Buying an existing business can be less risky than launching a new one, but only when you take certain precautions. Failure to make assessments before making the purchase is starting on the wrong foot and making a hasty decision will only lead to frustration and losses. When making a substantial investment like this one, it’s common sense to do some research so that you can conclude whether purchasing an existing business is a good idea or not.
That being said, here are key aspects to be on the lookout for when buying a business:
Positive Cash Flow
Chances are you will experience positive cash flow from the start after closing the deal. However, this is only possible if the business has an established customer base and the necessary infrastructure. The latter is everything from a storefront to social media presence, established website to licensing and other legal requirements already in place. Given the clients stay loyal and your business plan allows for it, the cash flow should be adequate to cover any borrowing costs incurred before purchasing the business as well.
It is essential to spend time with an excellent accountant to go through the financial statements for the last couple of years. Check whether the financial ratios make sense and the numbers align with what you’re expecting from the business. Ask for a report to show that the business has done its tax returns on time. If not, this could be a sign of a struggling company. Bear in mind that it will always be in the seller’s best interests to have the numbers looking as good as possible in order to fetch the best price. The company’s net position has to cover your personal wages and adequate cash flow to clear any loans you have secured to purchase the business.
After going through the checks and balances, you will part of the quoted price will include equipment and also goodwill. This basically covers the price of the company’s customer base and good reputation. The point, however, of purchasing an existing company is to avoid the need to set up equipment and draw a loyal client base. So, do not just rely on the numbers and do some footwork in the local region coupled with online research to make sure the company comes with a good reputation. Also, check whether the region has many competitors. If it does, then the company might be overvalued.
Taking over an existing company with employees that have been there for a while and know the ropes can be very beneficial. The staff needs to know you’re the new boss and to respect your management style, thoughts and opinions. At the same time, you do not want to shake things too much that you drive them away. Take the time to know them, both personally and professionally as well as the customers they deal with. Keep in mind that some clients may be loyal to a particular staff member in case of personal services like hairdressing.
So there you have it, some of the key aspects to consider when looking to buy an existing business.