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Three “Golden Rules” When You Want to Buy a Business

Most people start the process by looking at what’s for sale on commercial websites. We suggest taking a few steps back to start with and get a better understanding about a few key matters before you start your search. It will save you a lot of time, ensure you don’t miss out on the right opportunity once it presents itself and let business owners, brokers and advisors know you are a serious buyer, not just a tyre kicker.

1. Skill Sets

Start by identifying where your skills lie, what you’re good at, what you like doing and what industries you have knowledge about. This will help you to narrow your search and ensure your skills match the business you end up running.

You may never buy a business in the industry where all your experience lies, but you may have transferrable skills that will be complementary to the requirements of a particular business. It’s important to play to your strengths and what you know most about.

I’ve seen a financial planner help a lot of people into property. He has bought and successfully expanded a home improvements business while utilising his knowledge of property to help his clients self-marketing themselves to market the business.

2. Finances and Being Prepared  

It’s important to know how much money you must spend before you go to the shops. It can save you wasting a lot of time looking at items you simply can’t afford. It’s a great idea to sit down with your accountant and a finance broker to go through the options for financing a purchase once you have an idea of what sort of industry you are going into.

Often there are many options available to you depending on your current assets, the type of business you intend to buy, the stock level/working capital requirements and hard assets to run the business.

Once you’ve done this, you then need to look at your personal income requirements and see if you can afford a business in the industry you are looking at that will produce the returns you desire. Generally, the higher the return, the higher the risk or owner involvement required. It can also mean the lower the desirability of the industry.

From here you can formulate if you are able to become a self-employer or not. Sometimes when the desire is high you may look at partnerships and the like, but be sure to have a shareholder’s agreement in place.

Finally, always budget for working capital and unexpected expenses. It’s not a smart decision to go into a business on the smell of an oily rag, hoping that nothing breaks, no customers leave and you have covered every possible extra expense required to get into the business.

3. Due Diligence / Nothing is Perfect

Don’t take on face value what you are presented by the vendor or other representatives. As for supporting documentation that will corroborate the information provided.

You have the right to conduct Due Diligence (DD) on the subject business, but many will google search a DD list and simply forward it to the purchaser. Know that DD is different for different industries and the size of the business you are purchasing. You can quite easily look like you have no idea what you are doing and lose the vendors interest if you send them the DD list for a multinational purchase. Understand what you are asking for and make sure it is necessary.

DD can be conducted at different stages. Don’t waste your time and the vendor’s by asking for everything needed to purchase the business, only to make an initial offer. Start with enough to understand the business and then see if your offer is acceptable. You can then verify the information provided prior to handing over the cheque. There’s not point delving deeper into a business DD if the owner’s expectations are above what you think the business is worth.

Understand that some information you may think is necessary is confidential intellectual property of the business and in the wrong hands could cause serious damage to the goodwill. Be prepared for work around solutions to get what you need, without compromising the owners IP, and be prepared to wait to get all the information until the vendor believes it is the right time in the sales process.

The most common example is customer lists. You may want to know what the revenue spread is across the customers, but the vendor may not want to provide you with their names so they provide you with a list where customer names have been hidden on the basis that once contract terms are all binding the names will be revealed.

Remember, there is no such thing as perfect and you will inevitably find issues with a business. Look for the one that meets as many of your criteria as possible and has issues that you know are fixable and go for it. If you miss the one you want, it’s not like houses, you may wait years to find a similar business.

Mark Jason
LINK Australia, Managing Director