Factors to Consider Before Buying a Business
Many professionals and investors could be looking into buying an ongoing business as was to improve their investment portfolio.
Buying an existing business is generally considered as less risky than starting a new business from scratch since you will have:
Existing business already has a brand that easily recognizable by consumers. Furthermore it might own trademarks and copyright that add confidence to the business .
Easy to Secure Finance
One of main reasons why people tend to buy existing business is to merge with their existing business that failed to meet bank requirements.
By buying an existing business with complete audit reports and fulfilling the minimum requirements set by financial institution one can easily secure necessary funding.
Overcoming Licensing Hassle
Starting up a new business can often become all-consuming particularly in getting all the licenses that time consuming beside bound to certain quota requirements. With so much to do, it is easy to take over an business without going through all the hassle of begging and documentation process.
Prior, we look into factors to consider when buying a business we might as well look into some disadvantages of taking over as existing business
- Additional Investment
Most existing business owners, wish to let go their ongoing business as they unable to fund the operation since it requires capital injection to sustain and grow.
The under-performing businesses require a lot of investment to make them profitable.
After managing for years, owners might has sense increasing competition or changing trend that could cause declining in the industry that can affect future growth of business.
3. Bad Reputation
The seller might had developed bad reputation or personality within existing customer or industry. Their damaged relationships may be a major factor for the success of the business.
So, you had decided to buy a business as the advantages are much stronger and you able to turnaround the business in profitability.
Here we listed some important factors to consider before you proceed to make a purchase official.
4. Due Diligence
As you keen to become the owner of an existing business, there are items that need to be addressed before entering into any business takeover agreements or transactions. Do the following simple due diligence:
a) Verify all Licenses and Permits
Most businesses need licenses and permits to operate. The type of license or permit needed depends on your industry and the country in which the business is located. For an example if you taking over an existing Skills Training College, make sure their had fulfilled and not in bad record of departments or enforcement agencies involve..
b) Zoning Requirements
Zoning requirements may affect the type of business that you are intending to operate in a particular area. Visit Local council such as DBKL, MBPJ or even SMECorp for the basic Zoning Laws for more information about zoning and to ensure your business is abiding by all laws.
If you are acquiring that involve in production of chemical, hazardous, plastics or similar it is important to check the environmental regulations in the area.
Determining the Value of a Business
We suggest you use more than one method to determine the purchase price of the business
There are a number of different methods to determine a fair and equitable price for the sale of the business.
Here are a few:
Capitalized Earning Approach: This method refers to the return on the investment that is expected by an investor.
Excess Earning Method: Similar to the capitalized earning method, except that it separates return on assets from other earnings.
Cash Flow Method: This method is typically used when attempting to determine how much of a loan the cash flow of the business will support. The adjusted cash flow is used as a benchmark to measure the firm’s ability to service debt.
Tangible Assets (Balance Sheet) Method: This method values the business by the tangible assets.
Value of Specific Intangible Assets Method: This method compares buying a wanted intangible asset versus creating it.
Examine the financial statements from the business for at least the past three to five years. Also make sure that an audit report accompanies the statements from a reputable chartered auditing firm. You should not accept a simple financial review by the business itself.
Ask Why Selling
Ask, ask and ask again why current business owner willing to let go the business he developed such long. As purchaser you need to be a little skeptical, get to know why the current owner wants to sell of the business.
“If the business owner couldn’t give you a compelling reason why they were selling the business. You should discuss this with the current owner and ask around too.”
If you get conflicting answers or don’t feel as though the owner is being 100 percent truthful, it could signal problems ahead. You should raise the red and try to end the negotiation diplomatically before leaving the meeting room.
Indemnity from the Seller
Another option available when you found the business is viable and to your interest but feels the seller not very truthful, is by compelling the seller to sign an indemnity against any creditors’ action.
As a buyer, make sure the seller sticks around for a while say for minimum of 12 months to give away for you to understand business model and avoid negative customers’ feedback.
Retain Key Employees
Most often, buyers will try to have their trusted “Generals” taking up key positions on newly bought venture. We recommend to identify and retain key employees before you make the takeover.
If you decide to buy the business, there will be an adjustment period. One of the best ways to ease this transition is to retain vital employees. For instance, you may want to keep the sales staff to maintain customer relations, or maybe there is a phenomenal accounting staff in place. Make sure you know who the key players are before you buy the business.
Even though you’re planning to buy an existing business, it is essential to understand your current situation and review the current operating processes, cash flow, and marketing strategies to see if they need refreshing.
It is also good to set goals on how you want your new business venture to grow over time.