Step by Step instructions to buy a business
Business is an economic activity aimed to generate profit. Like every economic activity, even running and ongoing businesses are being sold and bought. The scales may be local or global. The reasons for sale or purchase of business entities may be numerous and varied.
It is wise to buy out a business rather than start it from scratch if you have some capital to invest and some experience with which you wish to venture on your own. This running business has its advantages – it has buyers, customers, employees, assets, goodwill etc. and you save a lot of time in setting this infrastructure. In all likelihood, the business will also have operating profits as well.
Most large business organizations, in the course of their diversification or expansion cycle, also prefer to buy out a business rather than start from scratch. It helps them hit the ground running. They have a set platform to start off and they modify the operations gradually to suit their way. They set new objectives, goals and targets. They evolve fresh strategies to run the business to fulfill the objectives.
The first and foremost factor essential before you venture to buy a business is to identify the business you wish to buy.
It is best to do a ruthless SWOT analysis [Strength, Weakness, Opportunities, Threats] of the business you wish to acquire. Importantly, analyse the reasons that attract you in that sector. Your skills, experience and interest must complement with the requirement of the successful operations of the acquired business in future.
The amount of money you have at your disposal to spend to buy a business will determine the size of the business you can acquire.
Typically you should have at least 40% of the amount ready with you before you venture to buy a business. The balance 60% amount of the negotiated purchase price may be financed from bank or lender(s). However, there are financial experts and advisors who suggest that you should have at least 10% value of the total price reserved with you for any contingencies which may arise during the taking over and running of the business after you acquire it. This will keep you free from stress and give you better maneuverability.
Targetting the business:
Once you have made up your mind on the sector and size of business you wish to buy, its location and price range; then start looking up for advertisements ‘Business for Sale’ in newspapers and trade magazines. Additionally, you can also put your ads ‘ wish to buy’ in the newspapers describing what you are looking. But do not restrict yourself to just these. You can make your own research and enquiries for businesses that you find attractive for your parameters. Using your contacts and networking skills, you can find out about them as well. Though these businesses may not be officially up for sale, but your offer may be appealing to them. You may hear from them as well.
You can also approach brokers who are specialized in this activity. They typically charge 5 to 10 percent of the total deal and mind you, it is worth it. These brokers will guide you in making your decision. The reputed brokers do not undertake work for those business up for sale who do not provide reliable information, financial or legal or provide incomplete disclosures. These brokers thus also help you in pre screening. In the case of large business acquisitions and mergers, there are specialized Mergers and Acquisitions (M & A) companies who do the same type of work for a price.
Research and Due-diligence:
Once you have an offer which is to your liking, do not get over excited about it. It is obvious for you to not to show excitement or haste in assessing the offer. A minute and detailed study of various financial statements, contract documents, assets, liabilities, receivables and payables etc. is necessary to ascertain the state of health of the business you wish to buy. Do not hesitate to ask for any detail or verification you need to satisfy yourself. It is important to go through the financial statements for the last five years as well as projected financial statements.
Make a list of top five or ten existing customers of the business presently. Also check for their length of association with the company. You can discreetly discover from them about their views about the company. Similarly, do the exercise for the top five suppliers of the company. This first hand review will give you a fair idea about the operations and work culture of the business.
It will be wise to find the opinion of the peer businesses or the competitors about the business. Any local issues must be enquired at site itself to understand the dynamics of the business. It is best to spend adequate amount of time and expertise in this stage. You make take help of Accountants and Attorneys who will give you a more qualified opinion on various financial, taxation and legal aspects of the business.
This is the most critical and unchartered territory of the whole deal where various factors are involved. The cost of landed properties, buildings, assets, inventories, market share, goodwill etc. are few of the important factors which determine the value of the business. It is ultimately the buyer’s understanding of the business which determines its price. However, one thing must be clear in buyer’s mind. It is the Return of Investment (ROI). If the ROI of your investment is low, then you should reconsider. The smaller businesses should necessarily have higher return compared to the large business acquisitions. One thing is important to remember here – do not be lured to buy a business at a higher price because you have already invested enough time, money or energy into it. There are other options available and the world does not end on this deal.
Structuring the deal :
Once the price is negotiated mutually, then the payment schedule is drawn. If it is Asset based deal, then you may make an upfront payment of 30 to 50% of the value and the balance payments shall be made in parts over an agreed period of time. In case of Stock option, you buy the stocks of the Company from its owner. This is an area which experts handle best. You have to make the final document which reflects your understanding and intent regarding the purchase from legal, financial and taxation viewpoint. The contract should allow you to rescind the deal if you find that the owner has intentionally misrepresented facts or concealed essential information.
Step by Step instructions to buy a business