Important Advice for Purchasing a Business – Part Two
In the previous post, we covered some important groundwork when it comes to purchasing a business—whether to buy in to a franchise versus starting from scratch, resources to determine where to find the best opportunities and the importance of networking. Keep reading to learn more about how to evaluate a business prior to signing on the dotted line.
Evaluating a business
Before deciding to buy a business, you should evaluate its condition and potential. Ask yourself the following questions:
- What is the physical location of the business like? Is the office, warehouse, plant or retail space in good shape? What about any equipment or inventory?
- If it’s an online business, how well-designed is the website? Is it secure? Are there any metrics to study?
- Does the business have a good reputation? You can check online for customer reviews.
- How visible and easily accessible is the business? Is it located in an urban or rural area? You will have to consider expenses—such as increased shipping costs—if you are farther away from your suppliers and customers.
- Are the products or services generating revenue? Are sales increasing, decreasing or flat?
- Does the business have a good working relationship with its suppliers and bank?
If a business is doing poorly, examine what the potential causes are—it may be a case of poor management or inadequate resources. If you think you can turn the business around and make it profitable, you could stand to gain from your investment. On the flip side, you are taking a big risk if it doesn’t work out.
Remember that if a deal seems too good to be true, it probably is.
Determining how much to pay for the business
As a buyer, it is imperative to understand what you can afford prior to beginning negotiations. You should be flexible in your negotiations, but also keep your budget and the value of the business in mind.
What is the value of the business?
- Determine the value of assets such as the building, equipment and products.
- Consider the business’s financial statements, annual reports and intellectual property (patents and trade-marks).
- Other valuable assets to any business are its reputation, customer lists and quality of personnel.
Talk to clients who buy directly from the business to get their perspective and uncover any potential red flags. Remember that banks are more receptive to a business that has a proven track record, so do your due diligence from the outset to avoid any roadblocks.
- Take your time and verify all of the information you are given before you commit to buying the business.
- Buy a business in an industry you know well and with products or services you are comfortable selling.
- Buy based on the return on investment, not strictly the price.
- Investigate suppliers, clients and the reputation of the business before you buy.
For more, read: Important Advice for Purchasing a Business – Part One