Buying a business

Buying off an existing business is considerably easier in terms of establishment costs and hassles. Though not entirely risk free, it has the advantage of an existing market share, employees, customer base, reputation and a tested organisational structure. Not all is won, unfortunately. A thorough research is of need to make sure you don’t end up with a mirage.

The business you should buy would depend on your own experience, knowledge or special skills that you may have developed over the years. It is usually a mistake to take over a business that is alien to you, no matter how attractive it may seem. There will be huge gaps between you and the requirement of knowledge for the new business. Furthermore, you may be purchasing it for a price that may be unfavourable to you.

Try to go for a business that you know about and preferably the one you like. It is comparatively a lot easier to handle it and since you enjoy the work, there is a higher chance that you will succeed.

Once you’ve found the right industry, now look for “your” company. Try to get a few leads or contacts from people you know. Most often, the best opportunities are surfaced and picked by word of mouth. Other sources include the newspaper or magazine advertisements, trade associations, real estate brokers etc.

The next step is to do little research work. Investigate the company documents thoroughly.

Financial statements

Examine the profit and loss statement, balance sheet and the cash flow statement. Analyse the profitability, productivity and efficiency as depicted by the statements. Know that these represent a true and fair view of the business as a going concern. Also, check the tax returns, match them with the financial statements and verify their authenticity.

Debtors and creditors

Study the figures in the balance sheet; calculate liquidity ratios to compare with similar companies in the industry. Scrutinise all documents to and from the debtors and creditors. Take note of any delays in payment by the customers and to the vendors. This would indicate the short-term liquidity of the company and the strength it has to settle the accounts. Run a credit check on the company’s top customers to confirm their credibility. Any lose policies can cause a problem in liquidity management.

Employees

Employee relationship is an important element in the transition phase. Key personnel are a key to the success of a business. Make note of their work habits and their interaction with the management and their level of satisfaction and the loyalty to the company and honesty in their work. Review employee benefit packages and contracts, make sure that whatever has been recorded has actually taken place. Interact with them if required, this will be a good gesture and they will see you as a person who cares for their welfare. In other words, win their hearts before you take charge of them, the acceptance level will be considerably high.

Location of the business

This will be important, especially if you are planning for a retail business. How good is the current location for the business in consideration? How critical is it to the success of the business? What is the future of the locality? How comfortable do customers feel by walking-in to the outlet? What would be the outcome of contemplated changes in the area? What is the level of competition? In turn, each of these questions needs answering, leading to a review of policies and possible management process changes.

Work environment

The physical atmosphere within the company can tell you many things. Observe the locality; get a first impression of the work environment and its maintenance. At the time of sale, an office is generally kept organised and well furnished. Keep a close eye on anything you may normally skip at a glance. Walk around the front end and back area especially where inventory is kept.

Competition

When purchasing a business, get a feeling of the competitive environment. Be attentive of the industry, the trends and their impact on your venture. Who are the competitors? What kind of market share do they have? What are their tactics? How long have they been in the business and what is their location? How has the environment changed recently for all competitors? You can get all this information from the industry association or from trade publications.

Registration and licensing

The business licenses and documents must be easily transferable. Identify the processes of transfer, the time it will take and the cost by contacting the local authorities. In addition, you should demand the following information from the company before buying any business.

• Who holds title to company assets?
• Are there any ongoing or potential litigation?
• Have there been any unemployment or compensation claims from workers?
• Has the company regularly paid up its tax liabilities?
• Are the commercial leases and contracts with various parties transferable?
• Has the company given any warranties or guarantees to its customers?
• Does the company have any trade secrets and how does it protect them?
• Does the company own patents and copyrights or any registered trademarks?
• Are the business licenses and/or tax registration certificates transferable?
• Is the business running in compliance with local laws and regulations?
• Is the company, in any way, involved in pollution or toxic waste dumping etc?
• Is the business a franchise? How should you seek approval from the franchiser?

The information will help you decide if you are on the right track. If you’ve been misinformed, it could mean that you should look somewhere else for the right business.

Reputation

The normal perception about the company can have serious consequences on the deal. The point of judgement isn’t the financial position but the overall behaviour of the company as part of the community and how it handles its responsibility. The goodwill of a company is generated from the way it services its customers, its support for the community and/or the industry, the way calls are attended by the staff – all go in the evaluation and appraisal of the company. It is very difficult to turn around a negative perception. The reputation can be judged with its treatment and engagement with the proximate environment, which includes customers, suppliers, banks, lenders, investors, the government and local bodies, competitors and the community at large.

The deal

After a thorough investigation about the company, you may have made up your mind. There is however, one important task remaining. You and the owner must agree on a price. One way to evaluate the business is hiring an independent and experienced appraiser who can appropriately estimate the company’s worth. if all goes well, you should be on the negotiating table agreeing on the terms of payment and the take over of assets.