You probably do not want to go through the process of starting a business from scratch, and therefore, might consider buying an existing business. This could be a good idea since an established business should already have built in customers, is hopefully profitable and thus likely to be less risky. However, that is not always the situation and bad purchases are often made. In order to increase the chances of making the right decision, please consider the following:
Type of business
When buying a business it is not wise to go into an area you know absolutely nothing about, think of your qualification, experience, hobbies and interests.
Do you have the money to purchase this business? If not, how will you finance this venture? Look at small business schemes – what kind of finances, if any are being offered? Also, is the owner willing to be paid in instalments, how will this be done, can you make these payments?
You want to look at the company’s detailed financial statements, over several years, preferably at least five (5) years. Match what is reflected on the statement with what is happening in the industry. Has the business been making a profit, if so, over what period of time? Look at the taxes paid and compare them with income reflected.
A company’s payables history can tell a story. A company that is really viable is able to pay its current liabilities as they fall due. Look at how long the company takes to pay its suppliers or other short-term creditors. Thirty-to-sixty (30-60) days are acceptable, but ninety (90) days and over are too long a period, this business could be struggling.
Do a credit check on the company’s major debtors. How long are their receivables outstanding for? Also, bare in mind that for the purpose of the sale the receivables figures might be inflated, check invoices. You will want to determine how likely it is that some receivables may become ‘bad debts’ (unrecoverable).
Look at current employees, how critical are they to the business’ success? Are there employees that are more liabilities than assets? Which employees will you need to keep, which do you let go? Take into consideration their overall performance and what customers think of these persons.
Is there a close relationship with the current owner and customers? Will they leave or stay if you take over?
How does this business stock up against the competition? What has been happening in the industry, is it growing? Have sales fallen, if so, why? Have competitors been leaving the industry? If so, why?
Does this company have a good corporate image? Is there potential to improve the image? You do not want a company that is riddled with scandal or that people in general have negative views towards as this will undoubtedly affect future growth.
Does this company have trade secrets, are such secrets protected? How are they protected?
When you meet with the seller ask questions and make sure you are satisfied with the answers given. Always ensure that your doubts are addressed and NEVER push them aside.
Where is the business located, is it a good strategic point? Sometimes location may not be important, but depending on the type of business you intend to operate, location could be critical.
Evaluate the seller
Would this person ordinarily be someone you would do business with? Do a credit check on the person.
Have there been any lawsuits filed against the business, if so what were the outcome? Are there any pending? You don’t want to walk into a liability.
Taxes and expenses
Check to make sure that taxes and other major expenses are paid and are not left for you to undertake. A prudent business will ensure that its taxes and important expenses are paid when due such as sales, corporate income and property taxes.
You could add more checks as you go along but these would uncover a lot of important information. If you are unable to soundly analyse the information, enlist the help of an experienced accountant or businessperson who could assist you in understanding what is happening.
Also, it is advisable to always seek the services of a lawyer before undertaking such a venture.