Now that you’ve finally found the right business to buy, your entrepreneurial gusto might be tempting you to get it all done and start a business. Wait up. You want to be sure that you’re getting a good deal and minimizing the risks.
Business broker from Orlando, Cress V. Diglio reminds business buyers of the importance of comprehensive due diligence. It is vital to enable you to come up with an informed decision and ensure a successful business acquisition.
Business sellers certainly want to maximize the value of the business, so expect them to present you with the most favorable figures and projections. As a buyer, it is your duty to know and study the outlook and the risks of the business.
Let’s see what to watch out for when buying an existing business.
Future developments in the sector
Upcoming industry changes or technological advancements can have either a positive or negative impact on a business. Although it is difficult to ascertain what will happen in the future, studying where the industry is headed can help you determine whether it is still wise to acquire the business or not. Watch out for critical scenarios, such as the possibility of the business becoming obsolete in the near future.
A change in ownership might encourage customers to leave. Study whether the current client-base would be retained even after a change in management. Know why the customers choose the business. Is it because of the location? Is it the quality of service? Or are they simply related to the owner? As the new owner, your goal is to retain them and add new clients.
Human resource is critical in running a business, and as much as possible, you want to retain key employees. This is especially true in businesses where employee expertise is necessary. In fact, some businesses rely so heavily on a few employees that they become less profitable without these assets.
Actual sales and profits
As mentioned above, sellers would present you their best figures. Watch out for overstated sales and profits. Also, consider seasonal aspects. Some businesses might show you only their all-time high or peak season sales. Check the accuracy of the numbers or have it evaluated by an accountant or business specialist. If possible, review the historical performance of the business for the past five years to see any variances.
Competition after the acquisition
Being the direct competitor of the seller is the worst situation to be in. Obviously, between a newbie and a veteran, customers would prefer the latter; not to mention that the seller would always have loyal followers. Having the seller as your competitor could negatively affect your business. As such, it is recommended that you put in a non-compete clause in your contract. This means that the seller will not set up, operate or engage in any business that would directly or indirectly compete with your business. Usually, non-compete clauses will have a certain period of time. Try to secure the longest time possible.
Business dealings not stated in the sales process
Not only should you look at the figures, but you also have to consider how they’re making a profit. Perhaps the business is posting good profits only because they are underpaying their workers or cutting on production costs – and worst, they are engaging in shady deals. Some businesses would not automatically declare liabilities, such as a leased asset. Check if you have to purchase new assets or refurbish assets. Be sure to explore all aspects of the business and know how they can impact its profitability in the future.
Condition of the assets and the premises
It is recommended that you personally (or by getting someone with expertise in the business) inspect the quality of the assets. Watch out for overvaluation of the assets. What is declared in the books may not reflect the actual value of the assets. Facilities, inventory, and equipment may not be in good condition. Maintaining outmoded equipment can be very costly.
Revenue vs. profit
Distinguish revenue and profit. Some prospective buyers get confused with these two terms. Revenue represents the amount paid by the customers while profit represents the amount that is left after all the costs have been deducted. A business that posts high revenues doesn’t necessarily make high profits. For example, a business may be raking in very promising numbers based on cash takings or sales, but may also be paying double the amount on expenses and taxes. As a result, they don’t make any profit. What ultimately matters is the profit a business makes.
Although buying an existing business offers a number of benefits, it is not risk-free. Exercising due diligence can help you minimize these risks and improve the chances of owning a stable, profitable business.