Buying a business has several advantages over creating one from scratch. An established business will already have customers, a working system and trained employees. Its products and services are already tested and recognized. This is the fast-track lane to business success. However, despite its advantages, there are also potholes to buying an established business. Due diligence is a must and going through its reports with your Brisbane bookkeeper is not enough. Here are some of the things you need to know when buying a business;
- Why is it being sold?
There could be a lot of reasons why the owner or owners are selling the business and knowing the specific reason/s why the business is being sold is a good practice and precautionary measure. The reasons will indicate if you are buying a good business or not. After all, it doesn’t make sense to sell a performing business without a very good reason. Most businesses are sold due to bankruptcy, the owner/s needing cash, the owner/s is retiring, lack of funding or declining income. Check for relevant trends, social changes and new government regulations that could trigger the sale. Stay away from high-risk acquisitions or businesses sold due to declining income, static products and mismanagement.
- Understand the sales.
Sales are the source of income and operating funds. It is important that you totally understand it. Aside from the volume and profitability, learn its cycles, trends and relevant marketing campaigns. Who are your customers, dealers and what are the sales terms? Are sales in cash? How are accounts collection handled? You can ask a Brisbane bookkeeper to help you determine the business cash flow and know whether it is healthy or not.
- Know its operational costs.
Take a closer look at its costs. Cost is the other side of profitability, if you cannot increase the sales, try lowering the costs. Do variable costs correspond with the pricing? What percentage of the costs is the overhead? What kinds of taxes are applicable to the business? Is the company dependent on just one or two suppliers?
- Study its balance sheet.
This is the summary of the business. Deep dive into its asset classifications, what type of assets does it have? Not all assets are desirable – old and stale A/Rs are almost worthless, extensive buildings are costly to maintain, plants and facilities that are no longer productive and some intangibles have expiration dates. Take a closer of the company’s inventory – how is it managed, what is the turnover and what storage systems are used. Most importantly, are the stocks saleable? Next, study the liabilities section. What are the outstanding debts, how much of it are due soon and what are its attributable interest rates? You might need an accountant or a bookkeeper in Brisbane to understand it fully. Ask for professional help.
- The business structure.
Knowing its business structure is also imperative to determine if the business fits you. Its structure also has an impact on its profitability and taxation. You can always change the structure as you see fit, but any changes will also affect its income, taxation, legal and record keeping.
- The people.
Get to know some of the people who are working in the company. They are the people who have firsthand knowledge of what the company is like, the culture, the business trends and the working dynamics. What are their tasks, pay rates and benefits? You will learn a lot about the company just by talking to some of the insiders. Also, you are bound to inherit some or all the employees if you go ahead with the purchase, so you might as well start getting to know them.
- The industry.
Knowing the factors outside of the organisation will give you a good idea if you’re buying a profitable business. Now that you know most of the business, shift your attention to its surroundings – its competitors, suppliers, market and the industry. While some industries are stable and constant like food, real estate and transportation, some are short termed and can be obsolete within a few years like some electronic devices, entertainment craze and fashion fads. Also, check the legal and ethical implications and government rulings that affect the company. For example, fur and leather are profitable businesses, but the increasing awareness and campaigns against animal cruelty can put the business in a bad light.
- Terms of sale.
Now that you’ve learned as much about the business as you can, it is time to examine the terms of sale. What can you expect from the seller in the handover? Are you buying the entirety of the company or are the owners keeping some part of it? What kind of support can you expect from the seller? Also, know if the seller is under time pressure to sell and if there are other interested buyers. This way, you will have a better handle at deciding whether to negotiate for a better price or upping your offer. While sellers will usually prefer cash payments, try to negotiate some terms. This will save you on upfront payment and ease up your cash flow. A Brisbane bookkeeper or accountant can guide you through the process of buying a business. Get professional help.