If you have the financial resources, buying a business can be an exciting adventure, but it can be risky – here are a few questions you should ask first.
If your business is expanding and you’re doing well, you may think about expanding by buying up another. This might be to bring in more income, access another market, or simply to scale up a business with potential into something really big. Either way, this process can be full of pitfalls, so it pays to ask a few questions of yourself first.
Why do you want to own a business?
The first thing you have to answer is why? People run businesses for many different reasons – perhaps you just want a business which will deliver a reliable income every year. If that’s the case you might be looking for a mature business which is already demonstrating a good track record of performance.
Alternatively, you might be looking for a long term investment – a company with plenty of scope for growth which you can scale up and hopefully sell on at a profit further down the line. The answers to this question will affect the type of business you look for and the level of risk you’re willing to take on.
Is this a healthy industry?
For some people buying a business is all about fulfilling a long term ambition – or even an unrealistic childhood dream. For example, perhaps you’ve always dreamt of owning a pub – not just for the money it might make, but also for the lifestyle you imagine it brings.
If that’s the case, you could be opening up all sorts of problems. For one thing – what’s the state of the industry like? Is it booming or have times been tough? If this pub is for sale is it just because the owners are looking for a new challenge or have they been having problems? If that’s the case you have to ask yourself if it’s because of the way they have been running things or just because making a success of the business in that location in this market is impossible. Entrepreneurs have a tendency to over-estimate their own skills in business. It’s important to be realistic.
Moreover, the experience of owning this type of business might not match your imagination. It could be a good idea to spend a year working behind a bar to see what it’s like.
Have you done your research?
There are plenty of websites available which list businesses for sale. You could spend a bit of time browsing the web seeing what’s available in your chosen sector and area. This could help you draw up a shortlist of businesses for further research.
Go into as much detail as you can at this stage. Scrutinise every page of their website and search for them online. Typing in a business’ name on social media often gives you a good idea of what people think. If it’s local you might try speaking to customers or even posing as one yourself to see how the business is regarded. If things are bad, then you might have some trouble mending its perception even if everything else looks good.
What’s it like first hand?
Just as when you’re buying a house it’s a good idea to view it first. Approach the business and arrange a time to visit it. Remember to be subjective and to listen to all your instincts. They will be trying to present themselves in the best possible light and it’s easy to get carried away. Look at it from a dispassionate point of view and if you’re gut is telling you something is wrong, it probably is. If you have any experience in business this can be useful in flagging up problems even if they are not staring you in the face.
At this point it’s always worth being sensitive. Be friendly and polite. This might be a business the owner has built up from scratch. They will want to feel safe in the knowledge they are leaving it in good hands. If you meet employees, remember that they might not yet have been told that the company is being sold. The owner might not want to do anything which might take their eyes off the ball at a critical time.
Are you really sure about this?
At this point, it’s a good idea to take a step back and do a reality check. You’ll now have a huge amount of information about the company from its annual financial reports, to how it feels to be a customer. You’ll have met the owners and staff and seen the business operating on a daily basis. This is a time to think about if this business is right for you and – just as importantly – are you right for this business? If all you’re bringing to the table is money, it might not be the right fit. Your strengths and weaknesses could be crucial to how this business performs. You need to know that this will be a good fit for your talents.
What do the experts think?
At this point you should run the idea past the experts. Have an accountant or solicitor look at the finances, and pour over the contracts. This might cost a little, but it’s better to spend money now to uncover a potential problem than be hit with it a year from now when you’re already on the hook. Their expertise could be the thing which saves you from yourself.
How are you paying for all this?
As with a property purchase, you’ll have to find a way of financing the deal. This will often be through some sort of credit arrangement. You should start with a budget in mind and of course have a clear idea about how you will be paying all this back. Whatever path you take it’s important to have this agreement in place before getting into any detailed discussions with the sellers.
Lenders will generally want detailed information about the business you intend to buy including three years’ worth of accounts and financial projections. If they don’t have a good history of growth this might make things more difficult, you should try and draw up a clear and thorough business plan so they can see there are realistic projections in place and a good prospect of a return. If the bank will be reluctant to offer you a loan, there may be other sources including pension or investment, friends and family. If going down that route, though, you really need to be certain as mixing family and business can be risky.
Time to buy
Once all the finance is in place it’s time to actually make your move. Put in an offer and enter negotiations. Initial terms might be turned down, so you should leave yourself some room for negotiations. If you don’t have a solicitor yet, now’s a great time to get one in place.
As part of this process you may want to include some conditions of sale, such as the original owner staying on for a little while to oversee a smooth transition. As part of the negotiation it’s always worth knowing why the owner is planning to sell. For example, if they are planning to retire, they might not put all that at risk for the sake of a few thousand pounds – this could help you to shave some money off the price. Remember, though, to be respectful and courteous at all times. Owning a business can be a very personal thing. If they don’t like the person they will be leaving it to they may still pull the plug.
Finally it’s time to do all your due diligence to verify the information the seller has provided. Remember to be non-committal up until the point at which you’re ready to press the go button. Use words such as ‘subject to contract’, in all negotiations.
