
It's essential that you have a good knowledge of all aspects of the business.
The National Australia Bank states that one of the first warning signs is that the business is unprofitable – if you purchase a business that is making a loss, it's possible that you'll have to fund the shortfall.
Additionally, reliance on one or two major clients for business is a worrying sign, because if one decides to go with another provider, you're profits could disappear overnight.
Lastly, if the business' assets are worth considerably less than the purchase price, this may make buying it more risky.
Do your due diligence
Before singing a contract, the Victoria State government recommends you do the following to minimise your risk:
- Check if a clause can be added into the contract that stipulates the business must make a specified minimum profit leading up to settlement.
- Look at financial records carefully: have an accountant review all documents to ensure the business is in a good position.
- Make transfer of existing contracts and clients a condition of sale.
- Insisting that you be able to work on or with the business before settlement. That way, you can verify the seller's claims with your own eyes.
- Include a clause in the contract that says settlement is dependent on all claims made the seller being truthful and accurate.
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Running your own business could be the key to independence – both financially and in life. Entering into the purchase with your eyes open aware of all the risks and with a business plan in place will help make sure that your enterprise booms, instead of busting.
When you're fully prepared to start your journey as a small business owner, Bsale is the best place to start. We have over 7,000 businesses listed for sale at any given time, so there's no 'risk' that you wont find exactly what you're looking for!
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