Top 9 Considerations Before You Buy a Business
Top 9 Considerations Before You Buy a Business
So you’re considering the exciting journey of becoming a business owner through acquisition. It is a significant step, whether you are a seasoned entrepreneur or a first-time buyer. This endeavour can be highly rewarding, but it also comes with its own set of challenges. To ensure your success, it is crucial to approach it strategically. Let us explore some key thoughts that can guide you in this journey.
Understand Your Motivation
Before you jump into the world of business acquisition, it is essential to take a moment for introspection. Ask yourself why you want to buy a business. Is it to follow your passion, turn a hobby into a business, be your own boss, achieve financial freedom, or leverage your skills and experience? Understanding your motivations will be the foundation upon which you build your business goals and make informed decisions throughout the entire process.
It is also particularly important to distinguish between buying a business and purchasing a job. While both options have their merits, they come with distinct levels of responsibility and expectations. Buying a business should ideally provide you with the opportunity to scale and grow, whereas buying a job may involve more day-to-day involvement in the business's operations.
Do not Start from Scratch
One of the most significant advantages of buying an existing business is that you are not starting from nothing. It may seem like starting from nothing is less expensive but consider that an established business already has a customer base, revenue streams, employees, equipment, suitable premises, and often a solid reputation. This can save you the time and effort required to build a brand and customer base from the ground up.
Grow Faster Through Acquisition
Business growth can happen organically or through acquisitions. Many experienced business owners quickly realize that acquiring an existing business can be a strategic move to expedite their own business's growth. By purchasing a business in a related industry or market, you can create economies of scale, tap into new customer segments, explore new distribution channels, or offer complementary products and services. This approach often allows a business to scale faster than it would through organic growth alone.
Strategies for Selecting the Right Business Opportunity
Choosing the right business opportunity is a critical first step in your journey. Take the time to thoroughly research the industry, including understanding its current market trends, competition, and whether it is still relevant i.e., is it a sunrise or sunset business, what are the barriers to entry. Assess the financial health of the business you are looking to purchase, examine its business operations, legal exposures, and existing contracts with suppliers, customers, and employees. Consider its location and how well it aligns with your own location and target market.
Also, particularly important, do not forget to think about your exit strategy from day one as sometime in the future you may want to sell or must sell due to unforeseen circumstances. you may want to cash out the asset you have built. Considering this early in the process will help you decide how to structure your business and can be attractive to potential future purchasers.
What is a Good ROI
A common question is, "What does a good Return on Investment (ROI) look like?" The answer is “how long is a piece of string” there is no one size fits all and it will depend on your financial goals and risk tolerance. However, ROI is a critical metric when evaluating businesses for sale.
To determine a good ROI, consider factors such as EBPITDA (earnings before Proprietorship, interest, tax, depreciation, and amortisation) where proprietorship is shareholders salaries or other remuneration from the business) and what the average capitalisation rate (multiple of EBPITDA) is for the industry.
Also consider the Vendors purchase price, expected cashflow and the banks propensity to provide a loan on the business. It is about aligning your investment with your financial objectives.
Due Diligence - Skip It at Your Peril!
Due diligence is a comprehensive process of examining all aspects of a business before making a purchase. It is time-consuming but skipping this step can lead to disastrous consequences.
Investigate financial records, contracts, legal matters, and any potential issues that could affect the business's future. Seek professional assistance when needed, such as legal and financial advisors.
Before finalizing a business acquisition, ensure you have a comprehensive understanding of the business's operations, customer base, revenue sources, and expenses. This knowledge will not only help you make informed decisions but also lay the foundation for your business strategy post-acquisition.
Your previous experience and expertise play a significant role in your ability to run the acquired business successfully. If you are entering an industry that is new to you, consider partnering with someone who has the necessary skills or hiring key employees to bridge the knowledge gap. It is also worth noting that some vendors are open to staying on full-time or part-time for an extended handover period because they may not want to own a business anymore but still want to work particularly if they can get back on the tools. Nothing beats knowledge gained through experience and keeping a vendor on after the sale is often gold.
Consider Finance from The Outset
Given recent global and local economic uncertainties, many financial institutions have become more risk averse. Financing your business acquisition can be a complex task. Therefore, it is crucial to explore various funding options early and continuously throughout the process. There is nothing more disappointing than having the deal fall through at the last moment due to financial issues.
Engage A Professional Support Team Early
We all understand that professional support can be expensive, but making a mistake in this process can cost you significantly more. Engaging the support of professionals such as accountants, solicitors and financial advisors early can help you avoid a lot of disappointment down the road.
Additionally, consider working with a Business Broker. They can be an invaluable asset during the acquisition process. Brokers have access to a network of businesses for sale, can facilitate negotiations, and provide expert guidance. Their industry knowledge and experience can help you navigate the complexities of buying a business, increasing your chances of a successful transaction.
Acquiring an existing business is a substantial undertaking that requires careful planning and execution. By understanding your motivations, conducting thorough research, performing due diligence, and leveraging your experience, you can increase your chances of success.
Remember that the support of professionals can be invaluable throughout the process. With the right strategies and an unobstructed vision, you can embark on your journey as a successful business owner through acquisition.
If you have any specific questions or need further guidance on any of these points, please feel free to ask.