If you have never purchased a business before, it is difficult to know what you need before buying a business. Just received a call from someone who found a potential business but did not know what to do next. Here are some helpful hints:
When buying a business, the most important thing that you need is knowledge. Knowledge of the following:
- knowledge of the business and industry that you are looking for
- knowledge if there are licences involved, do you need to apply for the transfer, can the ownership transfer easily
- knowledge if you found a franchise, do you meet the criteria for the franchisor to own a franchise in their system
- knowledge of your financing, how much equity you have, how much financing do you need?
- knowledge of preparing a business plan if you need bank financing
- knowledge of how to buy a business. If a business broker is representing a seller, do you need to hire a consultant or just approach the broker. Often brokers represent both the buyer and the seller since there is no MLS system for selling a business. The broker often has an exclusive listing on the business therefore you cannot bring in your own broker. However, you can find yourself an accountant or consultant who can advise you if the price is correct, help you in due diligence, help you find a business lawyer who can help write the letter of interest and the purchase and sales agreement
- education in the steps required if you are buying shares or assets of the business. The business blog, has hundreds of articles which can help you become informed on what to look for, what questions to ask. The more information you have, the smoother the purchase process will go and also it will help you ask the right questions to ask. The person who just called indicated that the profit of the business she was looking at was 57% of the revenue of the business. To me, a quick and dirty calculation indicated that this was extremely overly optimistic and the business was no where as profitable as she was let to believe. The asking price was only 1.4 times the profit that was provided which is a good indication that the numbers are overly optimistic. The asking price is based on different assumptions than the information provided to her.
- knowledge of finding good advisors, a good accountant to help you in your due diligence and also to help confirm if the asking price of the business is reasonable. Remember, if it costs you a few thousand dollars for advise, that is still far cheaper than buying the business and finding out that it will go bankrupt in a few months becuase you did not do your homework properly when given the opportunity in due diligence. Saving money on hiring the right people may cost you your entire investment. If things go right, then you may think you wasted your money but think of what you paid and consider it an insurance premium to confirm if you were buying the right investment.